Kromek Group plc
Annual Report 2017

Plain-text annual report

Kromek Group plc Annual report and accounts for the year ended 30 April 2017 Advancing CZT manufacture to target significant growth opportunities in SPECT, BMD and networked nuclear detection applications $100m+ market SPECT SPECT Nuclear Medicine diagnostic imaging where the patient is injected with a radiopharmaceutical. The pharmaceutical then congregates at tumour sites Contents 1 Financial and Operational Highlights 2 Chairman’s Statement 4 Chief Executive Officer’s Review 6 Chief Financial Officer’s Review 16 Directors’ Biographies Bone Mineral Densitometry 20 Review of Principal Risks $20m+ market 18 Directors’ Report 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 $1bn+ market Nuclear Safeguard 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 22 Corporate Governance Report 24 Directors’ Remuneration Report 28 Independent Auditor’s Report 29 Consolidated income statement 30 Consolidated statement of comprehensive income 31 Consolidated statement of financial position 32 Consolidated statement of changes in equity 33 Consolidated statement of cash flows 34 Notes to the consolidated financial statements 61 Company financial statements Our vision “ To be the world-leading provider of multispectral radiation detection products and technologies enabling our customers and users to take more timely decisions based on superior information ” KromeK Group plc Annual Report & Accounts 2017 Financial and Operational Highlights Financial Highlights n Revenue increased 7.5% to £9.0m (2015/16: £8.3m) n Product sales accounted for 74% of total revenues (2015/16: 65%), a growth year-on-year of 23% n Gross margin was 57% (2015/16: 53%) n Administration costs (including operating expenses) were £8.7m (2015/16: £8.3m) n EBITDA* was £1.5m loss (2015/16: £2.4m loss), following further investment of £3.5m (2015/16: £3.2m) of research costs expensed in preparation for the expected demand regarding D3S and SPECT n Loss before tax for the year was £3.8m (2015/16: £4.1m loss) n Total proceeds of £21m (£20m net of expenses) were raised as part of a Placing and Open Offer in February 2017, which saw a further 105,129,536 ordinary shares issued n Cash and cash equivalents at 30 April 2017 were £20.3m (30 April 2016: £3.9m) *EBITDA defined as earnings before interest, taxation, depreciation, amortisation and share-based payments. Revenue £9.0m +7.5% £8.3m 7 1 0 2 6 1 0 2 EBITDA £(1.5)m +8% £(2.4)m Cash Product % of sales £20.3m £3.9m 74% +23% 65% Operational Highlights Medical imaging Nuclear detection Security screening n Commenced delivery on $12.6m five-year OEM contract to develop and supply detectors for BMD diagnostics systems n Awarded repeat contracts by three current BMD customers worth $1.2m in total n Won contract worth minimum of $560,000 for the supply of radiation detectors with an existing customer n Continued to make progress on the development of CZT-based SPECT modules for customer in China n Delivered 10,000 D3S units in support of DARPA SIGMA programme n D3S detectors field-tested in Washington DC and currently deployed by New Jersey Port Authority n Awarded $1.6m two-year agreement from DTRA to develop a ruggedised high performance isotope radiation detector for military use n Won and delivered a $430,000 contract to supply nuclear radiation detection products to the UK Ministry of Defence R&D Six new patents were filed and 11 granted during the period. n Secured five-year agreement, worth a minimum of $3.1m, from an existing US-based customer n Awarded 12-month contract, valued at $990,000, together with a ten-year exclusivity agreement, by an existing US- based customer to develop and supply upgraded detectors n Awarded and delivered a contract for the Group’s bottle scanners from an Asian airport group 1 KromeK Group plc Annual Report & Accounts 2017 Chairman’s Statement “Our goals for this year were to focus on the sectors where we enjoy strong and growing market share, especially in nuclear detection and SPECT” Sir Peter Williams CBE Chairman 27 June 2017 “We anticipate that the coming year will see material growth in revenues, given that 74% of projected sales are already covered by firm bookings” 2 I am pleased to present our Annual Report for the year ended 30 April 2017, my first complete financial year as your chairman. I joined in 2015 at an exciting juncture and the past twelve months have, indeed, seen Kromek beginning to fulfil its potential. We are at the leading-edge in developing commercially viable radiation detection solutions and this has, in turn, enabled our customers to successfully launch their new generation of clearly differentiated products in a wide range of markets. Our goals for this year were to focus on the sectors where we enjoy strong and growing market share, especially in nuclear detection and SPECT, and I’m proud to say we achieved this. This success has been built on Kromek’s technological leadership derived from our long-term development programmes and mastery of CZT materials production. On page 4, Arnab Basu, our Chief Executive Officer, provides details of these operational achievements for the year. Securing the Financial Future In a further development of central importance, Kromek raised £19.8m (net) through a Placing and Open Offer in February 2017. The funds raised strengthened our balance sheet, underpinning our plans for the sustained growth of the business and supporting increasing commercial activity through the deployment of our proprietary technology. This placing enhances Kromek’s ability to secure significant future orders from major companies and government agencies who seek a level of assurance that the Group has the financial strength and stability to supply their needs over the longer term. We were delighted with the support shown by our current shareholders and it was also pleasing to add new blue-chip institutions to our register. KromeK Group plc Annual Report & Accounts 2017 employees and partners As we look to the future, I would also like to express gratitude to 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 ongoing support. Kromek now has the market opportunities, the products and technology, and a sound commercial position. With the strengthening of Kromek’s financial foundations and the long-term growth drivers showing no sign of abating, we look forward to delivering significant shareholder value in the years to come. “Our success has been built on the technological leadership derived from our long term development programmes and the mastery of CZT materials production” 3 Visibility of revenues Over the past four years, dealing with government agencies and major OEMs has inevitably made it difficult to predict the timing and magnitude of contracts with sufficient precision. However, in the last 24 months, the award of long-term contracts totalling $40m has given us both greater visibility going forward and the confidence that our analysis of our markets is realistic. On this basis, we anticipate that in the coming year we will see material growth in revenues. opportunities remain Significant The most significant achievement in the year was the completion of the sole source contract with the US Defense Advanced Research Projects Agency (“DARPA”) to supply spectroscopic personal radiation detectors (D3S) in support of their SIGMA programme. Our detectors have been field-tested in Washington DC and other major areas in the US and were also used by European authorities to protect the President of the United States during his recent visit to Brussels. We believe that the D3S deployment for the DARPA contract continues to represent a significant radiation detection opportunity for Kromek and we expect to expand our work within the US and elsewhere. The threat of “dirty” nuclear bomb placement remains regrettably real and government agencies around the world are looking for the means to guard against it. Also, within the diagnostic imaging sector in medicine, SPECT (used primarily for cancer detection) and other modalities remain important markets to us. We commenced delivery of systems under a $12.6m contract with a current OEM customer, a worldwide producer and exporter of bone mineral densitometry the detection of (“BMD”) diagnostics systems used osteoporosis. This is for the development and supply of detectors to be incorporated into the customer’s new generation systems. The contract further validates the benefits of our BMD technology and represents the continued healthy conversion of our enquiry pipeline into orders. In these key areas, our addressable market opportunity remains substantial, standing at over $20m and $100m p.a. in BMD and SPECT respectively. for Of perhaps even greater significance, in the area of portable advanced radiation detectors for nuclear safeguarding, we believe our market opportunity could be worth more than a billion dollars. We have achieved significant milestones in commercialising all these opportunities this year and remain confident of furthering our strategy of becoming the preferred component supplier to major OEMs through existing and new relationships. KromeK Group plc Annual Report & Accounts 2017 Business Review and Strategic Report Chief Executive Officer’s Review “Kromek has a stronger order book, good revenue visibility and is better positioned to capture the opportunities that exist across all its target markets” Dr Arnab Basu MBE Chief Executive Officer 27 June 2017 overview It has been another year of good progress for Kromek as the Group won several high value contracts across all its target markets. This has strengthened the Group’s market position as a key supplier of CZT detection systems to both commercial and government customers globally. Kromek has a stronger order book, good revenue visibility and is better positioned to capture the opportunities that exist across all its target markets. Kromek continued to execute on the large-scale contracts that have been secured over the last 24-months. The size and scope of these agreements is illustrative of the ramp- up in Kromek’s commercial activities. The larger contracts, alongside an increasing number of customers moving from R&D programmes to full commercialisation, has produced a continued shift in the Group’s sales mix from R&D to product sales, which were 74% of total revenue (2015/16: 65%). medical Imaging Kromek made good progress in Medical Imaging – securing new contracts and delivering on current agreements. In the BMD market, Kromek continued to serve its OEM customers, including the commencement of delivery of the $12.6m contract signed in H2 2015/16. In this market, the Group also received repeat contracts worth $1.2m from existing customers. It is worth noting that the size of the contracts were almost double the previous contracts from these customers. In addition, Kromek entered into an agreement for the supply of CZT-based gamma radiation detectors with an existing medical customer with a minimum value of $560,000 over the two-year agreement. 4 The Group also continued to make significant progress under its contract signed in 2014 for the development and delivery of CZT-based SPECT modules for an established manufacturer of x-ray diagnostics and analysis equipment in China. Nuclear Detection It was a milestone year in Nuclear Detection as Kromek continued to win new contracts, executed large orders and enhanced its reputation with government agencies and global OEMs. In particular, Kromek completed the delivery of an initial 10,000 D3S units in support of DARPA’s SIGMA programme. To date, Kromek has secured over $11m worth of contracts under the programme. In further interaction with the US defence agencies, Kromek was awarded a $1.6m two-year agreement by the Defense Threat Reduction Agency (“DTRA”), subject to final contract. This award is to build on, and further enhance, the Group’s technology platform to develop a ruggedised, high performance, isotope radiation detector that is capable for use in military and other harsh environments. Other contracts awarded in the period include a $430,000 contract with the UK Ministry of Defence for the supply of nuclear radiation detection products and an extension to an existing contract for the development and delivery of nuclear radiation detection devices for a major civil nuclear partner amounting to $278,000. Both of these contracts were delivered, on schedule, during the period. KromeK Group plc Annual Report & Accounts 2017 Kromek continued to make good progress in its partnership with Mirion (formally Canberra) for product distribution and R&D collaboration. This three-year R&D programme with Mirion is expected to be worth at least $900,000 over the life of the contract. These contracts demonstrate that Kromek continues to gain commercial traction through the increasing adoption of our technology in the security screening market. Kromek’s bottle scanners are installed in 50 airports in 11 countries in Asia, Europe and Australia. Security Screening Kromek secured a milestone five-year agreement, valued at a minimum of $3.1m, with an existing US-based customer that is an emerging leader and global company in the homeland security marketplace. It is Kromek’s first long-term contract in the security screening market and, significantly, is another OEM customer that has moved from being an R&D customer to entering the commercial phase. In addition, Kromek was awarded a contract, valued at $990,000, by an existing US-based customer, that is a global leader in aerospace and defence technologies. The contract is for the upgrade of the Group’s advanced security screening detectors that the customer has deployed since 2009. The upgraded CZT detectors are critical to the customer’s security screening application. Kromek was also awarded two contracts, totalling $265,000, which were both delivered during the period. One for the Group’s bottle scanners, from an Asian airport group that is a new customer, and the other for components for screening systems, from an existing customer. r&D The Group continued to work on both externally and internally funded R&D activities to develop products and platform technologies that can form important elements of our future product roadmap. During the period, six new patents were filed and 11 patents were granted. The research pipeline has delivered several fundamental new technologies as we: n invested in developing a new low-power Bluetooth- connected readout system designed for seamless integration of large volume vehicle-mounted detectors (complementing the handheld D3S detectors) in the SIGMA detector network; n successfully developed and supplied prototype radiation detectors to DTRA that resulted in a new award for the development of detectors for military applications; n developed a high-performance ASIC for use in advanced radiation detectors, further enhancing the product offerings in the nuclear detection market while lowering electronic design costs; and n developed and introduced a new series of x-ray imaging modules in the BMD market, further enhancing Kromek’s position in this market. “Kromek is experiencing a step change in the growth across all its business segments and expects to report revenue growth for 2017/18 of approximately 40%” outlook Kromek is experiencing a step change in the growth across all its business segments and expects to report revenue growth for 2017/18 of approximately 40% in line with market expectations. This expectation is underpinned by the good visibility of revenues as the Group continues delivery on over $40m of contracts signed over the last 24 months. The Group also continues to benefit from its customers launching next-generation CZT-based products into the market. In 2017/18, Kromek expects OEM customers to launch further products incorporating the Group’s technology, prompting additional orders to be placed as sales of these products accelerate. Overall, the Group’s products continue to gain traction in all its business segments with Kromek winning new customers as well as strengthening its relationships with existing customers. With a strengthened order book in place and improved revenue visibility, the Board looks to the future with confidence. 5 KromeK Group plc Annual Report & Accounts 2017 Business Review and Strategic Report Chief Financial Officer’s Review “Key areas of development were to expand the D3S suite of products and the SPECT and BMD platforms linked to existing contract deliverables and significant future revenue opportunities” Mr Derek Bulmer Chief Financial Officer 27 June 2017 “Year-on-year growth in product sales of 23% reflects further traction with the D3S, SPECT and BMD products delivering on the supply contracts that have been announced over the last 24 months” 6 This was a successful year for Kromek as the Group achieved another year of revenue growth, with the continued increase in product sales, and improved gross margin resulting in reduced EBITDA loss. We also significantly strengthened our balance sheet with a placing and open offer in February 2017 of £19.8m (net). revenue The Group achieved revenue growth of 7.5% year-on-year driven by higher product sales at £6.7m (2015/16: £5.4m), which accounted for 74% of total revenue (2015/16: 65%) as detailed in the table below. revenue mix 2016/17 2015/16 £’000 % share £’000 % share product r&D Total 6,671 2,297 8,968 74% 26% 5,432 2,910 8,342 65% 35% The year-on-year growth in product sales of 23% reflects further traction with the D3S, SPECT and BMD products as they delivered on the supply contracts that have been announced over the last 24 months. Gross margin Gross margin (calculated before labour and overhead recovery) increased to 57% (2015/16: 53%). This improvement is the result of product mix and production efficiencies as well as the impact of the allocation of product development amortisation. On the latter point, amortisation of product development is now expensed on a straight-line estimate rather than linked to specific sales of unit product. The Group amended its accounting estimate of development cost amortisation to reflect the changes KromeK Group plc Annual Report & Accounts 2017 in the accounting standards, IAS 38: Intangible Assets and IAS 16: Property, Plant and Equipment, which were effective for accounting periods beginning on or after 1 January 2016. On a like-for-like basis, if the gross margin in 2015/16 is re- calculated on the same basis as it has been for 2016/17 relating to the change in allocation of amortisation costs, gross margin for 2015/16 would be 55%. Thus, like-for-like, gross margin improved by 2% year-on-year, driven by product mix and production efficiencies. (including operating Administration costs expenses) Administration costs and operating expenses increased by 5% to £8.7m (2015/16: £8.3m). The key movement in the year relates to the higher amortisation charge of £1.4m (2015/16: £0.8m) resulting from the change in the method of estimate and allocation of amortisation as noted above. This additional charge was partly offset by some net cost savings of approximately £0.2m. eBITDA and profit/(loss) from operations Due to increased product sales and movement in gross margin, EBITDA for 2016/17 was a loss of £1.5m compared with a loss of £2.4m for the prior year, as set out in the table below: Revenue Gross margin (%) Loss Before Tax eBITDA Adjustments: Net interest Depreciation Amortisation Share-based payments Other income eBITDA 2016/17 £’000 8,968 57% (3,794) 40 762 1,417 99 15 2015/16 £’000 8,342 53% (4,143) 83 709 828 166 (19) (1,461) (2,376) The £0.9m improvement in EBITDA in 2016/17 compared with 2015/16 is substantially a result of £0.7m of additional gross profit generated from higher revenues and improvements in gross margin. This has been further supported by net reductions in administrative costs as noted above. Loss before tax for the year was £3.8m (2015/16: £4.1m loss). 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 £0.7m for the year (2015/16: £0.9m). The Group deferred tax provision saw a movement of a credit of nil (2015/16: £1.2m) 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 £0.7m (2015/16: £2.0m). earnings per Share (“epS”) EPS is recorded in the year on a basic and diluted basis producing a loss of 1.8p per share (2015/16: 1.5p loss per share) for basic and a loss of 1.7p per share (2015/16: 1.5p loss per share) for diluted. r&D The Group invested £4.2m in the year (2015/16: £2.8m) in near- term product developments that were capitalised on the balance sheet, reflecting the continued commitment to invest for the future growth of the business with new and enhanced products, and to meet the demands of customer programmes. A further £3.5m (2015/16: £3.2m) was incurred in the research and development of the core technology platform and manufacturing capabilities and expensed through the income statement in the period. Key areas of development were to expand the D3S suite of products and the SPECT and BMD platforms linked to existing contract deliverables and significant future revenue opportunities. The main driver in the increase in year-on-year near-term product development of £1.4m was the investment in a new ASIC platform that can be utilised to broaden the product portfolio by enabling higher detection sensitivity and smaller product form factors. The Group continues to undertake this investment in order to advance its commercial advantage. This was manifest in the period in D3S, BMD and SPECT product sales. This investment is considered critical and ongoing as the Group commercialises the opportunities that the technology provides and expands capabilities in a number of different applications, which will be further augmented by the recent ASIC development. During the period, the Group undertook expenditure on patents and trademarks of £0.3m (2015/16: £0.3m) with six new patents filed and 11 patents granted. capital expenditure Capital expenditure in the year amounted to £0.3m (2015/16: £0.4m), which primarily relates to upgrading the IT network along with some modest manufacturing projects. cash Balance Cash and cash equivalents was £20.3m at 30 April 2017 (31 October 2016: £3.8m; 30 April 2016: £3.6m). This follows the successful placing and open offer in February 2017 of £19.8m (net), offset by the adjusted EBITDA loss for the period, further investment in product development in the year of £4.2m, net working capital expansion in debtors, inventory and payables of £0.9m and a £3m drawn down on the newly renewed RCF facility. 7       KromeK Group plc Annual Report & Accounts 2017 We constantly evaluate new opportunities for our existing and complementary technologies Vertically integrated offering from advanced sensor materials to detection solutions Materials & Detectors Detector Fabrication Bonding & Hybridisation Research & Development ASICs & Electronics Application Development Systems Engineering Algorithms & Software ERNST & YOUNG ENTREPRENEUR OF THE YEAR A W A R D S I N N OVAT I O N W I N N E R 2 0 16 8 KromeK Group plc Annual Report & Accounts 2017 Kromek designs, develops and produces x-ray and gamma-ray imaging and radiation detection products Where we operate: eV Products, Inc. Pennsylvania Group Headquarters County Durham NOVA R&D, Inc. California Kromek has three major operational facilities in California, Pennsylvania and County Durham. We have established sales and distribution relationships covering Europe, North America and Asia Pacific 9 KromeK Group plc Annual Report & Accounts 2017 Kromek’s high-resolution CZT camera for SPECT enables superior diagnostics “Using CZT for medical imaging is like jumping straight from VHS to HD DVD in terms of image quality” GE Healthcare website ‘The Pulse’ 10 10 KromeK Group plc Annual Report & Accounts 2017 Medical Imaging SPECT: Nuclear Medicine diagnostic imaging where the patient is injected with a radio-pharmaceutical which concentrates at sites indicating diseases like cancer, Alzheimer’s or Parkinson’s Kromek offering Kromek provides simple turn-key product solutions and a robust supply chain for OEMs to integrate CZT cameras into their new systems and/or retrofit installed base Advantages of using cZT Higher resolution with superior specificity Reduced dose Reduced scan time Enables images of several tracers at once, further reducing scan time Improved image quality enables personalized medicine with more accurate and earlier detection of diseases such as cardiac ischemia and cancer, leading to earlier, more effective diagnosis, enabling a faster treatment cycle for lower cost of care Thyroid camera $100m+ Annual market opportunity for Kromek General purpose camera 11 KromeK Group plc Annual Report & Accounts 2017 D3S - Creating Intelligent Radiation Detection Networks Safeguarding cities from the threat of nuclear ‘dirty bombs’ 12 12 KromeK Group plc Annual Report & Accounts 2017 Nuclear Detection D3S - a portable combined gamma neutron detector which is networked via mobile phone linked to a central server. Warning system against the threat of nuclear terrorism The DARPA SigmA System D3S/Android Vehicle-mounted sensors Neutron Panels ID Web-based Situation Awareness & Analysis UI External System Integration The story so far... 10,000 detectors shipped 10000 , 2.5bn recorded data points acquired 2.5bn 10+ number of significant events in USA 10+ Port Authority of New York and New Jersey trial Source: DARPA.mil website 100 100-fold increase in the ability to locate & identify sources of radiation 1__ 10 One tenth of the cost of conventional sensors 10x 10 times faster at detecting gamma and neutron radiation 13 13 D3S - Creating Intelligent Radiation Detection Networks Safeguarding cities from the threat of nuclear ‘dirty bombs’ KromeK Group plc Annual Report & Accounts 2017 Working with partners to provide new technology to safeguard people and the environment Working in collaboration and partnership with customers has long been a cornerstone of how Kromek does business. Working in a safe and secure environment is an integral part of business culture at nuclear power giant, EDF Energy. Kromek and EDF Energy formed a partnership to solve one of the nuclear industry’s intractable problems: how to quickly and accurately determine whether an area or material had become contaminated and, if so, with what. Any time saved in determining the nature and extent of an incident is crucial to the rapid implementation of vital response teams and recovery times. Analysis techniques within the industry, historically, could be time consuming and involved taking samples to laboratories for analysis that could delay response times and further sampling. EDF Energy required a system that offered high- performance radiation detection capabilities that provided fast and accurate measurement of potentially mixed sources of radiation in real-time while being small and robust enough to be easily transported and used in-field. Utilising the GR1 detector at its core, Kromek and EDF Energy designed a fast and accurate analytical tool that could easily be installed into a vehicle. A fit for purpose software package was also designed in collaboration with EDF Energy. “As a business, EDF Energy is continuously investing in improving safety standards at all its sites and the development of the Q4GR1 has helped increase this capability” 14 14 EDF Energy Hunterston ‘B’ Power Station The high-resolution GR1 can accurately measure, separate and identify the presence of individual sources of radiation within mixed samples, and, because the detector is small, lightweight and portable, and has no requirement for cooling, it is ideal for in-field measurement. In-field testing and certification was undertaken by Cavendish Nuclear in conjunction with EDF Energy to verify the system’s capability in meeting EDF KromeK Group plc Annual Report & Accounts 2017 Energy’s Minimum Detectable Activity specifications, accurately detecting the low levels of radiation. As a business, EDF Energy is continuously investing in improving safety standards at all its sites and the development of the Q4GR1 has helped increase this capability. The result is the Q4GR1, which provides accurate results within 10 to 20 minutes, allows large numbers of samples to be taken in a reduced period of time. These provide actionable information for safeguarding public safety and helping to secure a safe working environment. EDF Energy is currently deploying the Q4gR1 into their environmental survey vehicles across the UK as part of their emergency arrangements. Final product: Q4GR1 installed inside an EDF Energy Environmental Survey vehicle The product development journey: incorporating the GR1 into the design process for the Q4GR1 15 KromeK Group plc Annual Report & Accounts 2017 Directors’ Biographies Sir Peter Williams Chairman Audit Committee Chair Dr Arnab Basu Chief Executive Officer Mr Derek Bulmer Chief Financial Officer and In-House Counsel Sir Peter was awarded an MA and PhD from the University of Cambridge, then taught at Imperial College. Moving into industry, he became Deputy CEO of VG Instruments Ltd and CEO and later Chairman of Oxford Instruments, the first spin-out from Oxford University. He was Senior Independent Director of GKN plc and a non-executive director of W.S. Atkins plc. He was also Chairman of Isis Innovation Ltd (the technology transfer arm of Oxford University). He received a CBE in 1992 and was knighted in 1998. He is currently Chairman of the Daiwa Anglo Japanese Foundation and advises several high technology companies. Dr Basu has a PhD in physics from Durham University, specialising in semiconducting sensor materials. Arnab held senior management positions in his family business, 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). A qualified Chartered Accountant and Barrister, Mr Bulmer has worked with KPMG and undertaken a number of senior management roles with blue chip public companies 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. 16 KromeK Group plc Annual Report & Accounts 2017 Mr Lawrence Kinet Non-Executive Director Dr Graeme Speirs Non-Executive Director Mr Jerel Whittingham Non-Executive Director Remuneration Committee Chair 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. 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 the University of Birmingham. Involved in the oil and gas industry, Graeme is an expert in the design and manufacture of polymer composite products. Mr Whittingham has extensive experience in investor, operational and strategy roles with technology-rich companies including Incuvest LLC, Amphion Innovations plc (Board member), INMARSAT and with several start-ups. He was appointed to Kromek’s Board in September 2013 having served on the Board of DSC Ltd, a predecessor company. He also served as CEO and later Executive chairman of university spin out, Myconostica Ltd, a medical technology company. Jerel is a graduate of London (UCL), Brussels and Cranfield Universities. 17 KromeK Group plc Annual Report & Accounts 2017 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 2017. principal activities Kromek Group plc is the leading developer of radiation detectors based on cadmium zinc telluride (CZT), 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 2017, principal risks and uncertainties, research and development, financial KPIs and the outlook for future years, are set out in the Chairman’s Statement, Chief Executive Officer’s and Chief Financial Officer’s Reviews, on pages 2-7. Future developments The Group’s development objectives for 2017–18 are disclosed in the Chief Executive Officer and Chief Financial Officer reviews on pages 4-7. The Directors continue to monitor the potential impacts of the UK’s decision to leave the European Union (EU). As the Group’s turnover is generated globally and the proportion of UK to EU trade is not a significant portion of this, the Directors believe that the impact will not be significant in the short term. The Directors will put in place plans to reduce or mitigate the risks arising once they have been firmly established. 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 2017. results and dividends The consolidated income statement is set out on page 29. The Group’s loss after taxation amounted to £3.08m (2015/16: £2.15m). The Directors do not recommend the payment of a dividend for the year ended 30 April 2017. During the year ended 30 April 2017, the Group made political donations of £nil (2015/16: £nil) and charitable donations of £nil (2015/16: £nil). 18 Directors The Directors, who served throughout the year except as noted, were as follows: Dr A Basu Mr D Bulmer Sir P Williams Mr L Kinet Dr G K Speirs Mr J H Whittingham 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 16 to the parent company financial statements. 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 The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors: n properly select and apply accounting policies; n present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; n provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and n make an assessment of the Company’s ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Auditor Each of the persons who is a Director at the date of approval of this annual report confirms that: n so far as the Director is aware, there is no relevant audit information of which the Group’s auditor is unaware; and n 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 auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. Deloitte LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. By order of the Board Dr Arnab Basu mBe Chief Executive Officer 27 June 2017 KromeK Group plc Annual Report & Accounts 2017 19 KromeK Group plc Annual Report & Accounts 2017 Review of Principal Risks The Board has carried out a robust assessment of the principal risks to achieving its strategic objectives. Risks are reviewed on a regular basis by the Board to identify any changes in risk profiles and to consider the optimal range of mitigation strategies. Risk Description mitigation Risks associated with competition The Group faces competition from two types of competitor: specialised companies targeting discrete markets and divisions of large integrated device manufacturers. The Group’s current and future competitors may develop superior technology or offer superior products, sell products at a lower price or achieve greater market acceptance in the Group’s target markets. Competitors may have longer operating histories, greater name recognition, access to larger customer bases and resources. As such, they could be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sale of their products than the Group could. To the extent possible, the Group carefully monitors competing technologies and product offerings. The Group intends to continue to make commercially- driven investments in developing new technologies and products to maintain a strong technology position, and is investing in further and more specialised marketing and sales resources. Group IP gives some additional protection and Kromek has invested in new IP management systems and processes in the last financial year. Risks associated with management of the group’s growth strategy The ability of the Group to implement its strategy in rapidly evolving and competitive markets will require effective management planning and operational controls. Significant expansion will be required to respond to market opportunities and the Group’s future growth and prospects will depend on its ability to manage this growth and to continue to expand and improve operational and financial performance, whilst at the same time maintaining effective cost controls. The Group’s experienced management team is well versed in the current markets available to the Group and well positioned to adapt to any changes in those markets. The Group also has detailed control systems including R&D cost control and extensive project management criteria. The Group has demonstrated its ability to identify, execute and integrate M&A opportunities with its two successful US acquisitions. Risks associated with product and technology adoption rates The rate of market acceptance of the Group’s products is uncertain as many factors influence the adoption of new products including changing needs, regulation, marketing and distribution, users’ habits and business systems and product pricing. Risks associated with timing of customer or third- party projects The Group’s strategy includes co-development with, or licensing its technologies to, large OEM partners for additional development, manufacturing or subsequent marketing. Consequently, the Group will be increasingly reliant on securing and retaining such partners, and delays in the progress of the development, manufacturing or marketing of the end product, as a result of a partner’s action or inaction, may delay the receipt of product-related revenues. 20 With a widely applicable technology base, the Group only chooses opportunities in which it believes there is a good match between its rare or unique capabilities and strong adoption drivers in growing large markets. The use of common technology platforms across multiple markets and applications reduces the investment risk in any given market segment and diversifies overall adoption risk. The Group has a diversified customer base and operates in a carefully selected portfolio of markets with different adoption risks and cycles. As part of its business model it also more directly controls a certain fraction of its revenues via the sale of complete end-user products in three different markets. KromeK Group plc Annual Report & Accounts 2017 Risk Description mitigation Risks associated with exchange rate fluctuations As a consequence of the international nature of its business, the Group is exposed to risks associated with changes in foreign currency exchange rates on both sales and operations. The Group is based in the UK and presents its financial statements in pounds sterling. However, its subsidiaries eV Products, Inc. and NOVA R&D, Inc., operate in the US and earn revenues and incur costs in US dollars. A growing proportion of the Group’s future revenues are expected to be denominated in currencies other than pound sterling. Exchange rate variations between currencies in which the Group operates could have a significant impact on the Group’s reported financial results. The Group is predominantly exposed to currency risk on sales and purchases made from customers and suppliers. Sales and purchases from customers and suppliers are made on a central basis and the risk is monitored centrally but not hedged utilising any forward exchange contracts. Apart from these particular cash flows, the Group aims to fund expenses and investments in the respective currency and to manage foreign exchange risk at a local level by matching the currency in which revenue is generated and expenses are incurred. 21 KromeK Group plc Annual Report & Accounts 2017 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 Non-Executive 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 also reviews the effectiveness of the Group’s internal control over financial reporting and considers key financial judgements made in the financial statements. 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 Non-Executive 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 24-26. 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 often made to analysts at those times to present the Group’s results and report on developments. This assists with the promotion of knowledge of the Group in the investment marketplace and with shareholders. The Board uses both the annual report and financial statements and the Annual General Meeting to communicate directly with private and institutional investors and welcomes their participation. The Chairman aims to ensure that the Chairs of the audit and remuneration committees are available at the Annual General Meeting to answer questions. Internal control The Board is responsible for establishing and maintaining the Group’s system of internal control and for reviewing its effectiveness. The system is designed to manage rather than eliminate the risk of failure to achieve the Group’s strategic objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. As an AIM listed company, the Group does not need to comply with Code provision C2.1 regarding the Directors giving a summary of the process applied by the Board in reviewing the effectiveness of the system of internal control. Instead, the Directors have set out below some of the key aspects of the Group’s internal control procedures. An ongoing process has been established for identifying, evaluating and managing the significant risks faced by the Group. The process has been in place for the full year under review and up to the date of approval of the annual report and financial statements. The Board regularly reviews this process as part of its review of such risks within its meetings. Where any weaknesses are identified, an action plan is prepared to address the issues and is then implemented. 22 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 concern other than via the Executive Directors and senior leadership team. Going concern As at 30 April 2017, the Group had net assets of £42.2m (2015/16: £24.7m) and cash and cash equivalents of £20.3m (2015/16: £3.9m) 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 five 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. KromeK Group plc Annual Report & Accounts 2017 23 KromeK Group plc Annual Report & Accounts 2017 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 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 remuneration committee is responsible for recommending the remuneration and other terms of employment for the Executive Directors of Kromek Group plc. 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 2017 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 2017 £’000 30 April 2016 £’000 10 53 16 30 In determining remuneration for the year, the committee has given consideration to the requirements of the UK Corporate Governance Code. remuneration policy The remuneration of Executive Directors is determined by the committee and the remuneration of Non-Executive Directors is approved by the full Board of Directors. The remuneration of the Chairman is determined by the Independent Non-Executive Directors. The remuneration packages of Executive Directors comprise the following elements: Basic salary and benefits Basic salaries for Executive Directors are reviewed annually having regard to individual performance and market practice. In most cases, benefits provided to Executive Directors comprise the provision of a Group car, or appropriate allowance, health insurance and contributions to a Group personal pension scheme. Annual bonus A bonus may be awarded at the end of each financial year, at the discretion of the 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. 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. 24 KromeK Group plc Annual Report & Accounts 2017 Directors’ shareholdings Beneficial interests of the Directors in the shares of the Group are shown below: Arnab Basu Derek Bulmer Peter Williams Lawrence Kinet Graeme Speirs* Jerel Whittingham 30 April 2017 30 April 2016 Number 2,952,000 63,934 80,000 200,000 23,768,415 114,890 % 1.1 0.0 0.0 0.1 9.2 0.0 Number 2,072,000 40,000 30,000 150,000 16,268,415 110,450 % 1.4 0.0 0.0 0.1 10.7 0.1 * Graeme Speirs has a direct interest in 10,994,940 (2016: 3,494,940) ordinary shares and is interested in 12,773,475 ordinary shares (2016: 12,773,475) held through Polymer Holdings Ltd. In total, Mr Speirs is interested, directly or indirectly, in 23,768,415 (2016: 16,268,415) ordinary shares amounting to 9.2% (2016: 10.7%) of the issued share capital. Directors’ emoluments for the year ended 30 April 2017 Salary £’000 Fees £’000 Benefits £’000 Bonus £’000 Pension contributions £’000 Total emoluments 2017 £’000 Total emoluments 2016 £’000 Non-executive chairman Sir Peter Williams executive Arnab Basu Derek Bulmer Non-executive Lawrence Kinet Graeme Speirs Jerel Whittingham Peter Bains* Charlotta Ginman* Max Robinson* Brian Tanner* 74 165 137 36 36 39 - - - - - - - - - - - - - - - 7 7 - - - - - - - - 30 - - - - - - - - - 10 64 - - - - - - - 74 235 197 36 36 39 - - - - 42 224 206 47 39 42 29 32 25 27 * Peter Bains, Charlotta Ginman, Professor Max Robinson and Professor Brian Tanner resigned from the Board with effect from 16 December 2015. 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 January 2017, an incentive award scheme for Arnab Basu and Derek Bulmer, to offer them up to 595,200 and 370,647 shares respectively, at a price of 1p per share to vest based on specified performance criteria. The remuneration committee agreed, in October 2015, an incentive award scheme for Arnab Basu and Derek Bulmer, to offer them up to 544,263 and 271,140 shares 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 up to 425,859 and 181,182 shares 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 up to 372,057 and 158,292 shares 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 auditor. 25 KromeK Group plc Annual Report & Accounts 2017 Directors’ Remuneration Report (continued) As at 30 April 2017, only the shares issued in the October 2013 award had vested with the 2014, 2015 and 2016 issues remaining unvested. Share price during the year During the year to 30 April 2017, the highest share price was 33.75p (2016: 49p) and the lowest share price was 19.86p (2016: 25.5p). The market price of the shares at 30 April 2017 was 30.12p (2016: 32.8p). 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 exercise price p 2016 number Awarded during the year Arnab Basu 22 September 2006 Arnab Basu 15 May 2007 1.5 1.5 800,000 80,000 Arnab Basu 20 November 2011 20.0 1,000,000 Derek Bulmer 13 September 2010 Derek Bulmer 15 October 2012 Derek Bulmer 31 May 2013 20.0 20.0 20.0 500,000 125,000 250,000 - - - - - - exercised during the year (800,000) (80,000) At 30 April 2017 number expiry date - - 22 September 2016 15 May 2017 - - - - 1,000,000 20 September 2021 500,000 13 September 2020 125,000 15 October 2022 250,000 31 May 2023 26 KromeK Group plc Annual Report & Accounts 2017 consolidated Financial Statements for the year ended 30 April 2017 27 KromeK Group plc Annual Report & Accounts 2017 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 2017 which comprise 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 related notes 1 to 37 in the Consolidated Financial Statements and related notes 1 to 17 in the Parent Company Financial Statements. 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 material misstatements or inconsistencies we consider the implications for our report. 28 opinion on financial statements In our opinion: n 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 2017 and of the group’s and the parent company’s loss for the year then ended; n the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; n 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 n 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, based on the work undertaken in the course of the audit: n the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and n the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and the Directors’ Report. 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: n 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 n the parent company financial statements are not in agreement with the accounting records and returns; or n certain disclosures of directors’ remuneration specified by law are not made; or n 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 Statutory Auditor Newcastle upon Tyne, United Kingdom 27 June 2017 continuing operations Revenue Cost of sales Gross profit Other operating income Distribution costs Administrative expenses (including operating expenses) operating loss Finance income Finance costs loss before tax Tax loss for the year from continuing operations Loss per share - basic (p) - diluted (p) Note 5 5 10 11 7 12 14 KromeK Group plc Annual Report & Accounts 2017 Consolidated income statement For the year ended 30 April 2017 2017 £’000 2016 £’000 8,968 (3,851) 5,117 (15) (194) 8,342 (3,913) 4,429 19 (181) (8,662) (8,327) (3,754) (4,060) 5 (45) 1 (84) (3,794) (4,143) 710 1,992 (3,084) (2,151) (1.8) (1.7) (1.5) (1.5) 29 KromeK Group plc Annual Report & Accounts 2017 Consolidated statement of comprehensive income For the year ended 30 April 2017 loss for the year Items that are or may be subsequently reclassified to profit or loss: 2017 £’000 2016 £’000 (3,084) (2,151) Exchange differences on translation of foreign operations 685 156 Total comprehensive loss for the year (2,399) (1,995) 30 KromeK Group plc Annual Report & Accounts 2017 Consolidated statement of financial position As at the year ended 30 April 2017 Non-current assets Goodwill Other intangible assets Property, plant and equipment current assets Inventories Trade and other receivables Current tax assets Cash and bank balances Total assets current liabilities Trade and other payables Finance lease liabilities Borrowings Provisions for liabilities Net current assets Non-current liabilities Finance lease liabilities Deferred tax liabilities Total liabilities Net assets equity Share capital Share premium account Capital redemption reserve Translation reserve Accumulated losses Total equity Note 15 16 17 19 21 21 24 22 26 25 23 28 29 30 31 2017 £’000 1,275 14,824 3,698 19,797 3,204 6,005 596 20,343 30,148 49,945 (4,567) - (3,000) (169) (7,736) 22,412 - - (7,736) 42,209 2,591 63,270 1,175 757 (25,584) 2016 £’000 1,275 11,222 3,974 16,471 2,810 5,159 811 3,857 12,637 29,108 (4,445) (9) - - (4,454) 8,183 - - (4,454) 24,654 1,522 44,484 1,175 72 (22,599) 42,209 24,654 The financial statements of Kromek Group plc (registered number 08661469) were approved by the board of directors and authorised for issue on 27 June 2017. They were signed on its behalf by Dr Arnab Basu mBe Chief Executive Officer 31 KromeK Group plc Annual Report & Accounts 2017 Consolidated statement of changes in equity For the year ended 30 April 2017 equity attributable to equity holders of the company Share capital £’000 Share premium account £’000 Capital redemption reserve £’000 Translation reserve £’000 Accumulated losses £’000 Total equity £’000 Balance at 1 may 2015 1,082 34,643 1,175 Loss for the year Exchange difference on translation of foreign operations Total comprehensive losses for the year Issue of share capital net of expenses Credit to equity for equity- settled share based payments - - - - - - 440 9,841 - - - - - - - Balance at 30 April 2016 1,522 44,484 1,175 Loss for the year Exchange difference on translation of foreign operations Total comprehensive losses for the year Issue of share capital net of expenses Credit to equity for equity-settled share based payments - - - - - - 1,069 18,786 - - - - - - - (84) - 156 (20,614) (2,151) 16,202 (2,151) - 156 156 (2,151) (1,995) - - 72 - - 10,281 166 166 (22,599) 24,654 (3,084) (3,084) 685 - 685 685 (3,084) (2,399) - - - 99 19,855 99 Balance at 30 April 2017 2,591 63,270 1,175 757 (25,584) 42,209 32 Net cash used in operating activities Investing activities Interest received Purchases of property, plant and equipment Purchases of patents and trademarks Capitalisation of development costs Net cash used in investing activities Financing activities Loans paid Revolving credit facility Proceeds on issue of shares Payment of finance lease liabilities Interest paid Net cash generated from financing activities Net increase in cash and cash equivalents cash and cash equivalents at beginning of year Effect of foreign exchange rate changes cash and cash equivalents at end of year KromeK Group plc Annual Report & Accounts 2017 Consolidated statement of cash flows For the year ended 30 April 2017 Note 32 2017 £’000 2016 £’000 (1,500) (2,845) 5 (261) (320) (4,187) (4,763) - 3,000 19,855 - (45) 22,810 16,547 3,857 (61) 20,343 1 (444) (320) (2,819) (3,582) (1,003) - 10,281 (9) (84) 9,185 2,758 1,183 (84) 3,857 33 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements For the year ended 30 April 2017 1. GeNerAl INFormATIoN Kromek Group plc is a company incorporated and domiciled in the United Kingdom under the Companies Act. These financial statements are presented in pound 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. The Group’s financial information has been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and on a basis consistent with that adopted in the previous year. ADopTIoN oF New AND reVISeD STANDArDS 2. The Group has adopted all amendments to standards with an effective date relevant to this year end with no material impact on its results, assets or liabilities. All other accounting policies have been applied consistently. 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): n IFRS 9 “Financial Instruments” will supersede IAS 39 “Financial Instruments – Recognition and Measurement” and is effective for annual periods beginning on or after 1 January 2018. IFRS 9 covers classification and measurement of financial assets and financial liabilities, impairment of financial assets and hedge accounting. n IFRS 15 “Revenue from Contracts with Customers” provides a single model for accounting for revenue arising from contracts with customers, focusing on the identification and satisfaction of performance obligations, and is effective for annual periods beginning on or after 1 January 2018. IFRS 15 will supersede IAS 18 “Revenue”. n IFRS 16 “Leases” provides a new model for lessee accounting in which all leases, other than short-term and small-ticket item leases, will be accounted for by the recognition on the balance sheet of a right-to-use asset and a lease liability, and the subsequent amortisation of the right-to-use asset over the lease term. IFRS 16 will be effective for annual periods beginning on or after 1 January 2019. The Directors are considering the future impacts of IFRS 9, IFRS 15 and IFRS 16, however it is not practicable to provide a reasonable assessment of the impacts of the standards until a detailed review has been completed. A detailed review of the impact of IFRS 15 will be completed in the upcoming financial year. SIGNIFIcANT AccouNTING polIcIeS 3. 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 modified for assets recognised at fair value on acquisition. 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. Going concern As at 30 April 2017, the Group had net assets of £42.2m (2016: £24.7m) and cash and cash equivalents of £20.3m (2016: £3.9m) 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 five 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. 34 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 3. SIGNIFIcANT AccouNTING polIcIeS (coNTINueD) Acquisitions on or after 1 may 2010 For acquisitions on or after 1 May 2010, the Group measures goodwill at the acquisition date as: n the fair value of the consideration transferred; plus n the recognised amount of any non-controlling interests in the acquiree; plus n the fair value of the existing equity interest in the acquiree; less n 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: Sale of goods and services i) 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 amount can be measured reliably, and it is probable that future economic benefits will flow to the Company. 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 ii) 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. Long-term contracts iii) 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 iv) 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 v) 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. 35 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 3. SIGNIFIcANT AccouNTING polIcIeS (coNTINueD) 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. 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. 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. 36 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 3. SIGNIFIcANT AccouNTING polIcIeS (coNTINueD) 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. Current tax i) 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 ii) Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the Consolidated Statement of Financial Position and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the statement of financial position liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted or substantively enacted at the statement of financial position date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. property, plant and equipment Fixtures and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is recognised so as to write off the cost or valuation of assets (other than land and properties under construction) less their residual values over their useful lives, using the straight-line method, on the following bases: Plant and machinery Fixtures, fittings and equipment Computer equipment 6% to 25% 15% 25% The gain or loss arising on the disposal or scrappage of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. Internally-generated intangible assets – research and development expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally-generated intangible asset arising from the Group’s product development is recognised only if all of the following conditions are met:  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;  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.  the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and  its ability to measure reliably the expenditure attributable to the intangible asset during its development. 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 37 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 3. SIGNIFIcANT AccouNTING polIcIeS (coNTINueD) 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 2-15-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 cash generating unit (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 post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or CGU) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Inventories Inventories are stated at the lower of cost and net realisable value. Costs comprise direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated in the statement of financial position at standard cost, which approximates to historical cost determined on a first in, first out basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Work in progress costs are taken as production costs, which include an appropriate proportion of attributable overheads. 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. provisions for liabilities Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Such provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value reflects current market assessments of the time value of money. Provisions are not recognised for future operating losses. Financial instruments Financial assets and financial liabilities are recognised in the Group’s statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Financial assets i) All financial assets are recognised and derecognised on a trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value. 38 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 3. SIGNIFIcANT AccouNTING polIcIeS (coNTINueD) 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 ii) 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. Impairment of financial assets iii) Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each statement of financial position date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. Derecognition of financial assets iv) The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. Financial liabilities and equity v) Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. Equity instruments vi) 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. Financial liabilities vii) 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 method 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. Derecognition of financial liabilities ix) The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. Share-based payments Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date and spread over the period during which the employees become unconditionally entitled to the options, which is based on a period of employment of three years from grant date. Details regarding the determination of the fair value of equity- settled share-based transactions are set out in note 34. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest. The vesting date is determined based on the date an employee is granted options, usually three years from date of grant. At each statement of financial position date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves. 39 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 3. SIGNIFIcANT AccouNTING polIcIeS (coNTINueD) cash Cash, for the purposes of the statement of cash flows, comprises cash in hand and deposits repayable on demand, less overdrafts repayable on demand. crITIcAl AccouNTING juDGemeNTS AND Key SourceS oF eSTImATIoN uNcerTAINTy 4. In the application of the Group’s accounting policies, which are described in note 3, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. critical judgements in applying the Group’s accounting policies The following are the critical judgements that the Directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. Development costs As described in note 3, the Group expenditure on development activities is capitalised if it meets the criteria as per IAS 38. These capitalised assets are amortised 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. 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) Development costs As disclosed in note 16, 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. ii) 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. iii) Contract revenue This policy requires forecasts to be made of the outcomes of long-term contracts, which include assessments and judgements on changes in expected costs. Ongoing revenue and profit recognition is also dependent on contract debtors being fully recoverable, which over the course of a multi-year contract requires ongoing monitoring and assessment. A change in the likelihood of recoverability could have a material impact on the results of the Group. 40 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 reVeNue 5. An analysis of the Group’s revenue is as follows: continuing operations Sales of goods and other services Revenue from grants Revenue from contract customers Total revenue Grant income Other income Total income 2017 £’000 6,676 74 2,218 8,968 (15) - 8,953 2016 £’000 6,015 227 2,100 8,342 15 4 8,361 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 performance indicators: revenues, gross profit and operating profit. The amounts provided to the Board with respect to assets and liabilities are measured in a way consistent with the Financial Statements. The turnover, profit on ordinary activities and net assets of the Group are attributable to one business segment, i.e. the development of digital colour x-ray imaging enabling direct materials identification, as well as developing a number of detection products in the industrial and consumer markets. Analysis by geographical area A geographical analysis of the Group’s revenue by destination is as follows: United Kingdom North America Asia Europe Australasia Total revenue 2017 £’000 931 4,455 3,276 296 10 8,968 2016 £’000 688 5,468 1,940 246 - 8,342 41 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 6. operATING SeGmeNTS (coNTINueD) A geographical analysis of the Group’s revenue by origin is as follows: year ended 30 April 2017 UK Operations £’000 US Operations £’000 Total for Group £’000 revenue from sales Revenue by segment: -Sale of goods and services -Revenue from grants -Revenue from contract customers Total sales by segment Removal of inter-segment sales Total external sales Segment result – operating loss Interest received Interest expense loss before tax Tax credit loss for the year Reconciliation to EBITDA: Net interest Other operating income Tax Depreciation of PPE Amortisation Non-recurring other income Share-based payment charge eBITDA other segment information Property, plant and equipment additions Depreciation of PPE Intangible asset additions Amortisation of intangible assets Statement of financial position Total assets Total liabilities 42 4,515 74 349 4,938 (494) 4,444 (1,727) 5 (45) (1,767) 710 (1,057) 40 15 (710) 324 923 - 48 (417) 107 324 2,051 923 35,993 (6,428) 3,794 - 1,869 5,663 (1,139) 4,524 (2,027) - - (2,027) - (2,027) - - - 438 494 - 51 8,309 74 2,218 10,601 (1,633) 8,968 (3,754) 5 (45) (3,794) 710 (3,084) 40 15 (710) 762 1,417 - 99 (1,044) (1,461) 154 437 2,456 494 13,952 (1,308) 261 761 4,507 1,417 49,945 (7,736) KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 6. operATING SeGmeNTS (coNTINueD) year ended 30 April 2016 UK Operations £’000 US Operations £’000 Total for Group £’000 revenue from sales Revenue by segment: -Sale of goods and services -Revenue from grants -Revenue from contract customers Total sales by segment Removal of inter-segment sales Total external sales Segment result – operating loss Interest received Interest expense loss before tax Tax credit loss for the year Reconciliation to EBITDA: Net interest Tax Depreciation of PPE Amortisation Non-recurring other income Share-based payment charge 3,993 227 568 4,788 (393) 4,395 (2,174) 1 (81) (2,254) 856 (1,398) 80 (856) 314 449 (19) 166 2,974 - 1,532 4,506 (559) 3,947 (1,886) - (3) (1,889) 1,136 (753) 3 (1,136) 395 379 - - 6,967 227 2,100 9,294 (952) 8,342 (4,060) 1 (84) (4,143) 1,992 (2,151) 83 (1,992) 709 828 (19) 166 eBITDA (1,264) (1,112) (2,376) other segment information Property, plant and equipment additions Depreciation of PPE Intangible asset additions Amortisation of intangible assets Statement of financial position Total assets Total liabilities 314 (314) 1,447 (449) 19,240 (4,163) 130 (395) 1,692 (379) 9,868 (291) 444 (709) 3,139 (828) 29,108 (4,454) 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 intangible 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. 43 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 6. operATING SeGmeNTS (coNTINueD) revenues from major products and services The Group’s revenues from its major products and services were as follows: Product revenue Research and development revenue Consolidated revenue 2017 £’000 6,671 2,297 8,968 2016 £’000 5,432 2,910 8,342 Information about major customers Included in revenues arising from USA operations are revenues of approximately £1,869k (2016: £1,227k) which arose from a major customer. Included in revenues arising from UK operations are revenues of approximately £2,925k (2016: £3,047k) which arose from the Group’s largest customer. 7. loSS BeFore TAx For The yeAr Loss for the year has been arrived at after (crediting)/charging: Net foreign exchange (gains)/losses Research and development costs recognised as an expense Depreciation of property, plant and equipment Amortisation of internally-generated intangible assets Cost of inventories recognised as expense Staff costs (see note 9) 8. AuDITor’S remuNerATIoN The analysis of the auditor’s remuneration is as follows: Fees payable to the company’s auditor and their associates for other services to the Group –The audit of the Company and its subsidiaries Total audit fees - Audit-related assurance services - Taxation services Total non-audit fees Total 44 2017 £’000 (792) 3,520 762 1,417 4,534 6,638 2016 £’000 (304) 3,178 709 828 3,780 6,238 2017 £’000 2016 £’000 43 43 13 2 15 58 52 52 10 14 24 76 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 STAFF coSTS 9. The average monthly number of employees (excluding non-executive directors) was: 2017 Number 2016 Number Directors (executive) Research and development, production Sales and marketing Administration Their aggregate remuneration comprised: Wages and salaries Social security costs Pension scheme contributions Share based payments 2 88 7 12 109 2017 £’000 5,592 526 421 99 6,638 2 86 10 13 111 2016 £’000 5,155 451 466 166 6,238 The total Directors’ emoluments (including non-executive directors) was £606k (2016: £713k). The aggregate value of contributions paid to money purchase pension schemes was £63k (2016: £46k) in respect of two directors (2016: two directors). The highest paid director received emoluments of £235k (2016: £224k) and amounts paid to money purchase pension schemes was £10k (2016: £16k). Key management compensation: Wages and salaries and other short-term benefits Social security costs Pension scheme contributions Share based payment expense Key management comprise the Executive Directors and senior operational staff. 10. FINANce INcome Bank deposits Total finance income 2017 £’000 1,047 187 134 81 1,449 2017 £’000 5 5 2016 £’000 1,177 205 92 149 1,623 2016 £’000 1 1 45 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 11. FINANce coSTS Interest on bank overdrafts, loans and borrowings Total interest expense TAx 12. recognised in the income statement Current tax credit: UK corporation tax on losses in the year Adjustment in respect of previous periods Foreign taxes paid Total current tax Deferred tax: Origination and reversal of timing differences Adjustment in respect of previous periods Total deferred tax Total tax credit in income statement 2017 £’000 45 45 2017 £’000 596 114 - 710 - - - 710 Corporation tax is calculated at 19.9% (2016: 20%) of estimated taxable loss for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. reconciliation of tax credit The charge for the year can be reconciled to the profit in the income statement as follows: Loss before tax Tax at the UK corporation tax rate of 19.918% (2016: 20.0%) Expenses not deductible for tax purposes Effect of R&D Rate differences effect of R&D Income not taxable Unrecognised movement on deferred tax Effects of other tax rates/credits Effects of overseas tax rates Adjustment in respect of previous periods Unrelieved tax losses arising in the period Fixed asset timing differences Total tax credit for the year 2017 £’000 3,794 755 (29) 833 - 89 (71) - - 114 (897) (84) 710 Further details of deferred tax are given in note 23. There are no tax items charged to other comprehensive income. 46 2016 £’000 84 84 2016 £’000 811 45 (11) 845 1,298 (151) 1,147 1,992 2016 £’000 4,143 829 (40) 1,049 (307) 2 (156) 722 11 (118) - - 1,992 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 12. TAx (coNTINueD) The rate of corporation tax for the year has remained at 20%. Finance (No.2) Act 2015 reduced the rate from 20% to 19% (with effect from 1 April 2017) and to 18% (with effect from 1 April 2020). The 2020 rate was further reduced to 17% by Finance Act 2016. Accordingly, deferred tax has been provided in line with the rates at which temporary differences are expected to reverse. There is a potential deferred tax asset on excess tax deductions arising from share-based payments on exercise of share options of £1,091k (2016: £1,259k). The asset has not been recognised as it is not considered probable that there will be future profits available. DIVIDeNDS 13. The Directors do not recommend the payment of a dividend (2016: £nil). loSSeS per ShAre 14. The calculation of the basic and diluted earnings per share is based on the following data: losses Losses for the purposes of basic and diluted losses per share being net losses attributable to owners of the Group Number of shares Weighted average number of ordinary shares for the purposes of basic losses per share Effect of dilutive potential ordinary shares: Share options Weighted average number of ordinary shares for the purposes of diluted losses per share Basic (p) Diluted (p) 2017 £’000 (3,084) 2017 Number 2016 £’000 (2,151) 2016 Number 174,572,586 141,337,174 3,564,858 6,249,111 178,137,445 147,586,285 2017 (1.8) (1.7) 2016 (1.5) (1.5) 47 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 15. GooDwIll cost At 1 May 2016 At 30 April 2017 Accumulated impairment losses At 1 May 2016 At 30 April 2017 carrying amount At 30 April 2017 At 30 April 2016 £’000 1,275 1,275 - - 1,275 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: US operations 2017 £’000 1,275 2016 £’000 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 reported 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 be 35% in Year 1, 26% in Year 2, 129% in Year 3, 37% in Year 4 and 0% in Year 5. These cash flows are then discounted at the Company’s weighted average cost of capital of 11.5% (2016: 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 2017 (2016: £nil). Management have considered various sensitivity analyses in order to appropriately evaluate the carrying value of goodwill. Having assessed the anticipated future cash flows the Directors do not consider there to be any reasonably possible changes in assumptions that would lead to such an impairment charge in the year ended 30 April 2017. 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 2017 or 2016. 48 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 16. oTher INTANGIBle ASSeTS cost At 1 May 2016 Additions Transfer to property, plant and equipment Exchange differences At 30 April 2017 Amortisation At 1 May 2016 Charge for the year Exchange differences At 30 April 2017 carrying amount At 30 April 2017 At 30 April 2016 Development costs £’000 Patents, trademarks & other intangibles £’000 8,377 4,187 (20) 396 12,940 485 748 84 1,317 11,623 7,892 5,660 320 - 305 6,285 2,330 669 85 3,084 3,201 3,330 Total £’000 14,037 4,507 (20) 701 19,225 2,815 1,417 169 4,401 14,824 11,222 Following the Amended Clarification of Acceptable Methods of Amortisation effective for annual accounting periods beginning on or after 1 January 2016, the Group now amortise the capitalised development costs on a straight-line basis over a period of 2-15 years rather than against product sales directly relating to the development expenditure. Provision is made for any impairment. 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 2017 and 30 April 2016. 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 11.5% (2016: 15%) and a flat terminal 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 2017 was £1,521k (2016: £1,681k), 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. 49 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 17. properTy, plANT AND equIpmeNT Computer Equipment £’000 Plant and machinery £’000 Fixtures and fittings £’000 cost or valuation At 1 May 2016 Additions Transfer from development costs Exchange differences At 30 April 2017 Accumulated depreciation and impairment At 1 May 2016 Charge for the year Exchange differences At 30 April 2017 carrying amount At 30 April 2017 At 30 April 2016 765 63 - 20 848 548 62 7 617 231 217 7,358 161 20 358 7,897 3,660 680 148 4,488 3,409 3,698 198 17 - 7 222 139 20 5 164 58 59 Total £’000 8,321 241 20 385 8,967 4,347 762 160 5,269 3,698 3,974 Assets held under finance leases with a net book value of £40k (2016: £39k) are included in the above table within plant and machinery. SuBSIDIArIeS 18. 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. 19. INVeNTorIeS Raw materials Work-in-progress Finished goods 2017 £’000 1,846 1,132 226 3,204 2016 £’000 1,208 1,142 460 2,810 The cost of inventories recognised as an expense during the year in respect of continuing operations was £4,534k (2016: £3,780k). The write-down of inventories to net realisable value amounted to £nil (2016: £17k). The reversal of write-downs amounted to £2k (2016: £138k). 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. 50 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 20. AmouNTS recoVerABle oN coNTrAcTS contracts in progress at the balance sheet date: Amounts due from contract customers included in trade and other receivables Contract costs incurred plus recognised profits less recognised losses to date Less: progress billings 21. TrADe AND oTher receIVABleS Amount receivable for the sale of goods Amounts recoverable on contracts (see note 20) Other receivables Prepayments Current tax assets 2017 £’000 3,139 3,139 3,139 - 3,139 2017 £’000 2,304 3,139 183 379 596 6,601 2016 £’000 1,240 1,240 1,907 (667) 1,240 2016 £’000 3,386 1,240 275 258 811 5,970 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 41 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, with the exception of stock recovered from customers in respect of the doubtful debts disclosed below. Ageing of past due but not impaired receivables at the statement of financial position date was: 31-60 days 61-90 days 91-120 days 121+ days Total 2017 £’000 50 12 15 48 125 2016 £’000 75 102 33 737 947 In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The Directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value. 51 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 21. TrADe AND oTher receIVABleS (coNTINueD) Ageing of impaired receivables at the statement of financial position date was: 31-60 days 61-90 days 91-120 days 121+ days Total 2017 £’000 - - - 667 667 2016 £’000 - - - 793 793 Of the £667k of debtors at 121+ days a cumulative provision totalling £435k for doubtful debts has been made at 30 April 2017 as noted below. At 30 April 2017, trade receivables are shown net of an allowance for doubtful debts of £435k (2016: £408k) arising from the ordinary course of business, as follows: Balance at 1 May 2016 Provided during the year Impact of foreign exchange Balance at 30 April 2017 Doubtful debt exposure 2017 £’000 408 - 28 435 2017 £’000 232 2016 £’000 252 156 408 2016 £’000 385 The doubtful 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. During the year the Group received £180k in respect of the trade debtors that are shown net of an allowance for doubtful debts. In effect, the net exposure of doubtful debts has fallen by £153k (net of foreign exchange) with the vast majority of the doubtful debts covered by stock held at the Group’s premises until the full amount is settled. The stock was initially delivered to the customers but taken back by the Group after late payment of the debt. Despite the improved position and positive developments in the year, the Directors have prudently decided not to release any of the doubtful debt provision in the year. Further to this, Kromek has a commitment of £100k from one of the doubtful debtors, of which the first £25k tranche was received on 21 June 2017. 52 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 22. FINANce leASe lIABIlITIeS Finance lease liabilities are payable as follows: Amounts payable under finance leases: Within one year In the second to fifth years inclusive Less: future finance charges Present value of lease obligations Analysed as: Amounts due for settlement within 12 months (shown under current liabilities) Amounts due for settlement after 12 months minimum lease payments 2017 £’000 2016 £’000 - - - - - - - - 9 - 9 - 9 9 - 9 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 2017, the average effective borrowing rate was 0.82% (2016: 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. 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 reporting period. At 1 May 2016 (Credit)/charge to profit or loss At 30 April 2017 Revaluation of intangibles £’000 Accelerated capital allowances £’000 Short term timing differences £’000 1,220 (147) 1,073 680 193 873 (17) 1 (16) Tax losses £’000 (1,883) (47) (1,930) Total £’000 - - - Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes: Deferred tax liabilities Deferred tax assets 2017 £’000 1,930 (1,930) - 2016 £’000 1,883 (1,883) - At the statement of financial position date, the Group has unused tax losses of £20,991k (2016: £15,722k) available for offset against future profits. A deferred tax asset has been recognised in respect of £6,763k (2016: £6,717k) 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 £14,228k (2016: £9,005k) 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. 53 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 24. TrADe AND oTher pAyABleS Trade payables and accruals Deferred income 2017 £’000 3,557 1,010 4,567 2016 £’000 3,582 863 4,445 Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 64 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. 25. proVISIoNS For lIABIlITIeS At 1 May 2016 Charge to profit or loss At 30 April 2017 2017 £’000 - 169 169 2016 £’000 - - - During the year, the company was given notice on one of its sites. A provision has been made based upon management’s best estimates and ability to measure the likely costs that may be incurred restoring the building back to its original state. However, due to uncertainty around timing or precise amount, the transaction satisfies the criteria of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. 26. BorrowINGS Secured borrowing at amortised cost Revolving credit facility Finance lease liabilities (see note 22) Total borrowings Amount due for settlement within 12 months Amount due for settlement after 12 months 2017 £’000 3,000 - 3,000 3,000 - 2016 £’000 - 9 9 9 - In February 2017, 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 six months from date of drawdown. The fair value equates to the carrying value. The borrowings are secured by a floating charge over the Group’s assets. Finance lease liabilities are secured by the assets leased. The borrowings are at a fixed interest rate with repayment periods not exceeding five years. 54 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 26. BorrowINGS (coNTINueD) The weighted average interest rates paid during the year were as follows: Revolving credit facility Finance lease liabilities 2017 % 3.10 0.82 27. DerIVATIVeS FINANcIAl INSTrumeNTS AND heDGe AccouNTING At 30 April 2017 and 30 April 2016 the Group had no derivatives in place for cash flow hedging purposes. 28. ShAre cApITAl Authorised, allotted, called up and fully paid: 152,211,082 (2016: 108,173,290) Ordinary shares of £0.01 each 106,884,536 (2016: 44,037,792) Ordinary shares issued at £0.01 each Total 259,095,618 (2016: 152,211,082) Ordinary shares of £0.01 each During the year 1,755,000 shares (2016: 567,200) were allotted under EMI share option schemes. 2017 £’000 1,522 1,069 2,591 29. ShAre premIum AccouNT Balance at 1 May 2016 Premium arising on issue of equity shares Expenses on issue of equity shares Balance at 30 April 2017 30. TrANSlATIoN reSerVe Balance at 1 May 2016 Exchange differences on translating the net assets of foreign operations Balance at 30 April 2017 2016 % 3.10 0.82 2016 £’000 1,082 440 1,522 £’000 44,484 19,983 (1,197) 63,270 £’000 72 685 757 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. 55 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 31. AccumulATeD loSSeS Balance at 1 May 2016 Net loss for the year Effect of share-based payment credit Balance at 30 April 2017 32. NoTeS To The cASh Flow STATemeNT Loss for the year Adjustments for: Finance income Finance costs Income tax credit Government grants credit Depreciation of property, plant and equipment Amortisation of intangible assets Share-based payment expense Operating cash flows before movements in working capital Increase in inventories Increase in receivables Increase in payables Increase in provisions Cash used in operations Income taxes received Net cash used in operating activities cash and cash equivalents Cash and bank balances £’000 (22,599) (3,084) 99 (25,584) 2016 £’000 (2,151) (1) 84 (1,992) (15) 709 828 166 (2,372) (707) (1,070) 302 - (3,847) 1,002 (2,845) 2016 £’000 3,857 2017 £’000 (3,084) (5) 45 (710) - 762 1,417 99 (1,476) (394) (846) 122 169 (2,425) 925 (1,500) 2017 £’000 20,343 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. 56 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 33. operATING leASe ArrANGemeNTS The Group as lessee Lease payments under operating leases recognised as an expense in the year 2017 £’000 532 2016 £’000 516 At the statement of financial position date, the Group had outstanding commitments for future minimum lease payments under non- cancellable operating leases, which fall due as follows: Within one year In the second to fifth years inclusive 2017 £’000 528 590 1,118 2016 £’000 509 595 1,104 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 2017 and 2016, the Group had no capital commitments or contingencies. 34. 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. Number of share options 2017 weighted average exercise price (£) Outstanding at beginning of the year Granted during the year Exercised during the year Forfeited during the year Outstanding at the end of the year Exercisable at the end of the year 12,505,010 142,400 (1,755,000) (377,540) 10,514,870 10,231,570 0.16 0.30 0.015 0.24 0.16 0.16 Number of share options 12,788,016 567,200 (25,000) (825,206) 12,505,010 11,412,010 2016 Weighted average exercise price (£) 0.16 0.28 0.015 0.26 0.16 0.16 The weighted average share price at the date of exercise for share options exercised during the year was £0.27 (2016: £0.31). The options outstanding at 30 April 2017 had a weighted average exercise price of £0.16 (2016: £0.16) and a weighted average remaining contractual life of five years (2016: six years). The range of exercise prices for outstanding share options at 30 April 2017 was 1.5p to 79p (2016: 1.5p to 79p). In 2017, the aggregate of the estimated fair values of the options granted is £15k (2016: £38k). The inputs into the Black-Scholes model are as follows: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk-free rate Expected dividend yields 2017 31p 30p 36.42% 6 years 0.46 0% 2016 32p 12p 35.56% 6 years 0.44 0% 57 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 34. ShAre BASeD pAymeNTS (coNTINueD) Expected volatility was determined by calculating the historical volatility of similar listed businesses over the previous three years. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. The Group recognised total expenses of £99k (2016: £166k) 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 three-year reporting period, with the first having ended on 30 April 2014, and the remainder on subsequent year end dates. On 07 January 2017 1,875,066 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 £79k (2016: £140k). The amounts recognised as a share-based payment expense for the year ended 30 April 2017 was £71k (2016: £140k). 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: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk-free rate Expected dividend yields 2017 22p 1p 35.00% 3 years 0.32 0% 2016 35p 1p 35.12% 3 years 0.32 0% 35. 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 £421k (2016: £466k) represents contributions payable to these schemes by the Group at rates specified in the rules of the schemes. As at 30 April 2017, contributions of £23k (2016: £30k) due in respect of the current reporting period had not been paid over to the scheme. 36. 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 shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy has remained unchanged between 2016 and 2017. The capital structure of the Group consists of net debt, which includes the borrowings disclosed in note 26 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 31. The Group is not subject to any externally imposed capital requirements. The Group’s primary source of capital is equity. By pricing products and services commensurately with the level of risk and focusing on the effective collection of cash from customers, the Group aims to maximise revenues and operating cash flows. 58 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 36. FINANcIAl INSTrumeNTS (coNTINueD) capital risk (continued) 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 £3.0m (2016: £nil). Details of the revolving credit facility have been included in note 26. The Group considers that the current capital structure will provide sufficient flexibility to ensure that appropriate investment can be made, if required, to implement and achieve the longer-term growth strategy of the Group. market risk The Group may be affected by general market trends, which are unrelated to the performance of the Group itself. The Group’s success will depend on market acceptance of the Group’s products and there can be no guarantee that this acceptance will be forthcoming. Market opportunities targeted by the Group may change and this could lead to an adverse effect upon its revenue and earnings. Foreign currency risk The Group’s operations are split between the UK and the US, and as a result the Group incurs costs in currencies other than its presentational currency of pound 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: £ sterling US$ sterling equivalent € sterling equivalent 2017 £’000 22,783 (2,832) 393 2016 £’000 4,180 (657) 333 Had the foreign exchange rate between sterling, US$ and € changed by 11% (2016: 5%), this would affect the loss for the year and net assets of the Group by £208k (2016: £16k). 11% is considered a reasonable assessment of foreign exchange movement as this has been the movement noted between 2016 and 2017. credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group only transacts with entities that are rated the equivalent of investment grade and above. This information is supplied by independent rating agencies where available, and if not available, the Group uses other publicly available financial information and its own trading records to rate its major customers. The Group’s exposure and the credit ratings of its counterparties are 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. 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 management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. 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. 59 KromeK Group plc Annual Report & Accounts 2017 Notes to the consolidated financial statements (continued) For the year ended 30 April 2017 36. FINANcIAl INSTrumeNTS (coNTINueD) Weighted average effective interest rate % - 3.1 3.1 Less than 1 month £’000 1-3 months £’000 3 months to 1 year £’000 1-5 years £’000 5+ years £’000 - - - - - - - - 3,000 3,000 - - - - - - Total £’000 - 3,000 3,000 1 may 2016 Revolving credit facility 30 April 2017 Significant accounting policies Details of the significant accounting policies and methods adopted (including the criteria for recognition, the basis of measurement and the bases for recognition of income and expenses) for each class of financial asset, financial liability and equity instrument are disclosed in note 3. categories of financial instruments Financial assets Cash and bank balances Loans and receivables Financial liabilities Amortised cost 2017 £’000 20,343 5,626 2016 £’000 3,587 4,901 (4,736) (4,455) 37. relATeD pArTy TrANSAcTIoNS Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its related parties are disclosed below. During the year, the Group were charged a fee of £100k (2016: nil) from Polymer N2 Limited, as an equitable resolution relating to commitments at the time of the IPO in 2013. Polymer N2 Limited is a company under the control of the one of the Group’s non- executive Directors and shareholder, Graeme Speirs. At 30 April 2017 the balance outstanding in respect of this fee was £100k (2016: nil) and was subsequently paid on 24 May 2017. Director’s transactions Other than those disclosed within this note and the shareholding transaction with directors noted in the Directors Report, there have been no other transactions with related parties. 60 KromeK Group plc Annual Report & Accounts 2017 Company statement of financial position As at the year ended 30 April 2017 Non-current assets Investment in subsidiaries current assets Trade and other receivables Cash and cash equivalents Total assets current liabilities Trade and other payables Borrowings Total liabilities Net assets equity Share capital Share premium account Accumulated losses Total equity 3 5 6 7 11 12 13 2017 £’000 - - 39,607 7,778 47,385 47,385 (352) (3,000) (3,352) 44,033 2,591 42,592 (1,150) 44,033 2016 £’000 - - 16,747 8,036 24,783 24,783 (129) - (129) 24,654 1,522 23,806 (674) 24,654 The loss for the year was £476k (2016: loss £414k). The financial statements of Kromek Group plc (registered number 08661469) were approved by the Board of Directors and authorised for issue on 27 June 2017. They were signed on its behalf by: Dr Arnab Basu mBe Chief Executive Officer 61 KromeK Group plc Annual Report & Accounts 2017 Company statement of changes in equity For the year ended 30 April 2017 equity attributable to equity holders of the company Share capital £’000 Share premium account £’000 Accumulated losses £’000 Total equity £’000 Balance at 1 may 2015 Loss for the year and total comprehensive losses for the year Issue of share capital net of expenses Balance at 30 April 2016 Loss for the year and total comprehensive loss for the year Issue of share capital net of expenses Balance at 30 April 2017 1,082 - 440 1,522 - 1,069 2,591 13,965 - 9,841 23,806 - 18,786 42,592 (260) (414) - (674) (476) - (1,150) 14,787 (414) 10,281 24,654 (476) 19,855 44,033 62 KromeK Group plc Annual Report & Accounts 2017 Company statement of cash flows For the year ended 30 April 2017 Net cash used in operating activities 10 Financing activities Net proceeds from issue of share capital Loans made to Group companies Loans paid Revolving credit facility Net interest paid Net cash from financing activities Net (Decrease)/increase in cash and cash equivalents cash and cash equivalents at beginning of year cash and cash equivalents at end of year 2017 £’000 (181) 19,855 (22,874) - 3,000 (58) (77) (258) 8,036 7,778 2016 £’000 (586) 10,281 (1,649) (1,003) - (35) 7,594 7,008 1,028 8,036 63 KromeK Group plc Annual Report & Accounts 2017 Notes to the company financial statements For the year ended 30 April 2017 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 of Financial Position. 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 2017 are as follows: Name Kromek Limited (Direct) Place of incorporation (or registration) and operation NETPark, Sedgefield, TS21 3FD, United Kingdom Kromek Germany Limited (Indirect through Kromek Limited) NETPark, Sedgefield, TS21 3FD, United Kingdom Kromek, Inc. (Indirect through Kromek Limited) NOVA R&D, Inc. (Indirect through Kromek Limited) eV Products, Inc. (Indirect through Kromek Limited) 373 Saxonburg Blvd, Saxonburg, PA 16056, United States of America 833 Marlborough Avenue, Riverside CA 92507, United States of America 373 Saxonburg Blvd, Saxonburg, PA 16056, United States of America Durham Scientific Crystals Limited (Indirect through Kromek Limited) NETPark, Sedgefield, TS21 3FD, United Kingdom Class of shares held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Proportion of ownership interest % 100 100 100 100 100 100 Activity % Scientific research and development Sales and marketing Holding company Scientific research and development Scientific research and development Dormant company The Company owns 100% of the share capital in Kromek Limited. Kromek Limited owns 100% of the share capital in Kromek Inc. and 100% of the share capital in Kromek (Germany) Limited. Kromek Inc. owns 100% of the share capital in eV Products Inc. and NOVA R&D Inc. The investments in subsidiaries are all stated at cost. 4. STAFF coSTS The average monthly number of employees (excluding non-executive directors) was: 2017 £’000 2016 £’000 Research and development, production Sales and marketing Administration 64 2 1 2 5 2 2 2 6 KromeK Group plc Annual Report & Accounts 2017 Notes to the company financial statements (continued) For the year ended 30 April 2017 4. STAFF coSTS (coNTINueD) Their aggregate remuneration comprised: Wages and salaries Social security costs Pension scheme contributions 5. TrADe AND oTher receIVABleS Amounts due from subsidiary undertakings Prepayments Other receivables Amounts due from subsidiary undertakings are unsecured, interest free and repayable on demand. 6. TrADe AND oTher pAyABleS Trade payables and accruals Social security and other taxation 2017 £’000 385 49 79 513 2017 £’000 2016 £’000 275 34 60 369 2016 £’000 39,603 16,729 4 - 12 6 39,607 16,747 2017 £’000 315 37 352 2016 £’000 113 16 129 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. 7. BorrowINGS Details regarding the borrowings of the Company are disclosed in note 26 to the consolidated financial statements. FINANcIAl ASSeTS 8. 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. 65 KromeK Group plc Annual Report & Accounts 2017 Notes to the company financial statements (continued) For the year ended 30 April 2017 FINANcIAl lIABIlITIeS 9. 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. 10. NoTeS To The STATemeNT oF cASh FlowS Loss for the year Adjustments for: Finance costs Operating cash flows before movements in working capital Decrease/(increase) in receivables Increase in payables Net cash from operating activities 11. ShAre cApITAl Allotted, called up and fully paid: 152,211,082 (2016: 108,173,290) Ordinary shares of £0.01 each 106,884,536 (2016: 44,037,792) Ordinary shares issued at £0.01 Total 259,095,618 (2016: 152,211,082) Ordinary shares of £0.01 each 12. ShAre premIum AccouNT Balance at 1 May 2016 Premium arising on issue of equity shares Expenses arising on issue of equity shares Balance at 30 April 2017 13. AccumulATeD loSSeS Balance at 1 May 2016 Net loss for the year Balance at 30 April 2017 66 2017 £’000 (476) 58 (418) 14 223 (181) 2017 £’000 1,522 1,069 2,591 2016 £’000 (414) 36 (378) (304) 96 (586) 2016 £’000 1,082 440 1,522 2017 £’000 23,806 19,983 (1,197) 42,592 £’000 (674) (476) (1,150) KromeK Group plc Annual Report & Accounts 2017 Notes to the company financial statements (continued) For the year ended 30 April 2017 14. 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. Foreign currency risk The Company currently does not undertake transactions denominated in foreign currencies. credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Company only transacts with entities that are rated the equivalent of investment grade and above. This information is supplied by independent rating agencies where available, and if not available, the Company uses other publicly available financial information and its own trading records to rate its major customers. The Company’s exposure and the credit ratings of its counterparties are 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 management framework for the management of the Company’s short, medium and long-term funding and liquidity management requirements. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by 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 interest rate % - 3.1 3.1 Less than 1 month £’000 1-3 months £’000 3 months to 1 year £’000 1-5 years £’000 5+ years £’000 - - - - - - - 3,000 3,000 - - - --- - - 1 may 2016 Revolving credit facility 30 April 2017 Total £’000 - 3,000 3,000 67 KromeK Group plc Annual Report & Accounts 2017 Notes to the company financial statements (continued) For the year ended 30 April 2017 ulTImATe coNTrollING pAreNT AND pArTy 15. In the opinion of the Directors, there is no ultimate controlling parent or party. 16. 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. 17. relATeD pArTy TrANSAcTIoNS During the year, the Group was charged a fee of £100k (2016: nil) from Polymer N2 Limited, as an equitable resolution relating to commitments at the time of the IPO in 2013. Polymer N2 Limited is a company under the control of the one of the Group’s non- executive Directors and shareholder, Graeme Speirs. At 30 April 2017 the balance outstanding in respect of this fee was £100k (2016: nil) and was subsequently paid on 24 May 2017. No dividends were paid in the period in respect of ordinary shares held by the Company’s Directors. 68 Directors, Secretary and 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 TS21 3FD NOMINATED ADVISER AND BROKER BANKERS Cenkos Securities plc 6.7.8. Tokenhouse Yard London EC2R 7AS HSBC Bank Plc 1 Saddler Street Durham DH1 3NR REGISTRAR AUDITOR Capita Asset Services 34 Beckenham Road Beckenham BR3 4TU Deloitte LLP Statutory Auditor Newcastle upon Tyne NE1 2HF PUBLIC RELATIONS ADVISER LEGAL ADVISER Luther Pendragon Ltd 48 Gracechurch Street London EC3V 0EJ Eversheds Sutherland Bridgewater Place Water Lane Leeds LS11 5DR Kromek Group plc NETPark, Thomas Wright Way, Sedgefield, County Durham, TS21 3FD 

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