Kromek Group plc
Annual report and accounts for the
year ended 30 April 2020
Contents
1 Financial and Operational
Highlights
2 Chairman’s Statement
Strategic Report
4 Chief Executive Officer’s
Review
8 Chief Financial Officer’s
Review
24 Review of Principal Risks And
Section 172 Statement
Governance
27 Directors’ Biographies
28 Directors’ Report
30 Corporate Governance Report
34 Audit Committee Report
35 Remuneration Committee
Report
Financial Statements
40 Independent Auditor’s Report
48 Consolidated income
statement
49 Consolidated statement of
comprehensive income
50 Consolidated statement of
financial position
51 Consolidated statement of
changes in equity
52 Consolidated statement of
cash flows
53 Notes to the consolidated
financial statements
87 Company financial statements
Strategic Report
p4 - 26
Chief Executive
Officer’s Review
p4
Significantly Increasing
Production Capacity p14
...exporting
worldwide
serving a global
customer base
The CZT Production
Lifecycle p18
Review of
Principal Risks
p24
Transforming Knowledge into
Real Products p20
Independent
Auditor’s
Report p40
Winning Technology:
Low Dose MBI p22
Annual Report & Accounts 2020
KromeK Group plc
Financial Headlines
Revenue
£13.1m
Adjusted
EBITDA*
(£0.4m)
Cash &
Equivalents
£9.4m
Product
% of Sales
79%
Gross
Margin
47%
2018/19: £14.5m
2019/19: £2.0m
30 Apr 19: £20.6m
2018/19: 83%
2018/19: 57.2%
*Adjusted EBITDA defined as earnings before interest, taxation, depreciation, amortisation, other income, exceptional items,
early settlement discounts and share-based payments. For a reconciliation, see the Chief Financial Officer’s Review on page 10.
“Notwithstanding the impact of the
pandemic, Kromek made significant
progress in strengthening its operations
with achievements across nuclear detection,
medical imaging and security screening”
Operational Highlights
“Substantial expansion programme
implemented at UK headquarters to
increase CZT manufacturing capacity
and D3S production”
Two-year contract by US Dept of Homeland Security
to develop CZT detector modules for advanced X-ray
systems for passenger baggage screening
Received and successfully delivered orders of £2.1m
from a European government-related company, a
new customer, for the provision and integration of
D3S-related technologies
Expanded geographic reach with winning
competitive tender to provide D3S platform
to Irish Civil Defence under three-year
contract
Commenced delivery on a
significant $58.1m contract to
provide an OEM customer with CZT
detectors and associated advanced
electronics for its state-of-the-art
medical imaging systems
Completed licensing agreement for manufacturing
and sale of medical ventilators from Metran Co.,
Ltd, Japan, to support the COVID-19 response
Won contracts with Canadian Nuclear Safety
Commission and Curaçao government for
civil nuclear solutions. Sold radiation mapping
solution for drones to UKAEA and Sellafield
Expanded sales team and rapid channel
development resulting in D3S platform now
having been sold in over 22 countries
Substantial increase in detector
manufacturing capacity and introduction of
process automation resulted in increased
throughput and efficiency in US facility,
delivering on substantial medical contracts
Security screening OEM customer achieved highest level of
European liquid explosive detection certification for cabin
baggage scanner with Kromek-based software and detectors
– enabling commercial deployment
1
KromeK Group plc
Annual Report & Accounts 2020
Chairman’s Statement
This has inevitably been a year of great challenge for your
Company and the consistent improvement over recent years in
revenue and earnings at the Adjusted EBITDA level has been
reversed.
The year had, however, begun promisingly, following the
successful fund raising in early 2019 and the securing of a major
contract to supply single photon emission computed tomography
(“SPECT”) systems for medical imaging. Planned investments
were made in the significant expansion of the cadmium zinc
telluride (“CZT”) crystal growth facilities in the UK and in detector
manufacturing in the US. During the period, GE Healthcare, a
world leader in such technology, has and continues to publicly
signal the growing strategic importance of CZT in the field of
diagnostic imaging. The areas of detection of cancer, cardiac
diseases and neural conditions will continue to create demand
for our technology and products as the world starts to normalise
beyond the effects of the current pandemic.
Elsewhere, in the nuclear security sector, our hugely successful
D3 series of handheld detectors has continued to develop and
secure market share with existing and new customers, both
in civil and military applications. In the US in particular, our
relationships with major agencies of the US government have
continued to develop, giving us great confidence in our future
potential growth, both there and internationally, while delivering on
current programmes.
However, the COVID-19 pandemic and its resulting effect on
the global economy has been felt with great severity. From late
February onwards, major customers were unable to accept
shipments as their markets started to shut down. In China in
particular, despite the securing of a contract amendment with
our major customer in medical imaging, the impediment to our
Sir Peter Williams CBE
Chairman
6 October 2020
“Our hugely successful D3 series of
handheld detectors has continued to
develop and secure market share with
existing and new customers, both in
civil and military applications”
2
Annual Report & Accounts 2020
KromeK Group plc
customer’s investment, trading and continued travel restrictions
has resulted in your Board’s decision to impair fully all outstanding
trade receivable and amounts recoverable on contract balances
in respect of this customer, resulting in the exceptional charge
for the year. As and when the Chinese economy reopens and
business environment normalises, your Board remains committed
to creating value from this contract and more widely from its
investment in the underlying technology.
Finally, and as an encouraging pointer for the future, our
relationship with DARPA has resulted in the award of a major
contract for automated wide-area detection of biological
pathogens, involving portable DNA sequencing to identify threats
such as COVID-19 in public spaces. Further additions to this
contract are anticipated in the coming year.
In conclusion, despite the disappointments of this year, I would
like to thank all our employees for their efforts under the extreme
circumstances of today. Their forbearance and determination in
the face of threats to public health and rapid adaptation to new
ways of working is greatly appreciated. The safety and wellbeing
of our team will remain a priority as we go through the process of
full-scale normal operations both in the US and UK.
“I would like to thank all our employees for their efforts under
the extreme circumstances of today. Their forbearance and
determination in the face of threats to public health and rapid
adaptation to new ways of working is greatly appreciated”
3
KromeK Group plc
Strategic Report
Annual Report & Accounts 2020
Chief Executive Officer’s Review
We entered 2019/20 in a stronger position than ever before,
increasing revenues by 43% in the first half over the previous
period. The pandemic caused markets to shut down and
materially impacted both our global customer base and supply
chain resulting in overall revenues for full year 2019/20 to be
lower than the previous year. However, the mitigation measures
and operational progress we have made during the year means
we are well-positioned to rebound strongly.
Notwithstanding the impact of the pandemic, we made notable
progress during the year in the strengthening of our operations.
We implemented a substantial expansion programme at our UK
headquarters in Sedgefield to increase our CZT manufacturing
capacity. We also continue to gain traction for our next-generation
molecular imaging SPECT products in medical imaging and our
D3S family of products in nuclear detection – which we believe
are the key drivers of our future growth.
medical Imaging
Medical imaging represents a significant market opportunity for
Kromek with SPECT and molecular breast imaging (“MBI”) as
key target growth areas for our CZT-based detector solutions.
In recent years, leading OEMs in these application areas are
increasingly adopting CZT detector platforms as the enabling
technology for their product roadmaps – leading to growing
demand for our solutions. However, because of COVID-19 related
factors, hospital resources have temporarily been redirected
and logistics constraints hamper new system installations.
Consequently, some orders were postponed as medical OEM
customers were required to delay new systems sales and product
introductions. While this disruption has had a significant impact
on our medical imaging business, we expect this to be short-term
and believe the market opportunity remains substantial. We are
also pleased to note that some customers are now beginning to
resume orders and detector production and shipments are being
scheduled.
We continued to make progress in this market during the year. In
particular, we commenced delivery on one of our most significant
Dr Arnab Basu MBE
Chief Executive Officer
6 October 2020
“Notwithstanding the impact of the
pandemic, we made notable progress
during the year in the strengthening of
our operations”
4
Annual Report & Accounts 2020
KromeK Group plc
contracts to date, which had been awarded in H2 2018/19, to
provide an OEM customer with CZT detectors and associated
advanced electronics to be used in its state-of-the-art medical
imaging systems. The contract is expected to be worth a
minimum of $58.1m over an approximately seven-year period.
During the year, we also advanced towards achieving clinical
validation of our CZT-based SPECT detectors at our customers’
site, under a contract signed in 2014. Shipment of these products
was planned and agreed with the customer from early 2020,
following several visits to the customer in late 2019 and January
2020. However, the severity of the pandemic in China during
the early part of 2020 greatly restricted our customer’s ability
to execute on the contract, which was compounded by the
difficulty imposed on movement of goods and our inability to send
essential personnel due to continued travel restrictions since the
beginning of the year. As a result, we are facing uncertainties to
the successful execution of the contract at the present time, which
has led the Board to take a prudent approach by impairing the
receivables against this contract to date on our balance sheet. This
is discussed in considerable detail in the CFO Review section of
this report. However, it is important to note that the commercial
relationship with this customer continues to remain strong as
both parties seek to address the significant market demand for
advanced diagnostic imaging products for the detection of cancer.
We also progressed the development of an ultra-low dose MBI
technology based on our CZT-based SPECT detectors. This
three-year project, which commenced in 2018, sees Kromek
work alongside partners in the Newcastle-upon-Tyne Hospitals
NHS Foundation Trust in the UK and an OEM partner.
Nuclear Security
We continued to see opportunities and demand for our D3S
platform, which is attracting business interest across the globe –
and has been sold in more than 22 countries. This is supported
by the expansion of the D3S sales and marketing activities and
establishing a wider distribution network, with new channels being
regularly put in place.
A key achievement was the award of a strategically significant
contract, worth £1.1m, by a European-government related
company, a new customer, for the provision of D3S-related
technologies, which was subsequently extended by £1.0m
to provide technology integration. The customer works with a
European government to detect and protect against potential
nuclear threats. We have successfully delivered this contract and
our solutions are being actively deployed by the customer for
wide-area threat monitoring.
Kromek was awarded a new and an extension contract worth
over $1m in total under two initiatives by the US government:
• The US government’s Countering Weapons of Mass
Destruction Office, which is a component within the US
Department of Homeland Security, awarded Kromek a
$0.7m extension contract to add further technical innovation
capability to the D3S family of products.
• The US government’s Joint Program Executive Office for
Chemical, Biological, Radiological and Nuclear Defense
(JPEO-CBRND) awarded Kromek a $0.4m contract to provide
D3S-related customisation for military operational transition,
which will leverage the DARPA SIGMA Program sensor and
technology.
The D3S platform was used in active deployments and field-
tests in multiple locations of strategic importance and high risk
across the US, Asia and Europe. This includes deployment under
an initiative, for which we were awarded a €0.2m contract, by
the European Commission’s Directorate-General for Migration
and Home Affairs, working alongside security authorities in
Belgium, Luxembourg, The Netherlands and Spain, to allow
the law enforcement authorities to validate new and emerging
technologies for homeland protection. The European Commission
used the D3S-ID and D3S Drone radiation detectors for the
protection of public spaces across multiple European locations
covering high risk venues such as airports, train stations and
other public areas. Following this initiative, we have received
an additional order for software development to expand the
capabilities of the D3S Drones as well as more detectors for a
new trial application.
We also continued to expand the geographic reach of the D3S
with the win of a competitive tender to provide our D3S platform
to the Irish Civil Defence under a three-year contract worth up
to €0.2m. The first units are now in use and further orders are
expected shortly. In addition, the Swiss Government has listed the
D3S-ID for use at waste and recycling sites.
Our business and product development pipeline have remained
good despite the inevitable delays as a result of a slowdown
around the world due to COVID-19. During the year, we launched
the latest version of the D3S for first responders, the D3M PRD.
We have continued to execute on multiple US government
sponsored programmes, including the development of a fully
ruggedised radio isotope identification device (RIID), which is
expected to be launched later this calendar year. We are starting
to see renewed procurement activities in the US, Asia and Europe
after a period of slowdown over the last six months. We have
continued to strengthen and expand our distribution network both
in Europe and Asia. This includes new in-country partners for the
D3S in France, Spain, Italy, Poland and Serbia.
civil Nuclear
In the civil nuclear markets, we won several new contracts
globally for our portfolio of high-resolution detectors and
measurement systems used in nuclear power plants, research
and for other applications. This included contracts with
the Canadian Nuclear Safety Commission as well as other
government customers. This was supplemented by the home
market, where radiation mapping solutions for drones were sold
to UKAEA and Sellafield. Our markets in civil nuclear continue
to expand with new customers and repeat orders from existing
customers.
5
KromeK Group plc
Annual Report & Accounts 2020
Strategic Report (Continued)
Security Screening
manufacturing Facilities
In security screening, we continued to provide our OEM and
government customers with components and systems for
cabin and hold luggage scanning applications. This includes
delivery on the $2.7m expansion order, which was received at
the end of the 2018/19 year, under our long-term contract to
provide key components for a US-based customer’s security
screening system for the detection of explosives. The order
expansion reflects the growing recognition of the strength of
Kromek’s detection solution and credentials as a high-quality
product supplier. We continue to receive increasing interest in
our technologies that can meet the high-performance standards
demanded by customers to ensure passenger safety while
increasing the convenience and efficiency of the security process.
We also reached a key milestone with another OEM customer
in the security screening market, which achieved the highest
level of European liquid explosive detection certification for
cabin baggage for their new generation scanner that is based
on Kromek technologies. This certification enabled commercial
deployment of the product and, post period, we have received the
first commercial order from our customer.
Biological-Threat Detection
Post period, we were awarded a contract extension worth up
to $5.2m by DARPA, a long-standing customer, to advance the
development of a solution for the detection and identification
of pathogens in an urban environment via a vehicle-mounted
biological-threat identifier. However, in response to the outbreak
of COVID-19, the project is expected to be expanded beyond
the development of a mobile wide-area bio-surveillance system
against possible bio-terrorism.
Once fully developed over the next few months, the technology
should be able to sample air and identify the presence of any
biological pathogen – including COVID-19 or any mutant version
that may emerge over time. It is intended that the technology
will be used to immediately flag the presence of someone with
a contagious disease and allow effective mitigation of the risk of
transmission. By placing samplers in high footfall areas, such as
airports and hospitals, or where people are in close proximity for
long periods, for example in transport vessels such as aircraft and
care homes, threats can be identified without having to individually
test people. Knowing a carrier is infected with a disease before
they infect further individuals is key to halting the onset of an
outbreak and before it causes major global disruption.
We expect to continue further development, piloting and
commercial deployments of this solution over the coming months.
In order to meet growing demand for Kromek’s products, we
continued our planned programme to significantly increase our
production capacity and optimise the manufacturing process.
During the year, we successfully completed a substantial
expansion programme at our UK headquarters in Sedgefield by
increasing both the number of furnaces for growing CZT and
material processing tools. In addition, we expanded the product
assembly space for new and existing handheld radiation detector
products in our existing UK factory.
The CZT manufacturing process capability was enhanced with
advanced automated sensor assembly capability, significantly
improving both process capability and operational capacity. As
part of the process, we will be introducing new CZT processing
technology, which is expected to further enhance process quality,
yield and manufacturing throughput.
This investment in the UK headquarters follows the relocation
of our US operations to a new purpose-built premise near
Pittsburgh, Pennsylvania. The site move was completed during
the year with the operation moving in its entirety during June
2019, which has enabled a ramp-up in production for CZT-based
cameras to serve the SPECT market. Both the UK and US
manufacturing sites are certified to ISO9001:2015 through the
annual ISO audit cycle.
From early 2020, we have experienced a slowing of demand
for CZT across our markets due to COVID-19 related disruption
around the world. However, we believe this is temporary and all
of the expansion, process improvements, automation and the
new facility in the US will be critical to address the expected and
substantial growth in demand for CZT-based products beyond
this immediate period.
r&D, product Development and Ip
We conduct a continuous appraisal of the global supply chain for
electronics components, critical materials and partner capabilities
to ensure readiness for both changing customer and market
demands. We have continued to expand our IP portfolio through
our core technology and product developments, in line with
our key aims for IP protection: protect products; create market
position and freedom to operate; and increase property value.
During the year, we applied for five new patents and had 20
patents granted across 10 patent families. The new applications
cover innovations across our nuclear, medical and biological-
threat detection offerings and, while relating to targeted product
developments, will also provide value beyond these fields. For
example, the patent applications in the nuclear field can apply to
multiple uses of scintillator detectors; the medical application will
provide valuable IP, which underpins a key benefit of CZT; and the
biological applications cover components that will have uses far
beyond CBRN detection.
6
Annual Report & Accounts 2020
KromeK Group plc
response to coVID-19
The COVID-19 pandemic presented unprecedented challenges to
Kromek’s supply chains and operations while adversely impacting
demand from certain customers. However, we were fast to
respond to the evolving public health emergency and by the
middle of March 2020, we had activated our business continuity
plan and transitioned most of our employees in the UK and US
to remote working in order to protect the health and safety of the
workforce.
Furthermore, a number of temporary mitigation measures were
implemented to bolster the liquidity of the business and its
financial position. Actions taken included the implementation of
some organisational restructuring; ceasing all discretionary capital
expenditure; curtailing all travel and non-essential spend; and
securing a short-term rent concession on some of our leased
properties.
However, with the lifting of lockdowns in the US and UK, our
workforce that are required to be onsite have been able to return
to our facilities as we now start to resume full-scale production.
We are also pleased to note that business is showing signs
of returning to normal trading, with orders being issued and
shipments, once again, being scheduled. However, this still
remains a challenge for certain parts of the world where both
movement of people and goods continue to be hindered by
restrictions.
In April 2020, facing weakening demand from our core markets,
we entered a licensing agreement with Metran Co., Ltd, a Japan-
based leading developer of medical ventilator products and
technology, with the intention to manufacture and sell invasive
emergency ventilators to support the COVID-19 crisis. We have
established the manufacturing capability for the ventilators, which
are now going through the emergency use approval processes in
various jurisdictions. We continue to see interest in the product
and signed an agreement for the supply of ventilators in a
European country, which will become effective following receipt
of appropriate certifications in that jurisdiction. We are also in
active discussions and negotiations for the distribution and sale
of ventilators in other countries where the approval processes are
ongoing. The Group anticipates this market to remain active over
the next 12-18 months as countries continue to build capacity in
the fight against COVID-19 and build resilience against any similar
pandemics in the future.
outlook
Kromek’s position as a leading manufacturer of next-
generation CZT-based products, supplying substantial
growing markets and multi-year contracts, gives the
business a degree of resilience.
The disruption in the final quarter of the 2019/20
year carried through to the first four months of the
new financial year. Normal business patterns are now
returning, and some customers are beginning to resume
orders with detector production and shipments being
scheduled. Two customers who had postponed their
contracts have now issued instructions to re-commence
the work. Additionally, the Group is experiencing
increasing visibility from its customers, including from
Kromek’s largest customer in the medical imaging
segment who has provided it with visibility on their plans
for the full fiscal year. Demand for the D3S family of
products continues to increase and there is renewed
procurement activities in the US, Asia and Europe after a
period of slowdown over the past six months. As a result,
the Board is cautiously optimistic for the year ahead
and will provide updates to the market as the outlook
becomes clearer moving forward.
From a long-term perspective, Kromek’s key addressable
markets benefit from fundamental growth drivers.
The Group expects to see the refresh of product
cycles continue in the medical sector, which is being
transformed by CZT-based radiation detection. Early and
better diagnostics is recognised as one of the means
to deal more effectively with diseases like cancer and
cardiac conditions. This pandemic has shown some of
the vulnerabilities in the western healthcare systems and
the lack of resilience due to under-investment over the
last decade, which is expected to drive growth in addition
to new demands in countries like China, India and Brazil.
In the nuclear detection segment, security authorities
continue to invest in sophisticated technologies, while
bio-security is an emerging focus with significant long-
term implications and monitoring and surveillance is
expected to become the only way to deal with threats
from novel viruses such as COVID-19.
With substantial long-term market drivers and a
significantly expanded production capacity in place,
Kromek is well-positioned to deliver on demand from
around the world for next-generation radiation detection
technologies.
7
KromeK Group plc
Annual Report & Accounts 2020
Strategic Report (Continued)
Chief Financial Officer’s Review
We indeed live and operate in times unprecedented and the
operational impacts of this pandemic on the Group have been
significant. The financial results that I analyse below are deeply
disappointing to deliver having shown so many years of growth,
coupled with excitement at the technology platform the Group
has created.
The Group started the year well, with half-year revenue increasing
by 43% to £5.3m (H1 2018/19: £3.7m) and the Group felt
confident of another year of strong growth. I had set out last
year the plan to reduce the significant debtor balance regarding
Amounts Recoverable On Contract (AROC) and had undertaken
several visits to China to effect this.
That process looked very promising during the period up to
January 2020, but then China, followed by the rest of the world,
was hit by the COVID-19 pandemic. This resulted in inevitable
obstacles for the Group. The Group’s financial year-end of 30
April 2020 was at the height of global lockdown measures
following a highly disrupted fourth quarter from January 2020
onwards. As was noted in the announcement of 1 May 2020, the
Group experienced a material impact on its operations because
of the COVID-19 outbreak with delays in certain projects due
to constraints imposed upon sub-contractors, suppliers, and
customers. The Group was also informed that two of its key
contracts would be delayed until sometime in the new financial
year. I am pleased to confirm that both customers have now
issued instruction to re-commence, though initially at lower levels
than originally contracted.
As a result of the impacts noted above, revenue has reduced by
10% to £13.1m (2018/19: £14.5m) and gross margin to £6.2m
(2018/19: £8.3m). Due to the loss in gross margin and higher
administration costs, the adjusted EBITDA decreased to a £0.4m
loss compared with earnings of £2.0m for the prior year. The
Group has also recorded an exceptional item of £13.1m, being
substantially the write down of AROC brought about by the
uncertainty of COVID-19. I discuss all these factors in more detail
in the sections below.
Mr Derek Bulmer
Chief Financial Officer
6 October 2020
8
Annual Report & Accounts 2020
KromeK Group plc
In light of the economic threat brought about by COVID-19, the
Board has sought to protect the business within the parameters
under our control and in the middle of March 2020, Kromek
activated its business continuity plan in response to COVID-19.
The Group’s employees in the UK and US were transitioned to a
large extent to remote working. Further to this, several temporary
mitigation measures have now been implemented to bolster the
liquidity of the business and its financial position. Actions taken
include the implementation of some organisational restructuring;
ceasing all discretionary capital expenditure; curtailing all travel
and non-essential spend; and securing short- and medium-term
rent concessions on some of the Group’s leased properties. We
have undertaken job reductions in the US and engaged the Job
Retention Scheme in the UK and furloughed a number of staff as
a result of the contract delays. These measures, along with others
in the pipeline, are expected to reduce running costs and cash
outflow. In addition, we have secured further loans with HSBC of
£1.4m and, in the US, Paycheck Protection loans of around $1m.
I have successfully varied the bank covenants on the Revolving
Credit Facility with HSBC to ensure the continued availability of
this instrument.
revenue
The Group generated total revenue of £13.1m (2018/19: £14.5m).
The split between Product sales and revenue from R&D contracts
is detailed in the table below:
revenue mix
2019/20
2018/19
product
r&D
Total
£'000 % share
£'000 % share
10,314
2,806
13,120
79%
21%
12,060
2,457
14,517
83%
17%
Revenue was directly affected in Q4 by the impact of COVID-19.
Major customers gave notification that they were unable to accept
products at previously expected levels as their own markets had
effectively shut down or logistics and operational support were
not available due to lockdown restrictions and the prioritisation of
the safety of personnel. To strengthen the Group’s cash position
in light of the direct economic and risk impacts of the pandemic,
the Group negotiated an early payment from a specific customer
in exchange for an early settlement discount. In line with IFRS 15,
these discounts (amounting to £0.7m; 2018/19: £nil) were netted
off against revenue. Without this discount, revenue would have
been £13.8m and gross profit would have been £6.9m with a
gross margin of 50.0%.
Gross margin
The year-on-year decrease in revenue, combined with a
reduction in gross margin, resulted in a fall in gross profit to
£6.2m (2018/19: £8.3m). The fall in gross margin to 47.3%
(2018/19: 57.2%) is attributable to three key elements. Firstly,
a lower margin yield associated with the initial year of the
commencement of production of the 7-year medical imaging
contract announced in early 2019. This process also required
the commissioning and production ramp up of a significant
number of furnaces and fabrication equipment, plus the running
of several new processes and yield programs. We have seen
some very positive developments in these areas and expect to
see this commissioning, ramp up and process development drive
improvements in margin in subsequent years. The second key
element, as noted above, results from a discount on an early
settlement to one key customer in airport security relating to a
substantial call-off and payment ahead of schedule. This both
de-risked this commercial opportunity, but also ensured that the
Group could record further receipts of $2m at the year-end and
thus strengthen the cash position in light of the pandemic. The
third key element to the reduction in gross margin was the cost
impact of bought in goods where alternative suppliers had to
be sought to complete the products and services that could be
shipped during the final two months of the year.
Administration costs
Administration costs and operating expenses increased by £1.6m
to £10.6m (2018/19: £9.0m). This increase is substantially the net
result of:
• £1.2m additional staff costs due to the planned expansion of
the sales and production teams, plus technology personnel
to support the biological detection project. This is largely as
planned and notified to the market during the fund raise of
February 2019.
• £0.3m is the additional costs of depreciation largely relating
to the capital expenditure on the furnace and fabrication
expansion of £6.1m.
• £0.3m is the additional costs of amortisation due to
continued investment in the technology platform and product
applications.
• £(0.7)m foreign exchange credit largely due to a surplus
realised on the Group’s US$ overdraft facility settled during
the year.
• £0.5m relating to a combination of other items, including an
increase in the US cost base, largely compensated by the
foreign exchange gain noted above.
9
KromeK Group plc
Annual Report & Accounts 2020
Strategic Report (Continued)
exceptional Items
Adjusted eBITDA* and result from operations
Kromek’s customers are often first adopters. Entrepreneurial
small- to medium-sized businesses that have the flexibility to
bring this technology to the forefront of their business model.
Much of this is in the East, especially in China, as such markets
are not typically hampered by legacy platforms attached to pre-
CZT technology. As such, COVID-19 has severely disrupted their
business models and made their access to sufficient financial
support more difficult.
Several visits to China were undertaken partly to assess the
possible impacts of the escalating level of trade friction between
the US and China, but also to assess the market opportunity,
business case of our customers and to explore to what
extent Kromek could assist in accelerating and expanding the
opportunity. These visits in late autumn 2019 and early in this
calendar year went extremely well and we had strong visibility of
the roll out of the product and thus the monetisation of the AROC.
Further, we determined a number of channels and partners to
assist in de-risking this position. Nonetheless, we could not
achieve this prior to the impact of COVID-19.
Whilst the Board remains very confident on the market
opportunity given the scale of populous in China and the sadly
prevalent and growing rates of cancer, the financial status of
some our customers has become uncertain. That said, we are
continuing to work with our customers to enable the fulfilment
of these opportunities for Kromek and for them. The Board is
confident that once there is greater clarity on the flow of funds
through investment and movement of goods and people, both
globally and within China, this position will reverse, and we will see
the opportunities materialise.
However, due to the uncertainty noted above following the direct
impact of COVID-19 on the flow of capital to our customers,
the Board has prudently chosen to take a full provision against
the AROC balance and I note an exceptional item of £13.1m
in relation to this. Despite the uncertainties of credit risk, the
Board has concluded relating to said customers, that all parties
remain committed to delivering on the opportunity presented
by this market. We have secured a contract addendum for
medical imaging systems with our major customer that sets
out clear call-off schedules and a commitment to a multi-year
opportunity, which also assists in monitoring any changes in
deemed credit status. As noted earlier by our Chairman, as the
Chinese economy reopens and this contract addendum becomes
effective, the Board remains committed to creating value from
this relationship, but also more widely from the investment in
the underlying technology. Our exposure and reputation for this
technology in China is growing and our network and support
structures in the region will ensure that we can effectively work
with our customers and expand our opportunities.
10
Primarily due to the impact of COVID-19 on the operations of the
Group and, consequently, the financial performance, adjusted
EBITDA for 2019/20 was a loss of £0.4m compared with earnings
of £2.0m for the prior year as set out in the table below:
Revenue
Gross profit margin
Gross margin (%)
Loss before Tax
eBITDA Adjustments:
Non- COVID-19 Related Items:
Net interest
Depreciation of PPE and Right of Use
assets
Amortisation
Share-based payments
COVID-19 Related Items:
Early settlement discount
Exceptional Item
Adjusted eBITDA*
2019/20
£'000
13,120
6,208
47.3%
(18,345)
2018/19
£'000
14,517
8,309
57.2%
(1,270)
544
1,185
2,142
225
746
13,062
(441)
364
879
1,806
195
-
-
1,974
*Adjusted EBITDA is defined as earnings before interest, taxation,
depreciation, amortisation, other income, exceptional items, early
settlement discounts and share-based payments. The impact of
COVID-19 has resulted in an exceptional item of £13.1m relating to
receivables and AROC and a specific airport security customer early
settlement discount of £0.7m as neither are in the normal course of
events and are significant in their size, practice and nature. Share-based
payments are added back when calculating the Group’s adjusted EBITDA
as this is currently an expense with a zero direct cash impact on financial
performance. Adjusted EBITDA is considered a key metric to the users of
the financial statements as it represents a useful milestone that is reflective
of the performance of the business resulting from movements in revenue,
gross margin and the costs of the business. This definition has changed
from 2018/19 to include the exceptional item and early settlement
discount. However, in 2018/19 there were no exceptional items or such
specific early settlement discounts meaning the Adjusted EBITDA from
2018/19 has not changed.
The £2.4m decrease in adjusted EBITDA in 2019/20 compared
with 2018/19 is substantially a result of a loss in gross profit of
£2.1m due to the lower revenue and reduction in gross margin
noted above.
Loss before tax for the year increased substantially to £18.3m
(2018/19: £1.3m loss), largely due to the loss in gross profit
of £2.1m, additional administration costs of £1.6m and the
exceptional item of £13.1m.
During 2019/20, the Group recognised other comprehensive
income of £1.0m (2018/19: £1.2m income) that arose in respect
of exchange differences on a net investment in a foreign operation
as described in note 2 to the financial statements. Unlike the
£0.7m gain resulting from foreign exchange on consolidation and
Annual Report & Accounts 2020
KromeK Group plc
revaluations and realisation of working capital balances noted
above that were expensed to the profit and loss account, this
gain has been treated as a reserve movement, consistent with the
prior year.
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 £0.9m for
the year (2018/19: £1.0m).
Following a review, we have revisited the historical treatment of
deferred tax in relation to development costs capitalised in our
US operations since reporting under IFRS. As a result, through
a prior year adjustment, a deferred tax liability has now been
recognised on the Group’s balance sheet as at 30 April 2019
totalling £0.9m with the corresponding adjustments made to the
profit and loss account and retained earnings. This liability has
subsequently been fully eliminated during the year ended 30 April
2020 following an offset with a deferred tax asset arising in our
US operations relating to accumulated losses to date. Please
refer to note 2 to the financial statements for a summary of the
adjustments made.
Due to the elimination of the deferred tax liability and the UK
Research and Development Tax Credit, the tax charge for the year
is a credit of £1.8m (2018/19: £0.6m credit).
earnings per Share (“epS”)
Due to a £3.5m loss after tax from continuing operations (after
excluding exceptional items) for the year, the EPS is recorded
in the year on a basic and diluted basis as 1.0p loss per share
(2018/19 restated: 0.2p loss per share). Due to a £16.5m loss
after tax from continuing operations (including exceptional items)
for the year, the EPS is recorded in the year on a basic and
diluted basis as 4.8p loss per share (2018/19 restated: 0.2p loss
per share).
r&D
The Group invested £5.3m in the year (2018/19: £2.7m) in
technology and product developments that were capitalised
on the balance sheet, reflecting the ongoing investment in
new products and new applications for the future growth of
the business. This capitalisation is higher in the current year
because of two key factors. Firstly, last year the figure was
artificially reduced due to the facility move in the US during the
first half of 2018/19 and the restrictions this disruption placed on
development work. Secondly, the Group has chosen to pursue
the opportunity in automated wide-area detection of biological
pathogens, involving portable DNA sequencing. It is the Board’s
belief that this technology will enable the identification of a
COVID-19 threat in public spaces and offers opportunities for the
Group in this critical market. This is a position endorsed by the
US government with DARPA awarding Kromek a major contract
in May 2020 as part of the development of this platform and
product applications.
The other key areas of development continue to be the expansion
of the D3S suite of products and the SPECT platforms. All such
investments in research and development are linked to contract
deliverables and in the Board’s belief in the significant future
revenue opportunities that the Group’s technology offers. The
Group continues to undertake this investment to strengthen its
commercial advantage.
During the year, the Group undertook expenditure on patents
and trademarks of £0.2m (2018/19: £0.2m) with five new patents
filed and 20 patents granted across 10 patent families. The
new applications cover innovations in all our sectors, including
biological-threat detection, covering our specific product
developments, but also providing value beyond these fields. In
particular, the biological applications cover components that the
Group believes will have uses beyond terrorist threat detection.
capital expenditure
Capital expenditure in the year amounted to £7.0m (2018/19:
£3.6m) and was announced during the early months of 2019.
This planned increase relates substantially to the expansion of
the CZT growth facility, manufacturing processes and capacity
in both the UK and US. Over recent years, the Group has
demonstrated that it can now replicate this capability on multiple
sites and significantly implement and scale up operations. This
is a major achievement by the Group and the many members of
our team that have worked on this project. The capital project is
now installed, commissioned and in operation - delivering against
multiple projects, but particularly against the medical imaging
contract announced in early 2019.
cash Balance
Cash and cash equivalents were £9.4m as of 30 April 2020
(30 April 2019: £20.6m). The £11.2m decrease in cash during
2019/20 was a combination of the following:
• An Adjusted EBITDA loss for the year of £0.4m
• Net cash used in financing activities of £0.9m
• £0.4m reduction in working capital, excluding the exceptional
write off of the AROC balance of £13.1m.
• R&D Tax Credit receipts of £0.9m.
•
Investment in product development and other intangibles,
with capitalised development costs of £5.3m and IP additions
of £0.2m.
• Capital expenditure of £7.0m, as noted above.
• £1.3m conversion of the Investment in long-term cash
deposits into a more liquid form.
The movement in key working capital balances is analysed as
follows:
• A £3.2m increase in inventories held on 30 April 2020 to
£6.4m (30 April 2019: £3.2m). Following the $58.1m medical
imaging contract awarded in January 2019, the Group is
holding more component stock and work in progress to
meet the call-off plan of the contract. Due to delays driven
11
KromeK Group plc
Annual Report & Accounts 2020
Strategic Report (Continued)
by COVID-19, a substantial element of shipments intended
for March and April 2020 were held back due to customer
requests. A revised call-off plan has been received during
August 2020 and it is anticipated that this inventory will begin
to flow into a monthly rolling production and shipment plan.
• A £1.3m increase in trade and other receivables (excluding
exceptional items) reflecting the timing of invoicing and
payments during the strict lockdown of the Group’s Q4.
• A £3.9m increase in trade and other payables to £8.8m
(2018/19: £4.9m). This increase is due to capital expenditure
in the year and the timing of invoicing around the year end.
This is further compounded by the build-up of inventory
to meet the needs of the medical imaging contract noted
above. The Group also secured a £0.7m grant during the
year regarding job creation in County Durham following the
aforementioned $58.1m medical imaging contract, which is
currently recognised on the balance sheet as deferred income.
• As I noted last year, in March 2019, the Group renewed its
existing Revolving Credit Facility with HSBC. The facility was
extended to £5.0m from £3.0m and the renewal period was
increased to a minimum of three years, with an additional
option for up to five years. At 30 April 2020, £3.1m of the
facility was drawn (30 April 2019: £3.0m) to support the
working capital expansion. A further £1.8m of the facility has
been used to fund plant and machinery. Given the downward
impacts on immediate outlook because of COVID-19, we
have renegotiated the bank covenants to ensure that the
Group can continue to rely on the flexibility of this facility.
Going concern
Given the degree of uncertainty surrounding the impacts of
the COVID-19 pandemic on economies and businesses, the
Board has considered a number of scenarios. As I note in my
introduction, the Group activated its business continuity plan in
response to COVID-19 from March 2020 and, subsequent to
that, the costs of the Group have been reduced. Further to that,
since 30 April 2020, we have managed to bring in additional
funds through securing additional loans with HSBC of £1.4m, to
further support some of the capital expenditure, and, in the US,
Paycheck Protection loans of around £0.8m. As described above,
we have successfully agreed a variation in the bank covenants on
the Revolving Credit Facility with HSBC to ensure the continued
availability of this instrument. Combining this additional liquidity
and reduced costs, the key factor that the Board considered in
the going concern assessment related to revenue expectations
and visibility. The Board was mindful of the guidance surrounding
a severe but plausible assessment and, accordingly, considered
a number of scenarios in revenue reduction against the original
plans. On a revised base case scenario, the Board is comfortable
that the Group can continue its operations for at least a 12-month
period following the approval of these financial statements.
Applying an even more severe set of assumptions, beyond the
Board’s estimate of base case scenario, with further reductions
in revenue whilst maintaining a full cost base, it is possible that
the Group may breach one of the bank’s five covenants during
the going concern review period. However, for the purpose of
stress testing the going concern in light of the pandemic, the
Board has specifically excluded any significant upsides from these
scenarios. This is despite COVID-19 representing potential major
opportunities for the Group in terms of its biological detection
capabilities and license agreements to manufacture ventilators.
This most severe scenario also excludes any mitigating reduction
in the cost base that the Board would clearly undertake in this
event. 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 12 months from the
approval of these financial statements.
12
Annual Report & Accounts 2020
KromeK Group plc
Financial reporting and Audit
It is my normal practice to have the financial reports completed
with final results announcement before the end of June. This
year, the final results announcement was in October 2020,
some three months later than normal. This is largely due to the
impacts of COVID-19 resulting in additional audit and Corporate
Governance protocols around areas of key audit importance.
Further, we had to conduct a virtual audit between both my team
and those of KPMG. Whilst this was compounded by a change of
audit engagement partner just days before the commencement
of the audit, all parties endeavoured to operate in a lockdown
environment and to deal with the additional challenges that this
brought. The financial results are deeply disappointing, however
the efforts of those involved to support the preparation of this
report were critical and are much appreciated.
13
KromeK Group plc
Annual Report & Accounts 2020
The number
of furnaces
increased more
than fivefold
CZT materials
preparation facilities
have also been
considerably
expanded
14
Annual Report & Accounts 2020
KromeK Group plc
Expansion of CZT Crystal
Growth and Detector
Manufacturing Facilities
Cadmium Zinc Telluride (CZT) is now a recognised technology that
overcomes the limitations of the prevalent legacy detectors. CZT-based
detectors provide high-resolution information on material composition and
structure and are used in multiple applications, ranging from the identification
of cancerous tissues to hazardous materials, such as explosives, and the
analysis of radioactive materials.
Kromek manufactures CZT in both the UK and US. It is a continuous
process of CZT manufacturing and device fabrication run on dedicated R&D
furnaces and fab lines that is now a fully automated, end-to-end process
without human intervention.
Over the past 18 months, Kromek continued its planned expansion
programme to significantly increase production capacity in order to meet the
growing demand for its products. We optimised the manufacturing process
through a major capital investment programme in increasing crystal growth
manufacturing capacity but also by significantly expanding the level of
process automation in both the UK and US.
During the year, we successfully completed a substantial expansion
programme at our UK headquarters in Sedgefield by increasing both the
number of furnaces for growing CZT and material processing tools. In
addition, we expanded the product assembly space for new and existing
handheld radiation detector products.
In the UK, the number of furnaces increased more than five-fold, ramping up
production capacity from 1,500kg of CZT processed each year to in excess
of 10,000kg, thereby enabling the manufacture of more than 70,000 finished
detectors annually.
The CZT materials preparation facilities have also been considerably
expanded and automated to support the new furnace volumes.
This investment in the UK headquarters follows the relocation of our US
operations to a new purpose-built premises near Pittsburgh, Pennsylvania.
“Annual production capacity has increased
from 1,500kg of CZT to 10,000kg, enabling
the manufacture of more than 70,000
finished detectors”
CZT Ingot
15
KromeK Group plc
Full automation increases capacity,
improves product quality and enhances reliability
Annual Report & Accounts 2020
High volume CZT crystal
production
High throughput automated
wire sawing and dicing
Automated high throughput
surface polishing
Automated processing of
electrical contacts
CZT Ingot
Ingot Sliced
Diced
Polished
Detector
Electrical
Contacts
Automated bonding and assembly
of CZT detector modules
16
Finished Module
Annual Report & Accounts 2020
KromeK Group plc
New Equipment Investment
Across CZT Production
Operations
In June 2019, our US operations relocated to a new, purpose-built premises
near Pittsburgh, Pennsylvania. The facility offers a world-class platform
upon which to build next-generation CZT-based molecular imaging SPECT
detector assemblies and other medical imaging products.
The building provides a significantly more efficient facility and allows for
further capacity expansion, which means that we can deliver on the
anticipated growth in medical imaging – which has already been evidenced
by the award of the significant seven-year $58.1m contract.
Substantial additional investment has been made in new equipment for
process automation necessary to expand our throughput capacity with
specialist machine tools for detector fabrication designed to improve
operating efficiencies throughout the CZT production cycle.
The site move has enabled a ramp-up in production for CZT-based detector
assemblies to serve the SPECT market. We have introduced new CZT
processing technology, which is expected to further enhance process quality,
yield and manufacturing throughput.
The CZT manufacturing process capability was enhanced with advanced
automated sensor assembly capability, significantly improving both process
capability and operational capacity.
An illustration of how the increase in automated processes will impact
detector fabrication can be seen opposite.
Both the UK and US manufacturing sites are certified to ISO9001:2015
through the annual ISO audit cycle.
17
KromeK Group plc
Kromek
offers a full turnkey
solution from CZT
material to detector
module production,
at volume, in one
place
...exporting
worldwide
serving a global
customer base
The large ingot
is then cut and
shaped into
blanks of various
thicknesses and
geometries
The next stage
of the process is
Lithography, which
creates the electrode
pattern for the
detector optimised
for specific
applications
Annual Report & Accounts 2020
We
manufacture
in the USA
and the United
Kingdom...
We produce
high-quality
CZT ingots
The cut blanks
are subject
to chemical
polishing and
deposition of
electrodes
We can develop
the detector
design to suit
customer
requirements
Strip
Hemi-
spherical
We offer
industry standard
detector
configurations
CPG
Pixelated
Detector
production is a
high throughput
automated
process
18
Annual Report & Accounts 2020
We also work
on custom detector
module or system design
to suit specific needs,
which includes simulation
and modelling to find the
optimal solution
for each application
KromeK Group plc
Direct bonding
down to
55micron,
detector
thickness from
15mm to 0.5mm
Detector
bonding
pick &
place
automatic
chip
bonding
ASIC
Detector
electronics
Connectors
This is how
a typical CZT
detector module
is built
CZT
ASIC
Readout electronics
These finished
detector arrays
are used in a wide
variety of imaging
situations from
large field of view
medical imaging
systems…
...to security
screening
We are our customer’s partner for design,
development and high-volume supply of
CZT and scintillator-based detection and
imaging assemblies, advanced handheld
and compact systems for radiation
detection for civil nuclear use and CBRNE
Homeland Defence
19
This scalable
module design
allows scale up to full
OEM systems including
full mechanical housing
and interfaces
and thermal
management
...to single live
scan-based
devices using
small field of view
cameras…
Kromek offers
a complete solution
with custom-designed
software and advanced
algorithms to support
gamma and x-ray
detectors for a
wide variety of
applications
KromeK Group plc
Annual Report & Accounts 2020
Transforming Knowledge
into Real Products
Kromek developed the advanced algorithm for the system
creating a robust and capable product achieving
the ECAC Type C, Standard 3 certification, the highest available.
It is the first dual-view system to achieve this level.
Background image: jeshoots.com
20
Annual Report & Accounts 2020
KromeK Group plc
This programme has demonstrated how Kromek is adapting
its technology to integrate into future systems for advanced
automated liquid explosives detection applications and beyond
The ECAC certification enabled commercial
deployment of the product to begin and, post period,
in August 2020, Kromek received its first commercial
orders, and deliveries are currently underway.
The equipment is co-branded with the OEM and
Kromek in a similar fashion to Intel (Intel Inside)
with PC manufacturers with equipment displaying
‘Kromek enabled’.
Over the next three years, Kromek will be looking to
improve the software capability of the algorithms to
meet the current and constantly evolving threat listing
to address new threats from both liquid and bulk
explosives.
Bomb attacks on civil aviation make detecting
explosive devices and explosive material in passenger
baggage a major concern. Specifically, the threat of
a major terrorist incident involving liquid, aerosol, and
gel-based explosives (LAGs) has been constant since
a plot to simultaneously blow up nine aircrafts using
liquid explosives was foiled in August 2006.
Since then, Kromek’s CZT-based technology has
been at the leading edge in the development of
liquid explosives detection systems (LEDS); whether
in manufacturing its own ground-breaking Identifier
inspection system or working to meet the exacting
requirements of regulator or screening manufacturer
customers.
Knowledge: separating science fact from
science fiction
Kromek was invited to take part in a funded research
project, under a ‘Eurostars’ grant, to develop
sophisticated algorithms to accurately determine the
contents of bottles when scanned by a generic cabin
baggage scanner.
This was to lead to Kromek’s transition from
producing standalone LED systems to integrating the
LEDs’ algorithms into applications for next-generation
cabin baggage screening equipment.
Approved: explosive Detection Systems for
cabin Baggage (eDScB)
In 2017, Kromek partnered with a leading European
OEM to further develop the algorithm and produce a
field-ready product capable of achieving the highest
level of threat detection compliance in European Civil
Aviation – ECAC certification.
The two-year programme saw Kromek develop an
advanced algorithm and a set of accessories for the
system, creating a robust and capable product, which
achieved the ECAC Type C, Standard 3 certification,
the highest available, in January 2020.
It is the first dual-view system to achieve this
level of certification.
21
KromeK Group plc
Annual Report & Accounts 2020
Fatty
Scattered
Fibroglandular
Heterogeneously
Dense
Extremely Dense
“Molecular Breast Imaging (MBI) has opened up a new frontier in the
fight against breast cancer. The SPECT gamma cameras are able
to detect breast cancers missed by mammography and ultrasound,
particularly in women with dense breasts tissue.”
22
Annual Report & Accounts 2020
KromeK Group plc
Winning Technology: low Dose
molecular Breast Imaging
A qualitative study on the impact of the device on the
clinical workflow will be conducted and published.
Preparations for a clinical trial will be conducted so that
both the technology and the clinical protocol have the
appropriate ethical and regulatory clearances.
This project is further evidence that CZT-based detectors
are becoming a core technology in replacing legacy
diagnostic products across the medical imaging sector.
Our innovative SPECT detectors are capable of significantly
lowering radiation doses, thereby offering cost savings for
health services and, crucially, making enhanced detection
and early diagnosis of breast cancer accessible on a much
wider scale.
Finding cancer early means that it is less likely to have
spread and treatment can be started earlier in the course of
the disease.
Screening mammograms are still the most used method for
detecting breast cancer early. Mammograms can usually
find lumps two or three years before a woman or her doctor
can feel them. However, not all breasts look the same on a
mammogram – a woman’s age or breast density can make
cancers more or less difficult to see. In general, screening
mammograms are less effective in younger women because
they tend to have denser breast tissue.
Some cancers cannot be detected on a mammogram due
to the location of the cancer or the density of the breast
tissue. About 25% of cancers in women aged 40-49 are not
detectable by a screening mammogram, compared with
about 10% in women older than 50.
Molecular Breast Imaging (MBI) is a nuclear medicine
technique with proven performance benefits. In a recent
clinical trial published by Mayo clinic, with the addition
of MBI to mammography, the overall cancer detection
rate (per 1000 screened) increased from 3.2 to 12.0. For
mammography alone, sensitivity (true positives) was 24%
and specificity (true negatives) 89%. For MBI, sensitivity was
81% and specificity 94%.
One of the major barriers for adoption of this proven
technology has been higher dose exposure to patients
compared with a 2D mammogram.
Using our expertise to overcome the barriers
Working with Newcastle Upon Tyne NHS Foundation Trust,
Kromek is developing the technology to create a lower dose
(with the target dose to equal that of a mammogram) with
the ability to guide a biopsy to the tumour.
Building on the core technology of SPECT imaging, the
technique reduces the time taken for a scan – providing
comfort for the patient but also reducing the radiation
exposure time.
23
KromeK Group plc
Annual Report & Accounts 2020
Strategic Report (Continued)
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.
Risks associated
with COVID-19
Risks associated
with competition
Description
The Group, like so many businesses, faces
the significant risk associated with the
impacts of the COVID-19 pandemic on the
business environment and, at a broader
level, in terms of providing a safe working
environment for its staff.
Mitigation
In light of the economic threat brought about
by COVID-19, the Board has sought to
protect the business within the parameters
of our control and in the middle of March
2020, Kromek activated its business
continuity plan in response to COVID-19.
Management have an extensive forecasting
process that can adapt to evolving economic
conditions. The Group regularly reviews the
operational markets it operates in, adapting
its trading prospects in its key markets. Its
key markets of nuclear, medical imaging
and security screening are not expected
to be materially impacted in the long term.
In order to mitigate the immediate global
reaction to COVID-19, management have
secured additional debt funding in the form
of Term loans in the UK and Paycheck
Protection loans in the US. Extensions have
also been achieved regarding existing debt
covenants to alleviate any possible short-
term uncertainties in financial performance
the Group may experience. The Group is
able to service existing markets from either
the UK or the US, which allows a degree of
flexibility should there be differing lockdown
guidance in respective geographical areas.
Approximately 50% of the workforce is
able to work from home effectively, which
has been evident through the delivery of
a financial year end at the peak of UK/
US lockdown measures in April 2020.
The operating sites follow local guidance
and have implemented a controlled return
to work policy and additional hygiene
measures regarding the use of PPE. Further
details of this are included in the Chief
Financial Officer’s Review. Some of the
24
Group’s existing customers are driving the
technology adoption in the key markets.
However, this could result in the increase
in short-term counterparty risk meaning
potential expected credit losses due to
COVID-19 disruption. Whilst the Group
is confident that this is only a short-term
impact, management take a proactive view
on such circumstances and are working
with the necessary customers in a flexible
and collaborative way to minimise any
potential impact. From a supply chain
perspective specifically for the Group,
the main material source of supply is
semiconductor material. Due to this being
used in critical markets such as medical
imaging, our supply chain is widely regarded
as essential and is therefore likely to function
at relatively normal levels during any local or
global lockdowns.
Description
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 more 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.
Mitigation
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 product and
technology adoption
rates
Description
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.
Mitigation
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 large growing
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.
Annual Report & Accounts 2020
KromeK Group plc
Risks associated
with management of
the Group’s growth
strategy
Risks associated with
timing of customer or
third-party projects
Risks associated
with exchange rate
fluctuations
Description
Description
Description
The Group’s strategy includes co-
development with 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.
Mitigation
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 proportion of its revenues via the
sale of complete end-user products in
three different markets.
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 and working capital.
Mitigation
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. The Group has also relocated
one of the US subsidiary companies to a
custom-built facility that specialises in the
production of CZT gamma cameras used
for SPECT.
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
headquartered in the UK and presents its
financial statements in pounds sterling.
However, its subsidiaries, eV Products,
Inc. and NOVA R&D, Inc., operate in the
US and earn revenues and incur costs in
US dollars. A growing proportion of the
Group’s future revenues are expected to
be denominated in currencies other than
pounds sterling. Exchange rate variations
between currencies in which the Group
operates could have a significant impact
on the Group’s reported financial results.
Mitigation
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.
25
KromeK Group plc
Annual Report & Accounts 2020
Strategic Report (Continued)
Review of Principal Risks (Continued)
Section 172 Statement
Under s172 of the Companies Act 2006, the Directors have a duty to act in good faith
in a way that is most likely to promote the success of the Company. This duty is for
the benefit of its members as a whole, having regard to the likely consequences of
decisions for the long-term. Further, the interests of the Company’s employees, the need
to foster relationships with other key stakeholders, the impact on the community and
the environment. Additionally, maintaining a reputation for high standards of business
conduct, and the need to act fairly as between members of the Company.
Key decisions made by the Board during 2019/20 were related primarily to the expansion
of production capabilities in the UK and US and key and long-term global technology
opportunities. The Board believes that the decision taken to expand production
capabilities for the growth of CZT in 2018/19 and 2019/20 to service significant and
expected product growth and commercialisation was in the best long-term interests
of shareholders, taking into account the balance of financial and operational risk
compared with the potential financial returns. Further, the Board believes that, following
a review of the existing commercial relationships with key customers in Asia, the most
prudent action was to impair assets on the balance sheet due to uncertainty created
by COVID-19. Asia still represents a significant technology opportunity for the Group,
however, it is currently uncertain of timescales to full market traction.
The top 10 investors in the Company equates to approximately 61% of the Company’s
shares. The Executive Directors communicate from time-to-time with these shareholders
and have a good understanding of their interests. The Executive Directors and other
members of the management team meet regularly with other shareholders, both
institutional and private, to explain and discuss the Group’s strategy and objectives
and to understand the interests of smaller shareholders in the Company. The Board
recognises its responsibility to act fairly between all shareholders of the Company.
The Group employed an average of 139 staff during 2019/20. The management team
interacts daily with all employees and operate dedicated HR functions at its key sites in
the UK and US. Management has implemented employee policies and procedures that
are appropriate for the size of the Group.
Apart from its shareholders and employees, the Group’s main stakeholders are
customers and suppliers. The Group has several contracts with customers that relate to
longer term technology development and supply. The Group has engaged a dedicated
Procurement and Legal function that operates with the Group’s commercial, project and
production teams and those of the Group’s key customers and suppliers
As a relatively small organisation, the Group’s impact on the community and the
environment is modest but the Board endeavours to ensure that the business acts
ethically and in an environmentally conscious manner. The Group endeavours to operate
to practical levels on matters of corporate responsibility and recently elected to contract
its energy supplies in the UK from clean energy sources.
Dr Arnab Basu mBe
Chief Executive Officer
6 October 2020
Risks associated with
Brexit
Description
As a consequence of the UK’s decision
to leave the European Union, there is
international uncertainty around the
impact this will have on business and
trade. The Group will continue to monitor
Brexit and other macroeconomic factors
such as US and China relations. Kromek,
as an export led Group, may be subject
to risks associated with international
trade, including operational impacts on
logistics, potential tariffs and duties (for
example on imports on some categories
of semiconductor material), and export
control matters for some of the Group’s
nuclear products as a result of the final
terms of the UK’s departure from the
European Union. There is unlikely to be an
impact on staff relating to any restriction
on the movement of labour.
Mitigation
The Group has significant operations and
market presence in non-EU territories
such as the US and Asia, as well as a
portfolio of products that are market
leaders because of the technological
capabilities offered. As a result, the Group
is strategically well-placed to navigate
whatever will be the outcome of the
Brexit process. However, management
continually monitors the political
environment and keeps the potential
impact of Brexit under review and other
global economic events such as the
existing relationship between the US and
China. The Group employs specialist skills
within its functions and applies regular
technical update training to constantly
monitor the changing environment and
latest government guidelines and industry
best practice.
26
Annual Report & Accounts 2020
KromeK Group plc
Directors’ Biographies
Sir Peter Williams, Chairman
Sir Peter Williams, CBE, FREng, FRS, completed his degree and PhD at Cambridge University, and then
taught at Imperial College. He then moved into industry, working at VG Instruments where he became
Deputy Chief Executive and at Oxford Instruments, the first spin out from Oxford University, where he held
the positions of CEO and Chairman. He also chaired Isis Innovation Ltd, the technology transfer arm of
Oxford University. He received a CBE in 1992 and was knighted in the Queen’s Birthday Honours list of 1998.
He was formerly Chairman of the National Physical Laboratory, VP and Treasurer of the Royal Society and
Chairman of the Daiwa Anglo Japanese Foundation.
Dr Arnab Basu, Chief Executive Officer
Dr Basu has a PhD in physics from Durham University, specialising in semiconducting sensor materials. He
held senior management positions in his family business, serving over 250 major telecommunications and
consumer electronics manufacturers, including Siemens and GEC. He also worked in commercial product
development for Elmwood Sensors Ltd (Honeywell Group, UK). A prominent figure within the business
community, Dr Basu was awarded EY ‘Entrepreneur of the Year’ (2009) and received an MBE for services to
regional development and international trade (2014).
Mr Derek Bulmer, Chief Financial Officer and In-House Counsel
Mr Bulmer qualified as a Chartered Accountant in 1992 and as a Barrister in 2010. He trained with Grant
Thornton and has also worked with KPMG and undertaken several senior management roles with blue-chip
public companies, including Bass plc, AWG plc and Ibstock plc. He has also held a number of roles as
Finance Director of privately owned groups in both the IT and oil and gas industries. Mr Bulmer has a wealth
of experience in executing and managing business acquisitions plus significant aspects of the commercial
and legal disciplines of corporate management and has undertaken several significant dispute resolutions and
settlements.
Mr Lawrence Kinet, Non-Executive Director
Mr Kinet has over 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. Mr Kinet 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 and 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.
Mr Jerel Whittingham, Non-Executive Director, Remuneration Committee Chair
Mr Whittingham has extensive experience in investor, operational and strategy roles with technology-rich
companies, including Incuvest LLC, Generics Group plc, Durlacher plc, Amphion Innovations plc, INMARSAT
and a number of start-ups. He was appointed to the Board of Kromek Group plc in September 2013 and
also served on the Board of DSC Ltd, a predecessor company of the Group. Currently he combines NED and
operational roles in technology growth companies. He also served as CEO and later Executive Chairman of
Myconostica Ltd, a medical technology company spun out from a leading UK university.
Mr Christopher Wilks, Non-Executive Director, Audit Committee Chair
Mr Wilks BSc, FCA, was formerly the Chief Financial Officer at Signum Technology, which he co-founded in
2012. Prior to this, he was Chief Financial Officer at Sondex plc where he successfully managed their listing
on the Main Market of the London Stock Exchange in 2003 and made several post-IPO acquisitions. In 2007
Sondex was acquired by GE. After graduating from Durham University with a BSc in Applied Physics and
Electronics, Mr Wilks joined Marconi Space Systems designing power systems for space craft and then he
trained as a Chartered Accountant at Arthur Young (now EY). After qualifying as a Chartered Accountant in
audit, he became a Manager in the Corporate Finance team. His intimate understanding of the physics and
financial worlds adds valuable insight and expertise to the Board of Kromek
27
KromeK Group plc
Annual Report & Accounts 2020
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 2020.
During the year ended 30 April 2020, the Group made political
donations of £nil (2018/19: £nil) and charitable donations of £nil
(2018/19: £nil).
principal activities
Directors
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.
The Group realises revenue primarily on the sale of radiation
equipment, development of radiation technology and for leading
research into different potential applications of its detection
technology.
The Directors who served throughout the year and up to the date
of signing this report (unless otherwise stated) were as follows:
Dr A Basu
Mr D Bulmer
Sir P Williams
Mr L Kinet
Mr J H Whittingham
Mr C Wilks
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 2020, 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
Review and the Chief Financial Officer’s Review, on pages 2- 13.
Future developments
The Group’s development objectives for 2020/21 are disclosed in
the Strategic Report on pages 4-26.
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, and the Group has
significant operations and manufacturing facilities in both the US
and UK, the Directors believe the Group is strategically well-
placed to navigate whatever will be the outcome of the Brexit
process. However, the Directors continually monitor the political
environment and keep the potential impact of Brexit under
review and other global economic events such as the existing
relationship between the US and China. 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 2020.
results and dividends
The emoluments and interests of the Directors in the shares of
the Group are set out in the Remuneration Committee 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 in respect of the
annual report and the financial statements
The Directors are responsible for preparing the annual report
and the Group and parent Company financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and parent
Company financial statements for each financial year. Under the
AIM Rules of the London Stock Exchange, they are required
to prepare the Group financial statements in accordance with
International Financial Reporting Standards as adopted by the EU
(IFRSs as adopted by the EU) and applicable law and they have
elected to prepare the parent Company financial statements on
the same basis.
Under Company law, the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent Company and of
their profit or loss for that period. In preparing each of the Group and
parent Company financial statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable, relevant
and reliable;
• state whether they have been prepared in accordance with
IFRSs as adopted by the EU;
The consolidated income statement is set out on page 48.
• assess the Group and parent Company’s ability to continue
The Group’s loss after taxation and exceptional items amounted
to £16.5m (2018/19 restated: £0.6m).
The Directors do not recommend the payment of a dividend for
the year ended 30 April 2020.
as a going concern, disclosing, as applicable, matters related
to going concern; and
• use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent Company or to
cease operations, or have no realistic alternative but to do so.
28
Annual Report & Accounts 2020
KromeK Group plc
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the parent Company and
enable them to ensure that its financial statements comply with
the Companies Act 2006. They are responsible for such internal
control as they determine is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error, and have general responsibility for
taking such steps as are reasonably open to them to safeguard
the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report and a Directors’
Report that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
employees
Kromek develops and manufactures products and systems that
are designed to make the world a safer place. The Board and
senior management value technological development in the
Group’s sector and actively support developments that lead to
better scanning and detection systems. To this end, Kromek
participates in technology transfer projects, and works with
many universities and other places of learning worldwide. The
Board, executive team and staff are active across a wide range
of industry steering groups, organisations and other stakeholder
organisations. All staff are encouraged to meet and participate
in events and conferences that operate in their area of expertise.
The Group’s learning and development policy encourages
employees to further their professional development. Operating
a business that is fair and equitable for all is vital to the Group’s
success. Kromek’s ethical values are outlined in its:
•
•
•
•
•
Equal opportunity policy;
Personal harassment policy;
Family-friendly policy;
Equality, inclusion and diversity policy; and
Anti-bribery and corruption policy.
These policies are circulated to staff as part of the employee
manual, and reminders are sent on a regular basis as the manual
is updated and changed.
The Group has several routes in place to reinforce ethical
behaviour, which, depending upon the situation, could be
resolved in a regular one-to-one meeting, personal improvement
plan or in more severe action, including immediate dismissal.
The Group’s current number of staff at the date of this report is
132 and the percentage of this number that is female is 33%.
Auditor
Each of the persons who is a Director at the date of approval of
this annual report confirms that:
• so far as the Director is aware, there is no relevant audit
information of which the Group’s auditor is unaware; and
•
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.
Substantial shareholders
As at 30 April 2020, shareholders holding more than 3% of the
share capital of Kromek Group plc were:
Name of shareholder
Number
of shares
% of voting
rights
Miton Asset Management Ltd
55,099,914
Canaccord Genuity Wealth
Management
Hargreaves Lansdown Asset
Management
Polymer Holdings
Interactive Investor
Herald Investment
Management
32,628,355
22,459,102
20,273,475
19,625,659
17,747,059
Killik Asset Management
11,926,952
Kromek Group Former
Directors (UK)
10,709,844
By order of the Board
15.99
9.47
6.52
5.88
5.69
5.15
3.46
3.11
Dr Arnab Basu mBe
Chief Executive Officer
6 October 2020
29
KromeK Group plc
Annual Report & Accounts 2020
Corporate Governance Report
The Directors recognise the importance of sound corporate governance and have chosen to apply the Quoted Companies Alliance
Corporate Governance Code (the “QCA Code”). The QCA Code was developed by the QCA, in consultation with a number of significant
institutional small company investors, as a corporate governance code applicable to companies with shares traded on AIM.
principle
compliance
1. Establish a strategy and business
model which promote long-term
value for shareholders
• Kromek is a leading supplier of radiation detection components and devices.
• The Group strategy is set out on pages 4 to 26 in the Strategic Report section of this Annual Report.
• The Board normally meets formally at least four times per year in person and four times per year
telephonically. One of the Board’s direct responsibilities is setting and monitoring strategy.
2. Seek to understand and
meet shareholder needs and
expectations
•
Investor roadshow meetings are held at least twice per year immediately following the full year and interim
announcements.
• Shareholders are invited to the AGM held in Sedgefield where all Board members have the opportunity to
3. Take into account wider
stakeholder and social
responsibilities and their
implications for long-term
success
interact with shareholders and are available to answer questions raised.
• Shareholder feedback is received from our Nomads and all shareholder feedback is discussed at Board
meetings.
• For further information, see Section 172 statement on page 26 of this Annual Report.
•
In terms of employees, regular meetings are held with management tiers to discuss strategy, keep
employees updated, seek feedback and promote employee engagement.
• The Group engages in continuous communication and engagement with customers in order to understand
their needs and requirements.
• The procurement team maintains strong relationships with existing suppliers whilst promoting new
partnerships with new suppliers.
• For further information, see Section 172 statement on page 26 of this Annual Report.
4. Embedded effective risk
• The Board has overall responsibility for risk management and is assisted by the Audit Committee in
management, considering
both opportunities and threats
throughout the organisation
monitoring the principal risks and uncertainties facing the Group as well as the actions taken to mitigate
those risks.
• The Group’s significant risks are reviewed and assessed throughout the year.
• The significant risks are disclosed on pages 24 – 26 of the Strategic Report within this Annual Report.
5. Maintain the Board as a well-
functioning, balanced team led by
the Chairman
• The Board is led by the Non-Executive Chairman, Sir Peter Williams.
• The members of the Board maintain the appropriate balance of experience, independence and knowledge
of the Group.
• For further information, please see page 27 of this Annual Report.
6. Ensure that between them the
• Between the four Non-Executive Directors and the two Executive Directors, the Board has an effective
Directors have the necessary
up-to-date experience, skills and
capabilities
7. Evaluate Board performance
based on clear and relevant
objectives, seeking continuous
improvements
8. Promote a corporate culture that
is based on ethical values and
behaviours
balance of skills, experience and capabilities including finance, technology, law and knowledge of the
medical sector.
• Biographies of each Director can be found on page 27 of this Annual Report.
• The Remuneration Committee evaluates Executive Director performance alongside remuneration and
reward.
• With regards to financial performance, the Audit Committee meets with the Auditors to plan the year-end
audit, followed up by a meeting to review the results of the audit.
• The Group’s ethical values are outlined on page 29 of this Annual Report.
• All staff are encouraged to meet and participate in events and conferences that operate in their area
of expertise. The Group’s learning and development policy encourages employees to further their
professional development.
9. Maintain governance structures
• As noted in principle 1, the Board normally meets formally at least four times per year in person and four
and processes and support good
decision making by the Board
10. Communicate how the Group
is governed and is performing
by maintaining a dialogue with
shareholders and other relevant
stakeholders
times per year telephonically.
• The Audit Committee also meets two times per year and one of its key responsibilities is to review the
effectiveness of the Group’s internal control over financial reporting and consider key financial judgements
made in the financial statements.
• The Group’s financial results and internal controls are also audited by external Auditors to ensure they are
consistent with the Audit Committee’s understanding.
• Communication with shareholders is explained in principle 2 above.
• The Group’s website details RNS announcements and copies of the Annual and Interim reports.
This information is available on the Group’s website. Please visit www.kromek.com.
30
Annual Report & Accounts 2020
KromeK Group plc
The Board
The Board normally meets formally at least four times per
year in person and four times per year telephonically. Its direct
responsibilities include approving 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.
Board meetings
The Board met five times in person during the year ended 30
April 2020, including one AGM. The following details the Board
meetings during 2019/20 and the attendees:
Date
26/06/2019
25/09/2019
26/10/2019
(AGM)
10/12/2019
04/03/2020
Attendees
Sir Peter Williams
Arnab Basu
Derek Bulmer
Lawrence Kinet
Jerel Whittingham
Christopher Wilks
Sir Peter Williams
Arnab Basu
Derek Bulmer
Lawrence Kinet
Jerel Whittingham
Christopher Wilks
Sir Peter Williams
Arnab Basu
Derek Bulmer
Lawrence Kinet
Jerel Whittingham
Christopher Wilks
Sir Peter Williams
Arnab Basu
Derek Bulmer
Lawrence Kinet
Jerel Whittingham
Christopher Wilks
Sir Peter Williams
Arnab Basu
Derek Bulmer
Lawrence Kinet
Jerel Whittingham
Christopher Wilks
Board effectiveness
The Board has set out, in the contract for Non-Executive
Directors, the time commitment required and asked for
confirmation that the Director can devote enough time to meet
the expectations of the Board.
The Board currently anticipates a minimum time commitment of
one day per month and further days if required for the satisfactory
fulfilment of Directors’ duties. This includes attendance at five
Board meetings per annum, including attendance at four in
person, the AGM, any general meeting, one annual Board
away day and at least one site visit per year. Also, Directors are
expected to devote appropriate preparation time ahead of each
meeting.
The Board requires the Directors to disclose any other significant
time commitments and to obtain the agreement of the Chairman,
or in the event that the Chairman has a conflict of interest in
relation to such matter, obtain the agreement of one of the
Company’s independent Non-Executive Directors, before
accepting additional commitments that might affect their time to
devote to the role as a Non-Executive Director of the Company.
The Board is satisfied that, between the Directors, the executive
team and senior management, the Group has an effective and
appropriate balance of skills and experience. These include the
areas of technology, business operation, finance, innovation,
international trading and marketing. All Directors have extensive
technical qualifications and experience relating to their area of
operation.
The Board conducts half yearly reviews of the effectiveness of its
performance as a unit and of the individual members, meeting
with Board members to discuss their involvement with the
Company to ensure that:
1. their contribution is relevant and effective;
2. that they are committed to Kromek and its values; and
3. where relevant, they have maintained their independence.
In order to measure the effectiveness of the Board against these
three points, four areas of performance are considered:
1. Process and relationships
• Effective in dispatching business in and between
meetings.
• Good internal board dynamics.
• Good key relationships.
2. Coverage
• Focuses on key issues and risks.
•
Initiative-taking, dealing with crises and identifying
emerging issues.
3. Impact
• Contributes to the Company’s performance.
4. Sustainability
• Aware of, and interested in, good practice.
The above forms a basis for discussion around performance in
one-to-one discussions with Board members, CEO, CFO and
Chairman to measure effectiveness. These occur after Board
meetings and during other meetings with the senior team. The
Board has not adopted any more mechanistic performance
exercises, but this is always under consideration and may be
adopted in the future.
relations with stakeholders
Shareholders
The Company communicates with shareholders through
the Annual Report and Accounts, full-year and half-year
announcements, regulatory announcements, the Annual General
Meeting (AGM) and one-to-one meetings with existing and
potential new shareholders. The Chairman aims to ensure that
the Chairs of the Audit and Remuneration Committees are
31
KromeK Group plc
Annual Report & Accounts 2020
Corporate Governance Report (Continued)
available at the Annual General Meeting to answer questions. All
regulatory announcements along with annual reports and notices
of all general meetings over the last five years are available on the
corporate website and are publicised through Kromek’s social
media channels and newsletters.
The Board receives regular updates on the views of shareholders
through briefings and reports from Investor Relations, the CEO,
CFO and the Company’s brokers. The Company communicates
with institutional investors frequently through briefings with
management and, at a minimum, at the time of the publication of
the half year and full year results.
Broader stakeholders
Kromek develops and manufactures products and systems
that are designed to make the world a safer place. To support
this goal, Kromek participates in technology transfer projects,
and works with many universities and other places of learning
worldwide. The Board, executive team and staff are active across
a wide range of industry steering groups, organisations and other
stakeholder organisations.
As noted in the Directors’ Report above, the Group’s learning
and development policy encourages employees to further their
professional development. The Group also has a number of
policies to ensure the operation of a business that is fair and
equitable for all.
Audit committee
The Audit Committee is chaired by Christopher Wilks, an
Independent Non-Executive Director. The other members are
Sir Peter Williams, Lawrence Kinet and Jerel Whittingham, all
Independent Non-Executive Directors. The committee meets at
least two 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 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.
32
The Audit Committee meets two times per year and the following
details the Audit Committee meetings and attendees during the
year ended 30 April 2020:
Date
25/06/2019
10/12/2019
Attendees
Christopher Wilks (Chair)
Sir Peter Williams
Derek Bulmer
Lawrence Kinet
Jerel Whittingham
Christopher Wilks (Chair)
Sir Peter Williams
Derek Bulmer
Lawrence Kinet
Jerel Whittingham
remuneration committee
The Remuneration Committee is chaired by Jerel Whittingham,
an Independent Non-Executive Director. The other member
is Lawrence Kinet, an Independent Non-Executive Director.
The committee is responsible for making recommendations to
the Board, within agreed terms of reference, on the Group’s
framework of executive remuneration and its cost. The committee
determines the contract terms, remuneration and other benefits
for each of the Executive Directors, including performance-related
bonus schemes and pension rights. Further details of the Group’s
policies on remuneration and service contracts are given in the
Remuneration Committee Report on pages 35 to 37.
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. The Directors
have set out below some of the key aspects of the Group’s
internal control procedures.
An ongoing process has been established for identifying,
evaluating and managing the significant risks faced by the Group.
The process has been in place for the full year under review
and up to the date of approval of the annual report and financial
statements. The Board regularly reviews this process as part of its
review of such risks within its meetings. Where any weaknesses
are identified, an action plan is prepared to address the issues
and is then implemented.
Each year the Board approves the annual budget. Key risk areas
are identified, reviewed and monitored. Performance is monitored
against budget, relevant action is taken throughout the year and
updated forecasts are prepared as appropriate.
Capital and development expenditure is regulated by a budgetary
process and authorisation levels. For expenditure beyond
specified levels, detailed written proposals have to be submitted
to the Board for approval. Reviews are carried out after the
purchase is complete. The Board requires management to explain
any major deviations from authorised capital proposals and to
seek further sanction from the Board.
Annual Report & Accounts 2020
KromeK Group plc
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 2020, the Group had net current assets of £12.3m
(30 April 2019: £36.5m) and cash and cash equivalents of
£9.4m (30 April 2019: £20.6m) 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 two years. As a result of COVID-19, a revised base
case scenario was assessed along with a severe but plausible
downside less likely scenario. In the revised base case scenario,
with continued support from HSBC, the Group has adequate
resources to operate for at least the next 12 months. In the
severe but plausible downside, stress test scenario beyond the
Board’s estimate of revised base case, it is possible that the
Group may breach one of the bank’s five covenants during the
12 month going concern review period. It should be noted that
the Board has specifically excluded any significant upsides from
these scenarios or mitigating cost reductions, despite COVID-19
representing potential major opportunities for the Group in terms
of its biological detection capabilities and license agreement
to manufacture ventilators. 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 its present and foreseeable obligations for a period of at
least 12 months from approval of these financial statements.
Accordingly, they continue to adopt the going concern basis in
preparing the Group financial statements. For further reference,
please refer to the basis of preparation note (page 53).
33
KromeK Group plc
Annual Report & Accounts 2020
Audit Committee Report
The Audit Committee also assesses the auditor’s independence
and performance. The year ended 30 April 2020 represents
the first year that Rebecca Pett, the KPMG LLP audit partner
and Responsible Individual (RI), has signed the accounts. She
has replaced David Mitchell as the RI in the year following staff
rotation. The year ended 30 April 2020 represents the third year
that KPMG LLP have acted as the external auditor of the Group.
Audit process
The auditor prepares an audit plan for its review of the full year
financial statements. The audit plan sets out the scope of the
audit, areas to be targeted and audit timetable. This plan is
reviewed and agreed in advance by the Audit Committee for
discussion. No major areas of concern were highlighted by the
auditor during the year; however, during the audit period, areas
of significant risk, audit differences and other matters of audit
relevance are regularly communicated. The auditor currently
calculates materiality using the Group’s normalised loss before
tax. As the Group’s loss before tax (before exceptional items)
has increased to £5.3m during 2019/20 (2018/19: £1.3m), the
materiality of the Group has consequently increased by 11%
to £167k (2018/19: £150k). There were no unadjusted material
differences reported by the auditor to the Audit Committee.
Internal audit
At present the Group does not have an internal audit function,
and the Audit Committee believes that management is able to
derive assurance as to the adequacy and effectiveness of internal
controls and risk management procedures without one.
risk management and internal controls
As described on pages 32 to 33 of the Corporate Governance
Report, the Group has established a framework of risk
management and internal control systems, policies, and
procedures. The Audit Committee is responsible for reviewing the
risk management and internal control framework and ensuring
that it operates effectively. During the year, the Audit Committee
reviewed the framework and is satisfied that the internal control
systems in place are currently operating effectively.
Whistleblowing
The Group has in place a whistleblowing policy that sets out
the formal process by which any employee of the Group may,
in confidence, raise concerns about possible improprieties in
financial reporting or other matters.
christopher Wilks
Audit Committee Chairman
6 October 2020
On behalf of the Board, I am pleased to present the Audit
Committee report for the year ended 30 April 2020.
The Audit Committee is responsible for ensuring that the financial
performance of the Group is properly reported and reviewed. Its
role includes monitoring the integrity of the financial statements,
reviewing internal control and risk management systems,
reviewing any changes to accounting policies, and reviewing and
monitoring the extent of the non-audit services undertaken by
external auditors outside the committee schedule to ensure there
is full opportunity for discussion.
members of the Audit committee
The Committee consists of four Independent Non-Executive
Directors: me (as Chair), Sir Peter Williams, Lawrence Kinet and
Jerel Whittingham.
The Board is satisfied that I, as Chairman of the Committee, have
recent and relevant financial experience. I was formerly Chief
Financial Officer at Signum Technology, which I co-founded in
2012. Prior to this, I was Chief Financial Officer at Sondex plc,
where I successfully managed their listing on the Main Market of
the London Stock Exchange in 2003 and made several post-
IPO acquisitions. In 2007, Sondex was acquired by GE. After
graduating from Durham University with a BSc in Applied Physics
and Electronics, I initially joined Marconi Space Systems designing
power systems for space craft, and then trained as a Chartered
Accountant at Arthur Young (now EY).
Duties
The main duties of the Audit Committee are set out in its Terms of
Reference, which are available on the Company’s website (www.
kromek.com) and are available on request from the Company
Secretary.
The main items of business considered by the Audit Committee
during the year included:
review of the financial statements and annual report;
•
• consideration of the external audit report and management
representation letter;
• going concern review;
•
•
•
•
• assessment of the need for an internal audit function; and
• meeting with the external auditor without management
review of the 2020 audit plan and audit engagement letter;
review of suitability of the external auditors;
review of the risk management and internal control systems;
review and approval of the interim results;
present.
role of the external auditor
The Audit Committee monitors the relationship with the external
auditor, KPMG LLP, to ensure that auditor independence
and objectivity are maintained. As part of its review, the Audit
Committee monitors the provision of non-audit services by the
external auditor. The breakdown of fees between audit and
non-audit services is provided in note 6 of the Group’s financial
statements. The non-audit fees related to the interim review, as
well as LTIP, compliance and tax advice for the Group.
34
Annual Report & Accounts 2020
KromeK Group plc
Remuneration Committee Report (Unaudited)
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 makes the following disclosures voluntarily,
which are not intended to comply with the requirements of the
Companies Act 2006.
The Remuneration Committee and Board use external
independent advisors to provide guidance on benchmarks,
scheme structures and metrics. KPMG LLP provided advice on
LTIP best practice, but not on specific executive schemes. The
use of KPMG in this capacity predated their role as the Group’s
auditor.
The Remuneration Committee is responsible for recommending
the remuneration and other terms of employment for the
Executive Directors of Kromek Group plc.
In determining remuneration for the year, the Remuneration
Committee has given consideration to the requirements of the UK
Corporate Governance Code.
remuneration policy
The remuneration of Executive Directors is determined by
the Remuneration 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 contractual bonus is awarded at the end of each financial
year, the quantum of which is at the discretion of the Board,
having considered the recommendations of the Remuneration
Committee. The maximum bonus currently ranges from between
25%–100% of basic salary to reward 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 incentive schemes, which are designed
to promote long-term improvement in the performance of the
Group, sustained increase in shareholder value and clear linkage
between executive reward and the Group’s performance.
The LTIP is based on total shareholder return (“TSR”) relative to
an AIM peer group. Any awards made vest only after three years.
The annual LTIP award was reduced to reflect the introduction of
a parallel value creation share plan (“VC”) following the 2017/18
review. The VC will vest from May 2022 to 2024 and pay-outs, if
any, are based on the absolute value of the Group at that date.
There is a minimum value threshold before any pay-out may occur
and a maximum value cap.
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 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 salaries 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 or share options.
Directors’ emoluments (Audited)
Emoluments of the Directors for the year ended 30 April 2020 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:
Year ended
Director
Arnab Basu
Derek Bulmer
30 April 2020
£’000
30 April 2019
£’000
10
10
10
10
Directors’ shareholdings
Beneficial interests of the Directors in the shares of the Group are
shown below:
Arnab Basu
Derek Bulmer
Peter Williams
Lawrence Kinet
Jerel Whittingham
Christopher Wilks
30 April 2020
30 April 2019
Number
2,972,000
132,292
200,000
300,000
364,890
175,000
%
0.9
0.0
0.1
0.1
0.1
0.1
Number
2,952,000
112,292
150,000
300,000
364,890
125,000
%
0.9
0.0
0.0
0.1
0.1
0.0
35
KromeK Group plc
Annual Report & Accounts 2020
Remuneration Committee Report (Continued)
Directors’ emoluments for the year ended 30 April 2020
The table below forms part of the audited financial statements:
Non-executive chairman
Sir Peter Williams
executive
Arnab Basu
Derek Bulmer
Non-executive
Lawrence Kinet
Jerel Whittingham
Christopher Wilks
Graeme Speirs*
Total
Salary
£’000
Benefits
£’000
Bonus
paid
£’000
Pension
contributions
£’000
Total
emoluments
2019/20
£’000
Total
emoluments
2018/19
£’000
69
210
172
36
39
39
-
565
-
11
4
-
-
-
-
15
-
-
-
-
-
-
-
-
-
10
10
-
-
1
-
21
69
231
186
36
39
40
-
601
74
316
219
38
41
40
15
743
*Graeme Speirs resigned from his position as a Non-Executive Director in the prior year ended 30 April 2019.
executive Directors’ share incentive scheme
(lTIp)
Share incentive scheme for Arnab Basu, Chief Executive
Officer, and Derek Bulmer, Chief Financial Officer
The Remuneration Committee agreed, in October 2019, an
incentive award scheme for Arnab Basu and Derek Bulmer, to offer
them up to 443,038 and 358,650 shares respectively, at a price of
1p per share to vest based on specified performance criteria.
The Remuneration Committee agreed, in January 2019, an
incentive award scheme for Arnab Basu and Derek Bulmer, to offer
them up to 411,765 and 333,333 shares respectively, at a price of
1p per share to vest based on specified performance criteria.
The Remuneration Committee agreed, in December 2017, an
incentive award scheme for Arnab Basu and Derek Bulmer, to offer
them up to 438,202 and 307,865 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 Total
Shareholder Return (TSR) condition, calculated as the average
total return in comparison to a peer group. The Board received
specialist advice from the Group’s auditor throughout the year
when the Group was not engaged in either the interim review or
statutory audit process.
As at 30 April 2020, the shares issued in 2018, 2019 and 2020
remained unvested.
During 2017/18, a new incentive award scheme was introduced
regarding an Average Valuation Creation of the Company, referred
to as the “VC”. This has awarded Arnab Basu and Derek Bulmer
2,001,791 and 1,601,432 options under the scheme respectively.
These options only vest after five years (at 1p per share) and are
subject to challenging specific performance criteria over that
period commencing 1 May 2017. The quantity of options that
vest is weighted, such that the maximum amount only vests on
achievement of all performance criteria.
Share price during the year
During the year to 30 April 2020, the highest share price was
27.00p (2018/19: 31.34p) and the lowest share price was 10.50p
(2018/19: 21.22p). The market price of the shares at 30 April 2020
was 20.00p (30 April 2019: 25.50p).
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.
36
Annual Report & Accounts 2020
KromeK Group plc
executive Directors’ share options
The following table shows the movement in the total share options
that have been granted to Arnab Basu and Derek Bulmer (separate
to those under the LTIP scheme as detailed on the previous page).
These options are not linked to any specified performance criteria:
Director
Date of grant
exercise
price p
At 1 may 2019
number
Awarded
during the
year
exercised
during the
year
At 30 April 2020
number
expiry date
Arnab Basu
20 Nov 2011
Derek Bulmer
13 Sept 2010
Derek Bulmer
15 Oct 2012
Derek Bulmer
31 May 2013
20.0
20.0
20.0
20.0
1,000,000
500,000
125,000
250,000
-
-
-
-
-
-
-
-
1,000,000
20 Sept 2021
500,000
13 Sept 2020
125,000
15 Oct 2022
250,000
31 May 2023
37
KromeK Group plc
Annual Report & Accounts 2020
This page is left intentionally blank
38
Annual Report & Accounts 2020
KromeK Group plc
Kromek Group plc
Annual report and accounts for the
year ended 30 April 2020
Financial Statements
39
KromeK Group plc
Annual Report & Accounts 2020
Independent Auditor’s Report To The Members of Kromek Group plc
1
our opINIoN IS uNmoDIFIeD
We have audited the financial statements of Kromek Group
plc (“the company”) for the year ended 30 April 2020 which
comprise the consolidated income statement, consolidated
statement of comprehensive income, consolidated statement of
financial position, consolidated statement of changes in equity,
consolidated statement of cash flows, company statement of
financial position, company statement of changes in equity,
company statement of cash flows, and the related notes,
including the accounting policies in note 2.
In our opinion:
— the financial statements give a true and fair view of the state of
the Group’s and of the parent company’s affairs as at 30 April
2020 and of the Group’s loss for the year then ended;
— the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards
as adopted by the European Union (IFRSs as adopted by the
EU);
— the parent company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU
and as applied in accordance with the provisions of the
Companies Act 2006; and
— the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (“ISAs (UK)”) and applicable law.
Our responsibilities are described below. We have fulfilled our
ethical responsibilities under, and are independent of the Group
in accordance with, UK ethical requirements including the FRC
Ethical Standard as applied to listed entities. We believe that the
audit evidence we have obtained is a sufficient and appropriate
basis for our opinion.
overview
Materiality:
Group financial
statements as a whole
£167,000 (2019: £150,000)
5% (2019: 5%) of normalised Group
loss before tax
Coverage
100% (2019: 100%) of Group loss
before tax
Key audit matters vs 2019
Recurring
risks
Revenue recognition on contracts
ongoing at year end
Recoverability of development costs
Parent company: investment and
receivables recoverability
Going Concern
The impact of uncertainties due to the
UK exiting the European Union
Event
driven
New: Recoverability of amounts
receivable on contract assets (‘AROC’)
New: Recoverable amount of goodwill
p
tu
tu
p
tu
40
Annual Report & Accounts 2020
KromeK Group plc
2
mATerIAl uNcerTAINTY relATeD To GoING coNcerN
The risk
Going Concern
We draw attention to note 2 to the
financial statements which indicates
that the Group is subject to a number of
covenants in respect of its borrowings.
Whilst the Group’s base case forecasts
do not indicate a breach of the
covenants (due to obtaining a waiver
from its lender) the severe but plausible
downside scenario does indicate a
breach of the covenants. The successful
replacement of its revolving credit
facilities, due to expire in April 2022, is
also uncertain.
The continued availability of the Group’s
bank facilities and the successful
replacement of the revolving credit
facility in April 2022, along with the other
matters explained in note 2,constitute
a material uncertainty that may cast
significant doubt on the Group and
Company’s ability to continue as a going
concern.
Our opinion is not modified in respect of
this matter.
Disclosure quality
Our procedures included:
our response
There is little judgement involved in the
directors’ conclusion that risks and
circumstances described in note 2 to the
financial statements represent a material
uncertainty over the ability of the Group
and company to continue as a going
concern for a period of at least a year
from the date of approval of the financial
statements.
However, clear and full disclosure of
the facts and the directors’ rationale
for the use of the going concern basis
of preparation, including that there is
a related material uncertainty, is a key
financial statement disclosure and so
was the focus of our audit in this area.
Auditing standards require that to be
reported as a key audit matter.
Historical comparisons: We assessed the
reasonableness of the cash flow forecasts
by considering the historical accuracy of the
previous forecasts.
Sensitivity analysis: We considered
sensitivities over the level of available financial
resources indicated by the Group’s financial
forecasts, including revenue cash flows, taking
account of reasonably plausible but severe
downsides that could arise individually and
collectively.
Test of detail: We tested the integrity of the
cash flow models.
Independent reperformance: We recalculated
the borrowing covenant calculations in each of
management’s forecasts.
Inspection: We inspected the signed covenant
waiver agreement with the lender.
Assessing transparency: We assessed the
completeness and accuracy of the matters
covered in the going concern disclosure by
reference to our audit findings from the above
procedures and our understanding of the
Group’s business.
41
KromeK Group plc
Annual Report & Accounts 2020
Independent Auditor’s Report (Continued)
3.
oTher KeY AuDIT mATTerS: INcluDING our ASSeSSmeNT oF rISKS oF mATerIAl mISSTATemeNT
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements
and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those
which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the
engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters. Going concern is a significant key audit matter and is
described in section 2 of our report. In arriving at our audit opinion above, the other key audit matters were as follows:
The risk
The impact of uncertainties due to the
UK exiting the European Union
Refer to pages 24-26 (principal risks),
page 34 (Audit Committee Report),
pages 53-61 (accounting policy) and
pages 63-86 (financial disclosures).
Extreme levels of uncertainty
The UK left the European Union (EU)
on 31 January 2020 and entered an
implementation period which is due to
operate until 31 December 2020. At that
point current trade agreements with the
European Union terminate. The UK is
entering negotiations over future trading
relationships with the EU and a number
of other countries. Where new trade
agreements are not in place World Trade
Organisation (WTO) arrangements will
be in force, meaning among other things
import and export tariffs, quotas and border
inspections, which may cause delivery
delays. Different potential outcomes of
these trade negotiations could have wide
ranging impacts on the Group’s operations
and the future economic environment in the
UK and EU.
All audits assess and challenge the
reasonableness of estimates, in particular
as described in recoverability of
development costs, valuation of goodwill
and parent company: investment and
receivables recoverability below, and related
disclosures; and the appropriateness of the
going concern basis of preparation of the
financial statements (see previous page).
All of these depend on assessments of
the future economic environment and the
Group’s future prospects and performance.
The uncertainty over the UK’s future trading
relationships with the rest of the world
and related economic effects give rise to
extreme levels of uncertainty, with the full
range of possible effects currently unknown.
our response
We developed a standardised firm-wide
approach to the consideration of the
uncertainties arising from the UK’s departure
from the EU in planning and performing our
audits. Our procedures included:
Our knowledge of the business: We
considered the directors’ assessment of
risks arising from different outcomes to the
trade negotiations for the Group’s business
and financial resources compared with
our own understanding of the risks. We
considered the directors’ plans to take
action to mitigate the risks.
Sensitivity analysis: When addressing
recoverability of development costs,
valuation of goodwill and parent company,
investment and receivables recoverability
and other areas that depend on forecasts,
we compared the directors’ analysis to our
assessment of the full range of reasonably
possible scenarios resulting from these
uncertainties and, where forecast cash flows
are required to be discounted, considered
adjustments to discount rates for the level of
remaining uncertainty.
Assessing transparency: As well as
assessing individual disclosures as part
of our procedures on going concern,
recoverability of development costs, parent
company: investment and receivables
recoverability and valuation of goodwill we
considered all of the disclosures concerning
uncertainties related to the UK’s future
trading relationships together, including
those in the strategic report, comparing the
overall picture against our understanding of
the risks.
42
Annual Report & Accounts 2020
KromeK Group plc
3.
oTher KeY AuDIT mATTerS: INcluDING our ASSeSSmeNT oF rISKS oF mATerIAl mISSTATemeNT (coNT.)
Group: Contract revenue recognition
Subjective estimate
Our procedures included:
The risk
our response
(£0; 2019: £5,278,000)
Refer to page 34 (Audit Committee
Report), pages 53-61 (accounting
policy) and pages 63-86 (financial
disclosures).
Group: Recoverability of amounts
receivable on contract assets
(‘AROC’)
(£172,000; 2019: £12,362,000)
Refer to page 34 (Audit Committee
Report), pages 53-61 (accounting
policy) and pages 75-76 (financial
disclosures).
— Accounting analysis: We inspected the
signed contracts and correspondence
with customers (including involving
legal specialists) to assess whether
the contracts had been appropriately
accounted for in line with IFRS 15.
— Independent reperformance: We
agreed costs to complete to detailed
breakdowns and checked the
mathematical accuracy to assess the
calculation of costs to complete and
whether revenue and margin had been
appropriately recognised.
— Assessing transparency: We assessed
the adequacy of the disclosures in
relation to the accounting treatment of
revenue recognised over time in the
Annual Report.
One of the Group’s contracts with its
customers involves the construction of
complex technical equipment and provision
of associated services over a period of more
than one year and has been accounted for
over time, with contract progress based on
costs incurred over an estimate of forecast
total costs.
No revenue has been recognised in respect
of this contract in the current year as the
contract has not progressed since the prior
year end. In addition, a 100% expected
credit loss provision has been recognised in
relation the contract assets and receivables
on this contract (see below).
The effect of these matters is that, as part
of our risk assessment for audit planning
purposes, we determined that revenue
recognised has a high degree of estimation
uncertainty, with a potential range of
reasonable outcomes greater than our
materiality for the financial statements as
a whole, and possibly many times that
amount. In conducting our final audit work,
we reassessed the degree of estimation
uncertainty to be less than that materiality.
Subjective estimate
Our procedures included:
Contract revenues recognised over time in
relation to one contract resulted in a contract
asset balance of £12.4m being recognised
on the balance sheet at 30 April 2019 and
31 October 2019.
During the year management recognised
a 100% impairment loss in relation to
the above balance. This was based the
assumption that the customer no longer
had the intent or ability to pay and that there
was no material residual value remaining in
relation to the contract assets.
The effect of these matters is that, as part of
our risk assessment, we determined that the
amount of the AROC balance impaired has a
high degree of estimation uncertainty with a
potential range of outcomes greater than our
materiality for the financial statements as a
whole and possibly many times that amount.
— Historical comparison: We performed
a review of payments received to date in
respect of the contract and assessed the
ongoing ability and intention to pay.
— Our sector experience: We challenged
whether there was any residual value
in the assets related to this contract,
informed through corroborative inquiries
with senior operational and technical
personnel.
— Inspection: We inspected
correspondence with the customer
to determine any matters relevant to
the recoverability of the contract asset
balance.
— Assessing transparency: We assessed
the adequacy of the disclosure related
to the estimation uncertainty, judgments
made and assumptions over the write
down of the contract asset balance and
assessed the presentation of this as an
exceptional item.
43
KromeK Group plc
Annual Report & Accounts 2020
Independent Auditor’s Report (Continued)
3.
oTher KeY AuDIT mATTerS: INcluDING our ASSeSSmeNT oF rISKS oF mATerIAl mISSTATemeNT (coNT.)
Group: Recoverability of
development costs
(£19,340,000; 2019: £15,331,000)
Refer to page 34 (Audit Committee
Report), pages 53-61 (accounting
policy) and pages 70-72 (financial
disclosures).
Parent company: Investment and
receivables recoverability
(£64,284,000; 2019: £50,902,000)
Refer to page 34 (Audit Committee
Report), pages 53-61 (accounting
policy) and pages 90-95 (financial
disclosures).
The risk
our response
Subjective estimate
Our procedures included:
The estimated recoverable amount is
subjective due to the inherent uncertainty
involved in forecasting and discounting
future cash flows and assumptions made in
relation to future market demand, production
capacity and yield, gross margin and
overhead rates.
The effect of these matters is that, as part
of our risk assessment, we determined
that the recoverable amount of capitalised
development costs has a high degree of
estimation uncertainty, with a potential
range of reasonable outcomes greater than
our materiality for the financial statements
as a whole, and possibly many times that
amount. The financial statements (note 14)
disclose the sensitivity estimated by the
Group.
— Sensitivity analysis: We performed
sensitivity analysis on the assumptions,
including growth rates and discount
rates, included in the Group’s valuations.
— Historical comparisons: We compared
the historical budget versus actual
financial data in order to make an
assessment of the Group’s forecasting
ability given the reliance on future
forecast revenues in the discounted
cashflows used to support the carrying
value.
— Assessing transparency: We evaluated
the adequacy of the disclosures related
to the estimation uncertainty, judgments
made and assumptions over the
recoverability of capitalised development
costs, in particular checking that the
sensitivity disclosures provided sufficient
detail.
Subjective estimate
Our procedures included:
The carrying amount of the parent
company’s investments in subsidiaries and
Group receivables balance are significant
and at risk of irrecoverability due the Group
continuing to be loss making. The estimated
recoverable amount of these balances is
subjective due to the inherent uncertainty
in forecasting trading conditions and cash
flows used in the budgets.
The effect of these matters is that, as part
of our risk assessment, we determined
that the recoverable amount of the cost
of investment in subsidiaries and Group
receivable balance has a high degree of
estimation uncertainty, with a potential
range of reasonable outcomes greater than
our materiality for the financial statements
as a whole, and possibly many times that
amount.
— Sensitivity analysis: We performed
sensitivity analysis on the assumptions,
including growth rates and discount
rates included in the Group’s valuations.
— Test of detail: We compared the amount
of the investment to the net assets of the
subsidiaries.
— Historical comparisons: We compared
the historic budget versus actual financial
data in order to make an assessment
of the Group’s forecasting ability given
the reliance on future forecast revenues
in the discounted cashflows used to
support the carrying value.
— Assessing transparency: We evaluated
the adequacy of the disclosures related
to the estimation uncertainty, judgments
made and assumptions over the
recoverability of the parent company
investment and receivables balance.
44
Annual Report & Accounts 2020
KromeK Group plc
3.
oTher KeY AuDIT mATTerS: INcluDING our ASSeSSmeNT oF rISKS oF mATerIAl mISSTATemeNT (coNT.)
Group: Recoverable amount of
goodwill
(£1,250,000; 2019: £1,250,000)
Refer to page 34 (Audit Committee
Report), pages 53-61 (accounting
policy) and pages 70-72 (financial
disclosures).
The risk
our response
Subjective estimate
Our procedures included:
Goodwill is a material balance in the Group
financial statements and subject to annual
impairment review in line with IAS 36.
The Group continues to be loss making
and forecasting and valuation requires
significant judgement and estimation. This
complexity is exacerbated by the current
level of economic uncertainty due to the
Covid19 pandemic.
We consider the carrying value of goodwill
(and intangible assets) and the risk over
potential impairment to be a significant
audit risk because of the inherent
uncertainty involved in forecasting and
discounting future cash flows, which
are the basis of the assessment of
recoverability.
The effect of these matters is that, as part
of our risk assessment, we determined
that the recoverable amount of goodwill
(and intangible assets) has a high degree
of estimation uncertainty, with a potential
range of reasonable outcomes greater than
our materiality for the financial statements
as a whole, and possibly many times that
amount.
— Tests of detail: We compared the cash
flows used in the impairment model to the
output of the Group’s budgeting process
and against the understanding we obtained
about the business areas through our
audit, and assessed if these cash flows
were reasonable.
— Historical comparison: We assessed
the historical accuracy of the forecasts
used in the Group’s impairment model by
considering actual performance against
prior year budgets. We also assessed the
forecast revenue growth with reference to
the most recent results for 2018 and 2019.
— Benchmarking assumptions: We
used external data and our own internal
valuation audit tools to evaluate the
discount rates.
— Sensitivity analysis: We performed
sensitivity analysis for the key inputs and
assumptions.
— Assessing transparency: We evaluated
the adequacy of the disclosures related
to the estimation uncertainty, judgments
made and assumptions over the
recoverability of goodwill, in particular
checking that the sensitivity disclosures
provided sufficient detail.
45
KromeK Group plc
Annual Report & Accounts 2020
Independent Auditor’s Report (Continued)
4.
our ApplIcATIoN oF mATerIAlITY AND AN
oVerVIeW oF The Scope oF our AuDIT
Normalised Group Loss before Tax
£3,404,600 (2019: £2,935,000)
Group Materiality
£167,000 (2019: £150,000)
Materiality for the Group financial statements as a whole
was set at £167,000 (2019: £150,000), determined with
reference to a benchmark of Group normalised loss before
tax, normalised by averaging over the last five years due
to fluctuations in the business cycle, of £3,404,600, of
which it represents 5% (2019: 5%).
Materiality for the parent company financial statements
as a whole was set at £160,000 (2019: £150,000),
determined with reference to a benchmark of company
total assets, chosen to be lower than materiality for the
Group as a whole, of which it represents 0.3% (2019:
0.2% of net assets).
We agreed to report to the Audit Committee any corrected
or uncorrected identified misstatements exceeding
£8,350, in addition to other identified misstatements that
warranted reporting on qualitative grounds.
Of the Group’s 6 (2019: 6) reporting components, we
subjected 4 (2019: 6) to full scope audits for Group
purposes. We conducted reviews (including enquiry)
of financial information at a further 2 (2019: nil) non-
significant components to support our consolidation
process of the Group’s accounts where individual
components were not financially significant and did not
contain significant risks or key audit matters.
The components within the scope of our work accounted
for the percentages illustrated opposite.
The work on all components, including the audit of the
parent company, was performed by the Group team.
£167,000
Whole financial statements
materiality (2019: £150,000)
£160,000
Range of materiality at 6
components (£2,700 to £160,000)
(2019: £4,000 to £140,000)
Normalised LBT
Group Materiality
£8,350
Misstatements reported to the audit
committee (2019: £7,500)
Group revenue
Group loss before tax
0
0
100%
(2019: 100%)
100
100
Group total assets
0
0
100%
(2019: 100%)
100
100
0
0
100%
(2019: 100%)
100
100
Full scope for Group
audit purposes 2020
Full scope for Group
audit purposes 2019
46
Annual Report & Accounts 2020
KromeK Group plc
5.
We hAVe NoThING To reporT oN The oTher
INFormATIoN IN The ANNuAl reporT
7.
reSpecTIVe reSpoNSIBIlITIeS
Directors’ responsibilities
The directors are responsible for the other information presented
in the Annual Report together with the financial statements. Our
opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion
or, except as explicitly stated below, any form of assurance
conclusion thereon.
Our responsibility is to read the other information and, in doing so,
consider whether, based on our financial statements audit work,
the information therein is materially misstated or inconsistent with
the financial statements or our audit knowledge. Based solely
on that work we have not identified material misstatements in the
other information.
Strategic report and directors’ report
Based solely on our work on the other information:
— we have not identified material misstatements in the strategic
report and the directors’ report;
— in our opinion the information given in those reports for the
financial year is consistent with the financial statements; and
— in our opinion those reports have been prepared in
accordance with the Companies Act 2006.
6.
We hAVe NoThING To reporT oN The oTher
mATTerS oN WhIch We Are requIreD To
reporT BY excepTIoN
Under the Companies Act 2006, we are required to report to you
if, in our opinion:
— adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have not
been received from branches not visited by us; or
— the parent company financial statements are not in agreement
with the accounting records and returns; or
— certain disclosures of directors’ remuneration specified by law
are not made; or
— we have not received all the information and explanations we
require for our audit.
We have nothing to report in these respects.
As explained more fully in their statement set out on pages 28-29,
the directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and
fair view; such internal control as they determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; assessing
the Group and parent company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going
concern; and using the going concern basis of accounting unless
they either intend to liquidate the Group or the parent company or
to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue our
opinion in an auditor’s report. Reasonable assurance is a
high level of assurance, but does not guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or
in aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the FRC’s
website at www.frc.org.uk/auditorsresponsibilities.
8.
The purpoSe oF our AuDIT WorK AND To
Whom We oWe our reSpoNSIBIlITIeS
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.
rebecca pett
(Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
6 October 2020
47
KromeK Group plc
Annual Report & Accounts 2020
Consolidated income statement
For the year ended 30 April 2020
continuing operations
Revenue
Cost of sales
Gross profit
Other operating income
Distribution costs
Administrative expenses
operating loss (before exceptional items)
Exceptional impairment losses on trade receivables
and amounts recoverable on contract
operating results (post exceptional items)
Finance income
Finance costs
loss before tax
Tax
loss for the year from continuing operations
loss for the year from continuing operations
(before exceptional items)
Loss per share
- basic (p)
- diluted (p)
*see notes 2 and 21 in the accounts
Note
4
4
8
9
10
5
11
13
48
2020
£’000
13,120
(6,912)
6,208
-
(336)
(10,611)
(4,739)
(13,062)
(17,801)
60
(604)
Restated*
2019
£’000
14,517
(6,208)
8,309
-
(184)
(9,031)
(906)
-
(906)
155
(519)
(18,345)
(1,270)
1,805
(16,540)
637
(633)
(3,478)
(633)
(4.8)
(4.8)
(0.2)
(0.2)
Annual Report & Accounts 2020
KromeK Group plc
Consolidated statement of comprehensive income
loss for the year
Items that are or may be subsequently reclassified to profit or loss:
For the year ended 30 April 2020
2020
£’000
Restated*
2019
£’000
(16,540)
(633)
Exchange differences on translation of foreign operations
1,047
1,189
Total comprehensive (loss)/income for the year
(15,493)
556
* see note 2 in the accounts
49
KromeK Group plc
Annual Report & Accounts 2020
Consolidated statement of financial position
As at 30 April 2020
Non-current assets
Goodwill
Other intangible assets
Investments – long-term cash deposits
Property, plant and equipment
Right-of-use asset
current assets
Inventories
Trade and other receivables
Current tax assets
Cash and bank balances
Total assets
current liabilities
Trade and other payables
Borrowings
Lease obligation
Net current assets
Non-current liabilities
Deferred tax liability
Deferred income
Lease obligation
Borrowings
Total liabilities
Net assets
equity
Share capital
Share premium account
Merger reserve
Translation reserve
Accumulated losses
Total equity
Note
14
15
16
17
19
20
20
22
25
23
2, 21
22
23
25
27
28
29
30
2020
£’000
1,275
21,878
-
12,551
3,852
39,556
6,416
8,210
1,031
9,444
25,101
64,657
(8,795)
(3,669)
(324)
(12,788)
12,313
-
(1,021)
(3,844)
(1,937)
(6,802)
(19,590)
45,067
3,446
61,600
21,853
1,981
(43,813)
45,067
Restated*
2019
£’000
1,275
18,165
1,250
6,252
3,975
30,917
3,227
19,997
987
20,616
44,827
75,744
(4,884)
(3,133)
(273)
(8,290)
36,537
(868)
-
(3,938)
(2,313)
(7,119)
(15,409)
60,335
3,446
61,600
21,853
934
(27,498)
60,335
*see notes 2 and 21 in the accounts
The financial statements of Kromek Group plc (registered number 08661469) were approved by the Board of Directors and authorised
for issue on 6 October 2020. They were signed on its behalf by:
Dr Arnab Basu mBe
Chief Executive Officer
50
Annual Report & Accounts 2020
KromeK Group plc
Consolidated statement of changes in equity
For the year ended 30 April 2020
Share capital
£’000
Share
premium
account
£’000
merger
reserve
£’000
Translation
reserve
£’000
Accumulated
income/
(losses)
£’000
Total
equity
£’000
Balance at 1 may 2018 as previously
reported
2,604
42,625
21,853
(269)
(26,557)
40,256
Prior year adjustment (see notes 2 and 21)
-
-
-
14
(503)
(489)
Balance at 1 may 2018 restated
2,604
42,625
21,853
(255)
(27,060)
39,767
Restated loss for the year (see notes 2 and 21)
Restated exchange difference on translation of
foreign operations (see notes 2 and 21)
Total comprehensive income/(losses) for
the year
-
-
-
-
-
-
Issue of share capital net of expenses
842
18,975
Credit to equity for equity-settled share-based
payments
-
-
-
-
-
-
-
-
(633)
1,189
-
(633)
1,189
1,189
(633)
556
-
-
-
19,817
195
195
Balance at 30 April 2019 restated
3,446
61,600
21,853
934
(27,498)
60,335
Loss for the year
Exchange difference on translation of foreign
operations
Total comprehensive income/(losses) for
the year
Issue of share capital net of expenses
Credit to equity for equity-settled share-based
payments
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(16,540)
(16,540)
1,047
-
1,047
1,047
(16,540)
(15,493)
-
-
-
225
-
225
Balance at 30 April 2020
3,446
61,600
21,853
1,981
(43,813)
45,067
51
KromeK Group plc
Annual Report & Accounts 2020
Consolidated statement of cash flows
For the year ended 30 April 2020
Note
31
Net cash inflow/(used in) operating activities
Investing activities
Investment receipts from money market account
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
Net proceeds on issue of shares
New borrowings
Payment of borrowings
Payment of lease liability
Interest paid
2020
£’000
179
1,250
60
(6,965)
(243)
(5,256)
(11,154)
-
2,100
(2,105)
(539)
(365)
2019
£’000
(4,777)
-
155
(3,644)
(210)
(2,731)
(6,430)
19,817
2,557
(111)
(486)
(293)
Net cash (used in)/generated from financing activities
(909)
21,484
Net (decrease)/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
(11,884)
20,616
712
9,444
10,277
9,488
851
20,616
52
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements
For the year ended 30 April 2020
GeNerAl INFormATIoN
1.
Kromek Group plc is a company incorporated and domiciled in the United Kingdom under the Companies Act. These financial statements
are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. Foreign
operations are included in accordance with the policies set out in note 2.
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.
The Group adopted IFRS 15 ‘Revenue from contracts with customers’ from 1 May 2018 and revenue is recognised in accordance with
this standard. IFRS 16 ‘Leases’ became mandatory for adoption on 1 January 2019 and was early adopted from 1 May 2018. IFRS 9
‘Financial Instruments’, which is mandatory for years commencing on or after 1 January 2018, was also adopted last financial year. For
further analysis in relation to the adoption of these standards, refer to the 2018/19 annual report.
There were no other new standards or amendments or interpretations to existing standards that became effective during the year that were
material to the Group.
2.
SIGNIFIcANT AccouNTING polIcIeS
Basis of preparation
The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the
European Union (“IFRSs”) and IFRIC interpretations.
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.
restatement
Following a review, management revisited the historical treatment of deferred tax in relation to development costs capitalised in the US
subsidiaries since reporting under IFRS. As a result of management’s review, a prior year adjustment has been made to recognise a non-
current deferred tax liability of £868k as at 30 April 2019 (30 April 2018: £503k).
The adjustment reduced the tax credit for the year ending 30 April 2019 by £350k to £637k (previously reported as £987k) and,
consequentially, increased the loss for the year from continuing operations by £350k (previously reported as a loss of £283k). As a result,
restatements were made as at 30 April 2018 and 30 April 2019 to adjust the translation reserve by £14k from a debit balance of £269k to
£255k and £29k from £949k to £934k, respectively. The comprehensive losses for the year set out in the total comprehensive income on
the consolidated statement of comprehensive income for the year ended 30 April 2019 were restated by a net amount of £379k to £556k
(previously reported as £935k).
The impact was to reduce net assets and equity as at 30 April 2019 by £868k (1 May 2018 by £489k).
There was no impact to the statement of cash flows.
As the effect of the restatement is limited to deferred tax liabilities and equity and has no impact on the loss before tax, no third balance
sheet has been presented.
This deferred tax liability accrued to 30 April 2019 has been fully eliminated during the year ending 30 April 2020 following an offset with a
deferred tax asset arising in the Group’s US operations relating to accumulated losses accrued in the year to 30 April 2020.
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
Assessment
The Directors have a reasonable expectation that the going concern basis of accounting remains appropriate and that the Group has
adequate resources to continue in operation for the next 18 months based on its cash flow forecasts prepared.
The Group meets its day-to-day working capital requirements from cash receipts from sales as well as external borrowings comprising a
Revolving Credit facility (RCF) and capex facility from HSBC (see note 26 for further details of these facilities) for which there are certain
covenants attached (see pages 85-86 for a definition of the covenants and the measurement and testing requirements). During and as
at the year ended 30 April 2020, the Group was not in breach of any of its covenants at any testing period. The RCF facility is subject to
renewal in April 2022.
53
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
2.
SIGNIFIcANT AccouNTING polIcIeS (CONtINUED)
Going concern (continued)
As previously set out, COVID-19 has represented a significant challenge for the Group and, as a result, post year-end the Board has revised
its forecasts for the next 18 months taking into account the impact of COVID-19. This has resulted in a ‘revised base case budget’. Under
this revised base case budget in the period to 30 April 2022, the Group was forecasting:
-
-
to breach its original EBIT:Finance charge covenant on 30 April 2021, which is tested on an annual basis; and
to breach its original net debt:EBITDA covenant on 31 October 2020, which is tested on a quarterly basis.
In response to these potential breaches the Board has negotiated a waiver in respect of the first covenant, which means the covenant will
not be tested until April 2022, and a waiver in respect of the second covenant for the three periods ending 31 October 2020, 31 January
2021 and 30 April 2021.
As a result of obtaining these waivers, the revised base case forecast does not indicate any breaches of its covenants over the next 18
months.
The revised base case forecast indicates that the Group will continue to operate within the existing facilities, should they remain available,
until the RCF renewal in April 2022.
Stress Testing
The Board has conducted a series of stress testing of future financial performance which model a range of future continued impacts
following COVID-19. These stress tests typically focused on the level and timing of revenue and working capital requirement. In the Board’s
severe, but plausible downside scenario the following assumptions have been applied:
• 24% reduction in revenues when compared to the revised base case budget for year to 30 April 2021.
• A return to revenue levels consistent with the revenue for the year ended 30 April 2019 between April 2021 and April 2022.
• An increase to 120 day working capital window from payment of direct cost suppliers to receipt of customer cash.
• Delayed cash inflows for specific instances in addition to extension to working capital cycle increase. The impact being to delay
£0.7m to June 2021 and delay £3.2m from late in the forecast period to outside of the April 2022 window.
This severe but plausible downside scenario indicates a breach of the net debt:EBITDA covenant from the compliance quarter ending 31
July 2021 as well as breaching its covenant in relation to Group credit balances on 31 October 2021. The effect of which could be that
the facilities would become repayable on demand. In addition, in this severe but plausible downside scenario the Directors have identified
additional controllable mitigations (notably reducing payroll costs and discretionary expenditure on tangible and intangible assets), the
effect of which is that the Group could continue to operate within the existing facilities, should they remain available.
Resilience/response to COVID-19
The Board has taken quick and effective action to protect the Group’s cash flow including:
• Conducted a 30% cost rationalisation across the US operating sites, representing annual savings of more than $1.4m.
• Secured £0.8m of Paycheck Protection Program Loans in the US.
• Negotiated a commercial agreement with an existing customer in the security screening market, to forward purchase product with
up-front payment terms, effectively bringing forward $2m of cash 12 months early.
• Secured grant funding in respect of expansion projects in County Durham to the value of £0.7m.
• Secured a new Term Loan with HSBC in the UK worth £1.4m, available for spend on capital projects. This was negotiated at a
competitive rate with that available under the UK CBILs programme.
• Positioned the Group to be able to manufacture ventilators that can potentially be used as an emergency device in any second
wave of COVID-19 or similar pandemic.
Material Uncertainty
In the severe but plausible downside scenario described above, the Group would be required to renegotiate its net debt:EBITDA bank
covenant within the 12-month going concern period and, whilst the Directors believe that they would have the ability to renegotiate or
waive this covenant, there is no certainty that this would be the case. Accordingly, the continued availability of the Group’s bank facilities
through the forecast period and the successful replacement on expiry of the RCF in April 2022 represents a material uncertainty that may
cast significant doubt on the ability of the Group and Company to continue as a going concern and, therefore, to continue realising their
assets and discharging their liabilities in the normal course of business. The financial statements do not include any adjustments that would
result from the basis of preparation being inappropriate.
As noted, the Board has specifically excluded any significant upsides from the scenarios detailed above for the sole purposes of the
parameters of this financial stress test. However, COVID-19 does represent significant opportunities for the Group. Kromek’s biological
detection capabilities have grown significantly over the last 24 months following successful extensions on contracts with US government
agencies (DARPA) that build on the Group’s existing SIGMA network offerings. The development of this unique and ground-breaking
technology platform, which aims to identify airborne pathogens within 60 minutes, is in a standalone market. This technology has the
potential to be significant in detecting, controlling, monitoring and mitigating the effects of future pandemics. Further, the Group has
positioned itself under license agreements to manufacture ventilators that can be used as resources in future pandemics drawing on
existing skills and capabilities of its workforce. These ventilators are currently going through a validation and homologation process in
territories that the Group has contingent orders from.
54
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
2.
SIGNIFIcANT AccouNTING polIcIeS (CONtINUED)
Business combinations
The Group financial statements consolidate those of the Company and its subsidiary undertakings. Subsidiaries are entities controlled by
the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so
as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken
into account. The financial information of subsidiaries is included from the date that control commences until the date that control ceases.
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in
preparing the consolidated financial information.
Acquisitions on or after 1 may 2010
For acquisitions on or after 1 May 2010, the Group measures goodwill at the acquisition date as:
•
•
•
•
the fair value of the consideration transferred; plus
the recognised amount of any non-controlling interests in the acquiree; plus
the fair value of the existing equity interest in the acquiree; less
the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
When the excess is negative, the negative goodwill is recognised immediately in profit or loss.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred.
Goodwill
Goodwill arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill
is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the
fair value of the acquirer’s previously held equity interest (if any) in the entity over the net of the acquisition-date amounts of the identifiable
assets acquired and the liabilities assumed.
If, after reassessment, the Group’s interest in the fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration
transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in
the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.
Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated
to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which
goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be
impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated
first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the
carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
contracts with customers
The Group adopted IFRS 15 ‘Revenue from contracts with customers’ from 1 May 2018 and revenue is recognised in accordance with
this standard. Revenue represents income derived from contracts for the provision of goods and services by the Group to customers in
exchange for consideration in the ordinary course of the Group’s activities.
The Board disaggregates revenue by sales of goods or services, grants and contract customers. Sales of goods and services typically
include the sale of product on a run rate or ad-hoc basis. Grants include technology development with parties such as Innovate UK as
detailed above. Customer contracts represents agreements that the Group have entered into that typically span a period of more than 12
months.
Performance obligations
Upon approval by the parties to a contract, the contract is assessed to identify each promise to transfer either a distinct good or service
or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Goods and
services are distinct and accounted for as separate performance obligations in the contract if the customer can benefit from them either
on their own or together with other resources that are readily available to the customer and they are separately identifiable in the contract.
Transaction price
At the start of the contract, the total transaction price is estimated as the amount of consideration to which the Group expects to be
entitled in exchange for transferring the promised goods and services to the customer, excluding sales taxes. Variable consideration, such
as price escalation and early settlements, is included based on the expected value or most likely amount only to the extent that it is highly
probable that there will not be a reversal in the amount of cumulative revenue recognised. The transaction price does not include estimates
of consideration resulting from contract modifications, such as change orders, until they have been approved by the parties to the contract.
The total transaction price is allocated to the performance obligations identified in the contract in proportion to their relative standalone
selling prices. Given the bespoke nature of many of the Group’s products and services, which are designed and/or manufactured under
contract to the customer’s individual specifications, there are sometimes no observable standalone selling prices. Instead, standalone
selling prices are typically estimated based on expected costs plus contract margin consistent with the Group’s pricing principles or based
on market knowledge of selling prices relating to similar product.
55
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
2.
SIGNIFIcANT AccouNTING polIcIeS (CONtINUED)
Revenue and profit recognition
Revenue is recognised as performance obligations are satisfied as control of the goods and services is transferred to the customer.
For each performance obligation within a contract, the Group determines whether it is satisfied over time or at a point in time. The Group
has determined that the performance obligations of the majority of its contracts are satisfied at a point in time. Performance obligations are
satisfied over time if one of the following criteria is satisfied:
– the customer simultaneously receives and consumes the benefits provided by the Group’s performance as it performs;
– the Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or
– the Group’s performance does not create an asset with an alternative use to the Group and it has an enforceable right to payment for
performance completed to date.
For each performance obligation to be recognised over time, the Group recognises revenue using an input method, based on costs
incurred in the period. Revenue and attributable margin are calculated by reference to reliable estimates of transaction price and total
expected costs, after making suitable allowances for technical and other risks. Revenue and associated margin are therefore recognised
progressively as costs are incurred, and as risks have been mitigated or retired. The Group has determined that this method faithfully
depicts the Group’s performance in transferring control of the goods and services to the customer.
If the over-time criteria for revenue recognition are not met, revenue is recognised at the point in time that control is transferred to the
customer, which is usually when legal title passes to the customer and the business has the right to payment. Kromek’s standard terms of
delivery are Ex works sellers’ site (incoterms@2010), unless otherwise stated.
The Group’s contracts that satisfy the over-time criteria are typically product development contracts where the customer simultaneously
receives and consumes the benefit provided by the Group’s performance. In some specific arrangements, due to the highly specific nature
of the contract deliverables tailored to the customer requirements and the breakthrough technology solutions that Kromek provides, the
Group does not create an asset with an alternative use but retains an enforceable right to payment and recognises revenue over time on
that basis.
When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately as an expense.
Contract modifications
The Group’s contracts are sometimes amended for changes in customers’ requirements and specifications. A contract modification exists
when the parties to the contract approve a modification that either changes existing, or creates new, enforceable rights and obligations.
The effect of a contract modification on the transaction price and the Group’s measure of progress towards the satisfaction of the
performance obligation to which it relates is recognised in one of the following ways:
(a) prospectively as an additional, separate contract;
(b) prospectively as a termination of the existing contract and creation of a new contract; or
(c) as part of the original contract using a cumulative catch up.
The majority of the Group’s contract modifications are treated under either (a) (for example, the requirement for additional distinct goods
or services) or (b) (for example, a change in the specification of the distinct goods or services for a partially completed contract), although
the facts and circumstances of any contract modification are considered individually as the types of modifications will vary contract-by-
contract and may result in different accounting outcomes.
Costs to obtain a contract
The Group expenses pre-contract bidding costs that are incurred regardless of whether a contract is awarded. The Group does not
typically incur costs to obtain contracts that it would not have incurred had the contracts not been awarded.
Costs to fulfil a contract
Contract fulfilment costs in respect of over-time contracts are expensed as incurred. No such costs have been incurred in current or
previous years. Contract fulfilment costs in respect of point-in-time contracts are accounted for under IAS 2 Inventories.
Inventories
Inventories include raw materials, work-in-progress and finished goods recognised in accordance with IAS 2 in respect of contracts with
customers that have been determined to fulfil the criteria for point-in-time revenue recognition under IFRS 15. It also includes inventories
for which the Group does not have a contract. This is often because fulfilment costs have been incurred in expectation of a contract award.
The Group does not typically build inventory to stock. Inventories are stated at the lower of cost, including all relevant overhead and net
realisable value.
Contract receivables
Contract receivables represent amounts for which the Group has an unconditional right to consideration in respect of unbilled revenue
recognised at the balance sheet date and comprises costs incurred plus attributable margin.
The Group does not plan, anticipate or offer extended payment terms within its contractual arrangements unless express payment interest
charges are applied and represent a value over and above that contracted or invoiced with the customer.
Contract liabilities
Contract liabilities represent the obligation to transfer goods or services to a customer for which consideration has been received, or
consideration is due, from the customer.
56
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
2.
SIGNIFIcANT AccouNTING polIcIeS (CONtINUED)
leases
IFRS 16 ‘Leases’ became mandatory for adoption on 1 January 2019 and was early adopted by the Group from 1 May 2018. The Group
recognises a Right of Use (“ROU”) asset and a lease liability at the lease commencement date. The ROU asset is initially measured at cost,
which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus
any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset
or the site on which it is located, less any lease incentives received.
The ROU asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of
the useful life of the ROU or the end of the lease term. The estimated useful lives of the ROU assets are determined on the same basis
as those of property and equipment. In addition, the ROU is periodically reduced by impairment losses, if any, and adjusted for certain
remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted
using the interest rate implicit in the lease, or, if that rate cannot be readily determined, the Group’s incremental borrowing rate.
Lease payments included in the measurement of the lease liability comprise fixed payments.
The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease
payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable
under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination
option.
When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the ROU asset, or is
recorded in profit or loss if the carrying amount of the ROU has been reduced to zero.
The Group has elected not to recognise ROU assets and lease liabilities for short-term leases of machinery that have a lease term of 12
months or less and leases of low value assets, including IT equipment. The Group recognises the lease payments associated with these
leases as an expense on a straight-line basis over the lease term.
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. The Directors have applied IAS 21 The Effects of Changes in Foreign Exchange Rates and have come to the conclusion that
the inter-company loans held by Kromek Limited, substantially form part of the net investment in Kromek USA, and so any gain or loss
arising on the inter-company loan balances are recognised as other comprehensive income in the period.
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 are normally recognised as income over the useful economic life of the capital
expenditure to which they relate.
Government grants are recognised in the income statement so as to match them with the related expenses that they are intended to
compensate. Grants that relate to capital expenditure are offset against related depreciation costs. Where grants are received in advance
of the related expenses, they are initially recognised in the balance sheet and released to match the related expenditure. Non-monetary
grants are recognised at fair value.
operating result
Operating loss is stated as loss before tax, finance income and costs.
57
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
2.
SIGNIFIcANT AccouNTING polIcIeS (CONtINUED)
exceptional items
Exceptional items are those items that, in the judgement of management, need to be disclosed separately by virtue of their nature, size or
incidence. Exceptional items have been classified separately in order to draw them to the attention of the reader of the accounts and, in
the opinion of the Board, to show more accurately the underlying results of the Group.
retirement benefit costs
The Group operates a defined contribution pension scheme for employees.
Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. For these schemes, the assets
of the schemes are held separately from those of the Group in independently administered funds. Payments made to state-managed
retirement benefit schemes are dealt with as payments to defined contribution schemes where the Group’s obligations under the schemes
are equivalent to those arising in a defined contribution retirement benefit scheme.
Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. Tax is recognised in the income statement except to the
extent that it relates to items recognised directly in equity, in which case it is recognised in equity. The R&D tax credit is calculated using the
current rules as set out by HMRC and is recognised in the income statement during the period in which the R&D programmes occurred.
i) current tax
The tax credit is based on taxable loss for the year. Taxable loss differs from net loss as reported in the income statement because
it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never
taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively
enacted by the statement of financial position date.
ii) Deferred tax
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in
the 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
Lab equipment
6% to 25%
15%
25%
6% to 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:
•
•
•
• how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the
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;
58
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
2.
SIGNIFIcANT AccouNTING polIcIeS (CONtINUED)
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 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 pre-tax discount rate of 14.86% (2019: 13.47%) 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. See note
14 for further detail.
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
recognition and initial measurement
(i)
Trade receivables are initially recognised when they are originated. All other financial assets and financial liabilities are initially
recognised when the Group becomes a party to the contractual provisions of the instrument.
59
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
2.
SIGNIFIcANT AccouNTING polIcIeS (CONtINUED)
Financial instruments (continued)
A financial asset (unless it is a trade receivable without a significant financing component) or financial liability is initially measured
at fair value plus, for an item not at Fair Value Through Profit or Loss (FVTPL), transaction costs that are directly attributable to its
acquisition or issue. A trade receivable without a significant financing component is initially measured at the transaction price.
(ii)
Financial assets
classification and subsequent measurement
Classification
(a)
On initial recognition, a financial asset is classified as measured at: amortised cost; Fair Value through Other Comprehensive
Income (FVOCI) – debt investment; FVOCI – equity investment; or FVTPL.
Financial assets are not reclassified subsequent to their initial recognition unless the Company changes its business model for
managing financial assets in which case all affected financial assets are reclassified on the first day of the first reporting period
following the change in the business model.
A financial asset is measured at amortised cost if it meets both of the following conditions:
• It is held within a business model whose objective is to hold assets to collect contractual cash flows; and
• Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent
changes in the investment’s fair value in OCI. This election is made on an investment-by-investment basis.
All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL.
Investments in subsidiaries are carried at cost less impairment.
Cash and cash equivalents comprise cash balances and call deposits.
Subsequent measurement and gains and losses
(b)
Financial assets at FVTPL – these assets (other than derivatives designated as hedging instruments) are subsequently measured at
fair value. Net gains and losses, including any interest or dividend income, are recognised in profit or loss.
Financial assets at amortised cost – these assets are subsequently measured at amortised cost using the effective interest method.
The amortised cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are
recognised in profit or loss. Any gain or loss on derecognition is recognised in profit or loss.
Financial liabilities and equity
Financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions:
(a) They include no contractual obligations upon the Group to deliver cash or other financial assets or to exchange financial assets
or financial liabilities with another party under conditions that are potentially unfavourable to the Group; and
(b) Where the instrument will or may be settled in the Group’s own equity instruments, it is either a non-derivative that includes no
obligation to deliver a variable number of the Group’s own equity instruments or is a derivative that will be settled by the Group
exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so
classified takes the legal form of the Group’s own shares, the amounts presented in these financial statements for called up share
capital and share premium account exclude amounts in relation to those shares.
Financial liabilities are classified as measured at amortised cost or FVTPL. A financial liability is classified as at FVTPL if it is classified
as held for trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at
fair value and net gains and losses, including any interest expense, are recognised in profit or loss. Other financial liabilities are
subsequently measured at amortised cost using the effective interest method. Interest expense and foreign exchange gains and
losses are recognised in profit or loss. Any gain or loss on derecognition is also recognised in profit or loss.
Where a financial instrument that contains both equity and financial liability components exists these components are separated
and accounted for individually under the above policy.
Intra-group financial instruments
Where the Group enters into financial guarantee contracts to guarantee the indebtedness of other companies within its Group,
the Group considers these to be insurance arrangements and accounts for them as such. In this respect, the Group treats the
guarantee contract as a contingent liability until such time as it becomes probable that the Group will be required to make a
payment under the guarantee.
60
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
2.
SIGNIFIcANT AccouNTING polIcIeS (CONtINUED)
Financial instruments (continued)
Impairment
(iii)
The Group recognises loss allowances for expected credit losses (ECLs) on financial assets measured at amortised cost, debt
investments measured at FVOCI and contract assets (as defined in IFRS 15).
The Group measures loss allowances at an amount equal to lifetime ECL, except for other debt securities and bank balances for
which credit risk (i.e. the risk of default occurring over the expected life of the financial instrument) has not increased significantly
since initial recognition, which are measured as twelve-month ECL.
Loss allowances for trade receivables and contract assets are always measured at an amount equal to lifetime ECL. When
determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating
ECL, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This
includes both quantitative and qualitative information and analysis, based on the Company’s historical experience and informed
credit assessment and including forward-looking information.
The Group assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due.
The Group considers a financial asset to be in default when:
• The borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as
realising security (if any is held); or
• The financial asset is more than 90 days past due.
Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial instrument.
Twelve-month ECLs are the portion of ECLs that result from default events that are possible within 12 months after the reporting
date (or a shorter period if the expected life of the instrument is less than 12 months).
The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to
credit risk.
measurement of ecls
ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e.
the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects
to receive). ECLs are discounted at the effective interest rate of the financial asset.
credit-impaired financial assets
At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt securities at FVOCI are
credit impaired. A financial asset is “credit impaired” when one or more events that have a detrimental impact on the estimated
future cash flows of the financial asset have occurred.
Write-offs
The gross carrying amount of a financial asset is written off (either partially or in full) to the extent that there is no realistic prospect
of recovery.
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.
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.
61
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
3.
crITIcAl AccouNTING juDGemeNTS AND KeY SourceS oF eSTImATIoN uNcerTAINTY
In the application of the Group’s accounting policies, which are described in note 3, the Directors are required to make judgements,
estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual
results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision
affects both current and future periods.
Critical judgements in applying the Group’s accounting policies
The following are the critical judgements that the Directors have made in the process of applying the Group’s accounting policies and that
have the most significant effect on the amounts recognised in the financial statements.
Development costs
As described in note 2, the Group expenditure on development activities is capitalised if it meets the criteria as per IAS 38. Management
have exercised and applied judgement when determining whether the criteria of IAS 38 is satisfied in relation to development costs. As
part of this judgement process, management establish the future Total Addressable Market relating to the product or process, evaluate the
operational plans to complete the product or process and establish where the development is positioned on the Group’s technology road
map and asses the costs against IAS 38 criteria. This process involves input from the Group’s Chief Technical Officer plus the operational,
financial and commercial functions and is based upon detailed project cost analysis of both time and materials.
performance obligations arising from customer contracts
As described in note 2, the Group recognises revenue as performance obligations are satisfied when control of the goods and services
is transferred to the customer. Management have exercised and applied judgment in determining what the performance obligation is
and whether they are satisfied over time or at a point in time. In applying this judgement, management consider the nature of the overall
contract deliverable, legal form of the contract and economic resource required for the performance obligation to be satisfied. Management
disaggregate the revenues by sales of goods and services, revenue from development grants (such as Innovate UK) and revenue from
contract customers. Typically, revenue from the sales of goods and services are recognised at a point in time. Revenue from development
grants and contract customers are recognised either over time or at a point in time depending on the characteristics of the specific contract
when applying IFRS 15.
cash Generating units
Management have exercised judgement in determining the number of cash generating units (CGUs). As set out in note 14, management
have determined that there are two CGUs – the US and UK. This is on the basis that management believes this is the lowest level cash
inflows and asset base can be separated. Whilst cash inflows can be separate at a lower level, management do not believe that the asset
base can be separated at a lower level. The identification of two CGUs is also the way management oversees and monitors the Group’s
performance.
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.
Development costs
i)
The key source of estimation uncertainty relates to the estimation of the asset’s recoverable amount, which involves assumptions
in relation to future uncertainties including discount rates and growth rates. For further details, see note 14.
As disclosed in note 15, development costs are capitalised in accordance with the accounting policy noted above. These capitalised
assets are amortised over the period during which the Group is expected to benefit.
contract revenue
ii)
This policy requires forecasts to be made of the outcomes of long-term contracts, which include assessments and judgements on
changes in expected costs. A change in the estimate of total forecast contract costs would impact the stage of completion of those
contracts and the level of revenue recognised thereon, which could have a material impact on the results of the Group.
r&D Tax credit
iii)
The R&D tax credit is calculated using the current rules as prescribed by HMRC. The estimation is based on the actual UK R&D
projects that qualify for the scheme that have been carried out in the period. Management form an estimation of the tax credit on a
prudent basis and then obtain additional professional input from the current tax providers prior to submission of the claim to HMRC.
The Group has assumed 100% of the R&D tax credit is recoverable. If only 95% of the claim were to be accepted by HMRC, this
would have the effect of reducing the tax receivable and corresponding tax credit by £52k to £979k.
recoverability of receivables and amounts recoverable on contract
iv)
Management judge the recoverability at the balance sheet date and provide where appropriate. The provision for impairment
represents management’s best estimate of losses incurred in the portfolio at the balance sheet date, assessed on customer risk
scoring and commercial discussions. Further, management estimate the recoverability of any AROC balances relating to customer
contracts. This estimate includes an assessment of the probability of receipt, exposure to credit loss and the value of any potential
recovery. Management base this estimate using the most recent and reliable information that can be reasonably obtained at any
62
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
3.
crITIcAl AccouNTING juDGemeNTS AND KeY SourceS oF eSTImATIoN uNcerTAINTY (CONtINUED)
point of review. A material change in the facts and circumstances could lead to a reversal of impairment proportional to the
expected cash inflows supported by this information.
Impairment reviews
v)
Management conduct annual impairment reviews of the Group’s non-current assets on the consolidated statement of financial
position. This includes goodwill annually, development costs where IAS 36 requires it and other assets as the appropriate standards
prescribe. Any impairment review is conducted using the Group’s future growth targets regarding its key markets of nuclear
detection, medical imaging and security screening. The current carrying value of this class of assets is £40m as set out on the
Group’s consolidated statement of financial position. Sensitivities are applied to the growth assumptions to consider any potential
long-term impact of current economic conditions, such as COVID-19. Any provision is made where the recoverable amount is less
than the current carrying value of the asset. Further details as to the estimation uncertainty and the key assumptions are set out
in note 14.
4.
operATING SeGmeNTS
products and services from which reportable segments derive their revenues
For management purposes, the Group is organised into two geographical business units from which the Group currently operates (US
and UK) and it is on these operating segments that the Group is providing disclosure. Both business units operate in the three key
markets of the Group (nuclear detection, medical imaging and security screening). However, typically, the US business unit focuses on
medical imaging and the UK on nuclear detection and security screening. However, this arrangement is flexible and can vary based on the
geographical location of the Group’s customer.
The chief operating decision maker is the Board of Directors, who assess performance of the segments using the following key performances
indicators: revenues, gross profit and operating profit. The amounts provided to the Board with respect to assets and liabilities are
measured in a way consistent with the financial statements.
The turnover, profit on ordinary activities and net assets of the Group are attributable to one business segment, i.e. the development of
digital colour X-ray imaging enabling direct materials identification, as well as developing a number of detection products in the industrial
and consumer markets.
Analysis by geographical area
A geographical analysis of the revenue from the Group’s customers by destination is as follows:
United Kingdom
North America
Asia
Europe
Australasia
Total revenue
2020
£’000
2,541
7,606
893
2,075
5
2019
£’000
2,267
4,869
5,452
1,905
24
13,120
14,517
Total revenue from contracts with customers was £12,835k (2019: £13,497k).
The Group has aggregated its market sectors into two reporting segments being the operational business units in the UK and US. The
UK operations consists of Kromek Group Plc and Kromek Limited. The US operations consists of Kromek Inc, eV Products Inc, and Nova
R&D Inc. The Board currently consider this to be the most appropriate aggregation due to the main markets that are typically addressed
by the UK and US and necessary skillsets and expertise.
63
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
4.
operATING SeGmeNTS (CONtINUED)
A geographical analysis of the Group’s revenue by origin is as follows:
Year ended 30 April 2020
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)/profit before exceptional items
Interest received
Interest expense
Exceptional items
(loss)/profit before tax
Tax credit
(loss)/profit for the year
Reconciliation to adjusted EBITDA:
Net interest
Other operating income
Tax
Depreciation of PPE right-of-use asset
Amortisation
Share-based payment charge
One-off customer financing discount
Exceptional items
Adjusted eBITDA
other segment information
Property, plant and equipment additions
Right-of-use assets
Depreciation of PPE and right-of-use asset
Release of capital grant
Intangible asset additions
Amortisation of intangible assets
Statement of financial position
Total assets
Total liabilities
64
uK operations
£’000
uS operations
£’000
Total for Group
£’000
8,312
285
811
9,408
(2,600)
6,808
(1,906)
60
(326)
-
(2,172)
904
(1,268)
266
-
(904)
545
1,148
225
-
-
12
5,888
1,136
545
(33)
3,973
1,148
40,997
(13,925)
7,205
-
342
7,547
(1,235)
6,312
(2,833)
-
(278)
(13,062)
(16,173)
901
(15,272)
278
-
(901)
640
994
-
746
13,062
(453)
1,077
3,429
640
-
1,526
994
23,660
(5,665)
15,517
285
1,153
16,955
(3,835)
13,120
(4,739)
60
(604)
(13,062)
(18,345)
1,805
(16,540)
544
-
(1,805)
1,185
2,142
225
746
13,062
(441)
6,965
4,565
1,185
(33)
5,499
2,142
64,657
(19,590)
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
4.
operATING SeGmeNTS (CONtINUED)
Year ended 30 April 2019 as restated (see note 2)
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)/profit
Interest received
Interest expense
loss before tax
Tax credit
(loss)/profit for the year
Reconciliation to adjusted EBITDA:
Net interest
Other operating income
Tax
Depreciation of PPE and right-of-use asset
Amortisation
Non-recurring other income
Share-based payment charge
Adjusted eBITDA
other segment information
Property, plant and equipment additions
Right-of-use asset
Depreciation of PPE and right-of-use asset
Intangible asset additions
Amortisation of intangible assets
Statement of financial position
Total assets
Total liabilities
6,718
1,020
82
7,820
(1,251)
6,569
(1,652)
155
(197)
(1,694)
1,020
(674)
42
-
(1,020)
432
1,085
-
184
49
569
1,051
432
1,309
1,085
41,370
(7,097)
4,694
-
4,534
9,228
(1,280)
7,948
746
-
(322)
424
(383)
41
322
-
383
447
721
-
11
1,925
3,075
3,257
447
1,632
721
11,412
1,020
4,616
17,048
(2,531)
14,517
(906)
155
(519)
(1,270)
637
(633)
364
-
(637)
879
1,806
-
195
1,974
3,644
4,308
879
2,941
1,806
34,374
(8,312)
75,744
(15,409)
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 2. 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.
65
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
4.
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
2020
£’000
10,314
2,806
13,120
2019
£’000
12,060
2,457
14,517
Information about major customers
Included in revenues arising from US operations are revenues of approximately £2,234k (2019: £4,092k) that arose from the Group’s
largest customer. Included in revenues arising from UK operations are revenues of approximately £1,542k (2019: £1,066k) that arose from
a major customer.
5.
loSS BeFore TAx For The YeAr
Loss before tax for the year has been arrived at after (crediting)/charging:
Net foreign exchange losses/(gains)
Research and development costs recognised as an expense
Depreciation of property, plant and equipment
Release of capital grant
Amortisation of internally-generated intangible assets
Cost of inventories recognised as expense
Exceptional items - impairment of trade receivables and AROC (see note 8)
Early settlement costs
Staff costs (see note 7)
6.
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
- Interim assurance
- Taxation and other services
total non-audit fees
total
66
2020
£’000
(653)
5,457
1,185
(33)
2,142
4,654
13,062
746
8,776
2019
£’000
82
5,432
879
-
1,806
4,152
-
-
7,696
2020
£’000
2019
£’000
110
110
12
70
82
192
62
62
10
24
34
96
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
7.
STAFF coSTS
The average monthly number of employees (excluding non-executive directors) was:
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
2020
Number
2019
Number
2
116
8
13
139
2020
£’000
7,432
754
365
225
8,776
2
95
7
12
116
Restated
2019
£’000
6,602
570
329
195
7,696
The current period classification of certain wage and salary expenses has been revised and comparatives have been represented on a
consistent basis. There is no impact to the statement of profit and loss as all of the reclassifications occur within the administrative expense
line item on the income statement.
The total Directors’ emoluments (including non-executive directors) was £580k (2019: £728k). The aggregate value of contributions
paid to money purchase pension schemes was £21k (2019: £21k) in respect of three directors (2019: three directors). For a breakdown
of remuneration by director, refer to the Directors’ emoluments table on page 36. There has been no exercise of share options by the
Directors in the period and therefore no gain recognised in the year (2019: nil).
The highest paid director received emoluments of £221k (2019: £306k) and amounts paid to money purchase pension schemes was £10k
(2019: £10k).
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.
2020
£’000
980
130
28
185
1,323
2019
£’000
1,127
136
27
184
1,474
67
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
8.
excepTIoNAl ITemS
Exceptional items, booked to operating costs, comprised the following:
Impairment of trade receivables and AROC
Total exceptional items
2020
£’000
13,062
13,062
2019
£’000
-
-
The immediate and ongoing impact of the COVID-19 pandemic has created significant economic uncertainty on a global scale. The
expected credit losses are reviewed annually, or when there is a significant change in external factors potentially impacting credit risk, such
as COVID-19, and are updated where management’s expectations of credit losses change.
Management group and measure the expected credit losses of trade receivables based on operational market and geographical region.
As illustrated in note 4, the Group operates across a number of geographical areas.
This impairment relates to two separate contracts with specific customers within this geographical area who were identified as having a
significantly elevated credit risk. The assessment carried out by management suggested delays in delivery due to travel restriction and
subsequent doubt over expected future cash flow, increasing the likelihood of credit default by these specific debtors in the next 12 months
due. This charge of £13,062k has therefore been presented as an exceptional item arising as a result of COVID-19 in accordance with the
Group’s accounting policy, as it is considered to be one-off in nature, size and incidence. It represents a full write down of invoiced debtors
and AROC. The amounts have been fully written down as management have concluded that any collateral is not considered to be material.
From a tax perspective, this impairment has increased the taxable losses in the period, however no deferred tax asset has been recognised
as it is not yet certain that there will be future taxable profits available.
Asia still represents a significant technology opportunity for the Group, however, the Group is currently uncertain of timescales to full market
traction. Any subsequent reversal of the amount recognised in future years would also be recognised as an exceptional item.
2020
£’000
60
60
2020
£’000
365
239
604
2019
£’000
155
155
2019
£’000
293
226
519
9.
FINANce INcome
Bank deposits
Total finance income
10.
FINANce coSTS
Interest on bank overdrafts, loans and borrowings
Interest expense for lease arrangements
Total interest expense
68
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
11.
TAx
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
2020
£’000
1,030
(129)
-
901
904
-
904
Restated*
2019
£’000
642
(5)
-
637
-
-
-
Total tax credit in income statement
1,805
637
* see note 2
A UK corporation rate of 19% (effective 1 April 2020) was substantively enacted on 17 March 2020, reversing the previously enacted
reduction in the rate from 19% to 17%. This will increase the Company’s future current tax charge accordingly. The deferred tax asset at
30 April 2020 has been calculated at 19% (2019: 17%).
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% (2019: 19.0%)
(Non-taxable income)/expenses not deductible
Effect of R&D
Rate differences effect of R&D
Share scheme deduction under Part 12 CTA 2009
Unrecognised movement on deferred tax
Adjustment in respect of previous periods
Effects of overseas tax rates
Total tax credit for the year
* see note 2
2020
£’000
18,345
3,486
(3,754)
553
(255)
1
239
(129)
1,664
1,805
Restated*
2019
£’000
1,270
241
(223)
771
-
9
(96)
(5)
(60)
637
Further details of deferred tax are given in note 21. There are no tax items charged to other comprehensive income.
The effect of R&D is the tax impact of capitalised development costs being deducted in the year in which they are incurred.
Adjustment in respect of previous periods relate to additional R&D tax credits the Group receives following final submission.
The rate of corporation tax for the year is 19% (2019: 19%). A UK corporation rate of 19% (effective 1 April 2020) was substantively
enacted on 17 March 2020, reversing the previously enacted reduction in the rate from 19% to 17%. Accordingly, deferred tax has been
provided in line with the rates at which temporary differences are expected to reverse.
The other tax jurisdiction that the Group currently operates in is the US. Any deferred tax arising from the US operations is calculated at
28.89% which represents the federal plus state tax rate.
69
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
12.
DIVIDeNDS
The Directors do not recommend the payment of a dividend (2019: £nil).
13.
loSSeS per ShAre
The calculation of the basic and diluted earnings per share is based on the following data:
losses
Losses for the purposes of basic and diluted losses per share being net losses attributable to owners
of the Group
Number of shares
2020
£’000
(16,540)
2020
Number
Restated*
2019
£’000
(633)
2019
Number
Weighted average number of ordinary shares for the purposes of basic losses per share
344,644,492
275,073,400
Effect of dilutive potential ordinary shares:
Share options
1,084,826
2,581,104
Weighted average number of ordinary shares for the purposes of diluted losses per share
345,729,318
277,654,504
Basic (p)
Diluted (p)
* see note 2
2020
(4.8)
(4.8)
2019
(0.2)
(0.2)
Due to the Group having losses in each of the years, the fully diluted loss per share for disclosure purposes, as shown in the income
statement, is the same as for the basic loss per share.
14.
ImpAIrmeNT oF INTANGIBle ASSeTS INcluDING GooDWIll
cost
At 1 May 2019
At 30 April 2020
Accumulated impairment losses
At 1 May 2019
At 30 April 2020
carrying amount
At 30 April 2020
At 30 April 2019
£’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:
70
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
14.
ImpAIrmeNT oF INTANGIBle ASSeTS INcluDING GooDWIll (CONtINUED)
cGu
US
UK
Total
Goodwill
£’000
1,275
-
1,275
Intangibles
£’000
10,242
11,636
21,878
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 4 within the segmental analysis of the US operations.
Impairment tests
The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired, by comparing
the carrying value of the goodwill to its value in use on a discounted cash flow basis.
The Group tests intangible assets with finite lives for impairment if an indicator exists. The Board considers the potential impact of
COVID-19 on the future prospects of the business to be an indicator of impairment and has carried out an impairment test by comparing
the carrying value of each CGU to its value in use on a discounted cash flow basis.
In undertaking the impairment test, management considered both internal and external sources of information. The impairment testing did
not identify any impairments in either CGU.
Forecast cash flows
Management has prepared cash flow forecasts for 10 years plus a perpetuity. This exceeds the five years as set out in the standard
but has been used on the basis that the entity is in the early stage of its maturity and will not have reached steady state after five years.
Management have visibility over contracts in place and in the pipeline that enable it to forecast accurately for 10 years and the cash flows
are based on the useful economic life of the ‘know how’, which is considered to be the essential asset.
uS
The key assumptions to the value in use calculations are set out below:
- Growth rate. The 2020 model does not include any revenue growth in years 1 and 2 (see below for comparatives). The
cumulative aggregate growth rate ‘CAGR’ of revenue in the 10-year model is 28%. This growth rate comprises both capacity
increases as a result of increases in raw material to finished product efficiencies and price increases, factoring in existing
contracts and those in the pipeline and is reflective of historical growth rates as well as the Company’s share of the overall
markets the US CGU operates in. No growth is assumed after 10 years.
- Discount rates. Management have derived a pre-tax discount rate of 14.86% using the latest market assumptions for the risk-
free rate, the equity premium and the net cost of debt, which are all based on publicly available sources, as well as adjustments
for forecasting risk for which management considered the historical growth of the entity as well as the visibility of cash flows
from a contracted perspective, which are all based on publicly available sources. The discount rate is lower than that used in
2019. The key drivers of this change are the changes in market assumptions for US corporate bond yields and risk-free rates.
uK
- Growth rate. The model does not include any growth in years 1 and 2 (see below for comparatives). The CAGR in the 10-year
model is 18%. This growth rate comprises both capacity increases as a result of increases in raw material to finished product
efficiencies and price increases, factoring in existing contracts and those in the pipeline and is reflective of historical growth rates
as well as and the Company’s share of the overall markets the UK CGU operates in. No growth is assumed after 10 years.
- Discount rates. Management have derived a pre-tax discount rate of 13.14% using the latest market assumptions for the risk-
free rate, the equity premium and the net cost of debt, which are all based on publicly available sources, as well as adjustments
for forecasting risk for which management considered the historical growth of the entity as well as the visibility of cash flows
from a contracted perspective. The discount rate is lower than that used in 2019. The key drivers of this change are the changes
in market assumptions for UK corporate bond yields and risk-free rates.
71
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
14.
ImpAIrmeNT oF INTANGIBle ASSeTS INcluDING GooDWIll (CONtINUED)
Sensitivities
The headrooms in the base case models are £17,613k (US CGU) and £25,519k (UK CGU). The table below sets out the impact of the
following reasonable changes in assumption on the headroom of each CGU:
Discount Rate +2%
CAGR falls to 23% (US) and 15% (UK)
Combination of Discount Rate +2% and CAGR decreases above
2019
US Reduction in Headroom
£’000
UK Reduction in Headroom
£’000
(9,136)
(20,775)
(29,560)
(10,669)
(22,514)
(28,485)
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 cash generating unit (CGU). This is
reported in note 4 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 10
year forecasts for each cash-generating unit. The base 10-year projection is year-on-year growth over the next 10 years, with overheads
remaining relatively stable. The annual growth rate of the CGU for the next 10 years is expected to be 70%. These cash flows are then
discounted at the Company’s weighted average cost of capital of 11.97% (2018: 12.37%).
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 2019 (2018: £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 2019. For illustrative purposes, a compound
reduction in revenue of 10% in each of years 1-10 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 impairment in 2019 or 2018.
72
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
15. oTher INTANGIBle ASSeTS
Development
costs
£’000
patents,
trademarks &
other intangibles
£’000
cost
At 1 May 2019
Additions
Exchange differences
At 30 April 2020
Amortisation
At 1 May 2019
Charge for the year
Exchange differences
At 30 April 2020
carrying amount
At 30 April 2020
At 30 April 2019
19,085
5,256
346
24,687
3,754
1,549
44
5,347
19,340
15,331
7,202
243
144
7,589
4,368
593
90
5,051
2,538
2,834
Total
£’000
26,287
5,499
490
32,276
8,122
2,142
134
10,398
21,878
18,165
The Group 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.
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 2020 was £705k (2019: £952k), 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.
Further details on impairment testing are set out in note 14.
73
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
16.
properTY, plANT AND equIpmeNT
lab
equipment
£’000
Assets under
construction
£’000
computer
equipment
£’000
plant and
machinery
£’000
Fixtures and
Fittings
£’000
-
20
-
-
20
-
-
-
-
20
-
494
5,606
(6,100)
-
-
-
-
-
-
-
494
1,131
144
15
16
10,651
1,181
5,985
224
1,306
18,041
825
124
8
957
349
306
5,435
648
90
6,173
11,868
5,216
427
14
100
11
552
191
45
2
238
314
236
Total
£’000
12,703
6,965
-
251
19,919
6,451
817
100
7,368
12,551
6,252
cost or valuation
At 1 May 2019
Additions
Transfer between classes
Exchange differences
At 30 April 2020
Accumulated depreciation and
impairment
At 1 May 2019
Charge for the year
Exchange differences
At 30 April 2020
carrying amount
At 30 April 2020
At 30 April 2019
17.
rIGhT-oF-uSe ASSeT
The Group early adopted IFRS 16 and from 1 May 2018 recognised right-of-use assets for leases previously classified as operating leases
applying IAS 17. Details of the Group’s right-of-use assets and their carrying amount are as follows:
cost
Opening right-of-use asset on 1 May 2019
New leases in the year
Effect of movements in exchange rates
cost at 30 April 2020
Depreciation
Depreciation charged to right-of-use asset on 1 May 2019
Charge for the year
Exchange differences
Depreciation at 30 April 2020
carrying amount
At 30 April 2020
At 30 April 2019
74
2020
£’000
4,308
134
123
4,565
333
368
12
713
3,852
3,975
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
18.
SuBSIDIArIeS
A list of the subsidiaries, including the name, country of incorporation, and proportion of ownership interest is given in note 3 to the
Company’s separate financial statements.
19.
INVeNTorIeS
Raw materials
Work-in-progress
Finished goods
2020
£’000
3,202
3,015
199
6,416
2019
£’000
1,394
1,656
177
3,227
The cost of inventories recognised as an expense during the year in respect of continuing operations was £4,654k (2019: £4,152k).
The write-down of inventories to net realisable value amounted to £616k (2019: £751k). The reversal of write-downs amounted to £150k
(2019: nil). 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.
20.
AmouNTS recoVerABle oN coNTrAcTS AND TrADe AND oTher receIVABleS
contracts in progress at the balance sheet date:
Amounts due from contract customers included in trade and other receivables
ECL impairment
Contract costs incurred plus recognised profits less recognised losses to date
Less: progress billings
Less: ECL impairment
Trade and other receivables
Amount receivable for the sale of goods
Amounts recoverable on contracts (see note 20)
Other receivables
Prepayments and accrued income
Current tax assets
2020
£’000
12,195
(12,023)
172
12,730
(535)
(12,023)
172
2020
£’000
6,076
172
662
1,300
1,031
9,241
2019
£’000
12,362
-
12,362
12,929
(567)
-
12,362
2019
£’000
5,592
12,362
848
1,195
987
20,984
Amount receivable for the sale of goods
Trade receivables disclosed above are classified as financial assets at amortised cost.
The average credit period taken on sales of goods is 54 days. The Group initially recognises an impairment allowance 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.
75
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
20.
AmouNTS recoVerABle oN coNTrAcTS AND TrADe AND oTher receIVABleS (CONtINUED)
Amount receivable for the sale of goods (continued)
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 credit impaired receivables at the statement of financial position date was:
31-60 days
61-90 days
91-120 days
121+ days
Total
2020
£’000
222
38
4
1,915
2,179
2019
£’000
113
113
-
893
1,119
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.
Ageing of impaired receivables at the statement of financial position date was:
31-60 days
61-90 days
91-120 days
121+ days
Total
2020
£’000
-
-
-
1,323
1,323
2019
£’000
-
-
-
116
116
At 30 April 2020, trade receivables are shown net of an impairment allowance of £1,323k (2019: £116k) arising from the ordinary course of
business, as follows:
Balance at 1 May 2019
Provided during the year
(Released) during the year
Impact of foreign exchange
Balance at 30 April 2020
2020
£’000
116
1,204
-
3
1,323
2019
£’000
303
-
(193)
6
116
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.
76
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
21.
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.
restated
fair value
revaluation of
acquired
intangibles
£’000
restated
accelerated
capital
allowances
£’000
restated
short-term
timing
differences
£’000
At 1 May 2019
Prior year adjustment (note 2)
Restated at 1 May 2019
(Credit)/charge to profit or loss
At 30 April 2020
339
121
460
(71)
389
1,069
2,446
3,515
1,441
4,956
restated
tax
losses
£’000
(1,254)
(1,531)
(2,785)
restated
total
£’000
-
868
868
(2,044)
(868)
(154)
(168)
(322)
(194)
(516)
(4,829)
-
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
*see note 2
2020
£’000
4,829
(4,829)
-
Restated*
2019
£’000
3,974
(3,106)
868
At the statement of financial position date, the Group has unused tax losses of £27,614k (2019: £20,632k) available for offset against
future profits. A deferred tax asset has been recognised in respect of £4,484k (2019: £6,763k) 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 £23,130k (2019: £13,869k) as it is not yet considered sufficiently certain 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.
22.
TrADe AND oTher pAYABleS
payable within one year:
Trade payables and accruals
Deferred income
payable in more than one year:
Deferred income
Deferred tax liability (note 2)
2020
£’000
8,632
163
8,795
2020
£’000
1,021
-
1,021
2019
£’000
4,871
13
4,884
2019
£’000
-
868
868
Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken
for trade purchases is 40 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.
77
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
22.
TrADe AND oTher pAYABleS (CONtINUED)
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.
23.
leASe oBlIGATIoN
The Group has measured lease liabilities at the present value of the remaining lease payments, discounted using the Group’s incremental
borrowing rate at the date of initial application. Details of the Group’s liability in respect of right-of-use assets and their carrying amount
are as follows:
Opening lease liability at 1 May 2019
New leases entered into during the year
Finance costs
Payments made during the year
Impact of foreign exchange
At 30 April 2020
Presented as:
Lease liability payable within 1 year
Lease liability payable in more than 1 year
At 30 April 2020
2020
£’000
4,211
134
240
(539)
122
4,168
324
3,844
4,168
Rental charges associated with other low value leased assets that fall within the expedient threshold have been expensed to the profit and
loss accounts (£15k).
24.
proVISIoNS For lIABIlITIeS
At 1 May
Charged to profit or loss
Fully utilised
Impact of foreign exchange
At 30 April
2020
£’000
-
-
-
-
-
2019
£’000
424
-
(424)
-
-
During the prior year, the Company was given notice on one of its sites. The site’s dilapidations provision reflects management’s best
estimates and ability to measure the likely costs that may be incurred restoring the building back to its original state. The Group had no
future obligations as at 30 April 2019 relating to the old site as full and comprehensive corrective dilapidations were undertaken so the
provision has been utilised in full.
78
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
25.
BorroWINGS
Secured borrowing at amortised cost
Revolving credit facility and capex facility
Other borrowings
Total borrowings
Amount due for settlement within 12 months
Amount due for settlement after 12 months
2020
£’000
4,900
706
5,606
3,669
1,937
2019
£’000
3,000
2,446
5,446
3,133
2,313
During the prior year, the Group successfully renewed its revolving credit facility, which also incorporates a Capex facility. Previously a
24-month facility, this facility is now a 36 months deal with a plus 1, plus 1 option with regards to years 4 to 5. In addition to the extension
of the renewal period, the quantum of the facility has increased from £3.0m to £5.0m. In October 2019, an additional £2.0m was drawn
down to help facilitate capital expenditure purposes. This is repaid on a quarterly basis in an amount equal to 1/20th of the drawn Capex
loan. Once repaid, the Group was able to draw down the repaid amount against the original RCF. This facility is secured by a debenture
and a composite guarantee across the Group. The terms of the RCF 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.
Other borrowings comprise a loan with the landlord in the US.
In the prior year, the Group secured a £2.3m loan with the landlord of the new Zelienople premises in relation to additional leasehold
improvements. A proportion of this loan was repaid early during the year and the balance was rescheduled over a shorter time period. This
loan is repaid in equal instalments on a monthly basis and attracts interest at 7.50% per annum. Following partial repayment in the year,
this facility no longer requires a standby letter of credit.
As seen on the face of the Statement of Financial Position, the investment of £1.25m into a money market account at 30 April 2019 is
zero at 30 April 2020.
At 30 April 2020, the total loan with the landlord was £0.7m (2019: £2.4m). Of this, £0.1m is due within 12 months (2019: £0.1m) and
£0.6m (2019: £2.3m) is due after 12 months.
The RCF borrowing is 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.
The weighted average interest rates paid during the year were as follows:
Revolving credit facility
Other borrowing facilities
26. DerIVATIVeS FINANcIAl INSTrumeNTS AND heDGe AccouNTING
At 30 April 2020 and 30 April 2019, the Group had no derivatives in place.
2020
%
3.30
5.20
2019
%
3.10
5.30
79
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
27.
ShAre cApITAl
Allotted, called up and fully paid:
344,635,089 (2019: 260,435,618) Ordinary shares of £0.01 each
12,000 (2019: 84,199,741) Ordinary shares issued at £0.01 each
Total 344,647,089 (2019: 344,635,089) Ordinary shares of £0.01 each
During the year, 12,000 shares (2019: 191,000) were allotted under EMI share option schemes.
28.
ShAre premIum AccouNT
2020
£’000
3,446
-
3,446
Balance at 1 May 2019
Premium arising on issue of equity shares
Expenses arising on issue of equity shares
Balance at 30 April 2020
29.
TrANSlATIoN reSerVe
Balance at 1 May 2019 (as restated*)
Exchange differences on translating the net assets of foreign operations
Balance at 30 April 2020
*see note 2
2019
£’000
2,604
842
3,446
£’000
61,600
-
-
61,600
£’000
934
1,047
1,981
Exchange differences relating to the translation of the net assets of the Group’s foreign operations, which relate to subsidiaries only, from
their functional currency into the parent’s functional currency, being sterling, are recognised directly in the translation reserve.
30.
AccumulATeD loSSeS
Balance at 1 May 2019 (as restated*)
Net loss for the year
Effect of share-based payment credit
Balance at 30 April 2020
*see note 2
80
£’000
(27,498)
(16,540)
225
(43,813)
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
31. NoTeS To The cASh FloW STATemeNT
Loss for the year
Adjustments for:
Finance income
Finance costs
Income tax credit
Depreciation of property, plant and equipment and ROU
Amortisation of intangible assets
Share-based payment expense
Operating cash flows before movements in working capital
(Increase) in inventories
Decrease/(increase) in receivables
Increase in payables
Increase/(decrease) in provisions
Cash used in operations
Income taxes received
Net cash used in operating activities
*see note 2
cash and cash equivalents
Cash and bank balances
2020
£’000
(16,540)
(60)
604
(1,805)
1,185
2,142
225
(14,249)
(3,189)
11,787
4,932
-
(719)
898
179
Restated*
2019
£’000
(633)
(155)
519
(637)
879
1,806
195
1,974
(213)
(8,663)
1,384
(424)
(5,942)
1,165
(4,777)
2020
£’000
9,444
2019
£’000
20,616
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.
81
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
32.
recoNcIlIATIoN oF lIABIlITIeS ArISING From FINANcING AcTIVITIeS
Balance at 1 May 2019
Cash flows;
- Repayments
- Additions
Non-cash
- Additions
- Effect of moving exchange rates
-
Interest applied
Balance at 30 April 2020
33.
ShAre-BASeD pAYmeNTS
Borrowings
£’000
5,446
(2,105)
2,100
-
93
72
5,606
lease
liability
£’000
4,211
(539)
-
134
122
240
4,168
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:
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
Number
of share
options
2020
Weighted average
exercise price (£)
Number
of share
options
2019
Weighted average
exercise price (£)
10,028,470
2,295,200
(12,000)
(919,000)
11,392,670
9,299,470
0.17
0.21
0.015
0.22
0.15
0.17
9,851,070
882,600
(191,000)
(514,200)
10,028,470
8,875,570
0.17
0.20
0.015
0.28
0.17
0.17
The weighted average share price at the date of exercise for share options exercised during the year was £0.015 (2019: £0.015). The
options outstanding at 30 April 2020 had a weighted average exercise price of £0.15 (2019: £0.17) and a weighted average remaining
contractual life of four years (2019: four years). The range of exercise prices for outstanding share options at 30 April 2020 was 1.5p to
79p (2019: 1.5p to 79p). In 2020, the aggregate of the estimated fair values of the options granted is £40k (2019: £46k). 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
82
2020
22p
22p
29.85%
6 years
0.74
0%
2019
26p
20p
29.30%
6 years
0.57
0%
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
33.
ShAre-BASeD pAYmeNTS (CONtINUED)
equity-settled share option scheme (continued)
Expected volatility was determined by calculating the historical volatility of similar listed businesses over the previous 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 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.
During October 2019, 1,298,330 (2019: 1,443,829) 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 £124k (2019: £183k). The amounts recognised as a
share-based payment expense for the year ended 30 April 2020 was £61k (2019: £12k).
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
2020
22p
1p
35.00%
3 years
0.32
0%
2019
22p
1p
35.00%
3 years
0.32
0%
During 2017/18, a new incentive award scheme was introduced for a number of key employees regarding an Average Valuation creation
of the Company, referred to as the “VC”. This has awarded key employees 8,007,162 options under the scheme. However, these options
only vest after five years (at 1p per share) and are subject to challenging specific performance criteria over that period commencing 1 May
2017. The quantity of options that vest is weighted, such that the maximum amount only vests on achievement of all performance criteria.
The Group recognised total expenses of £225k (2019: £195k) related to all equity-settled share-based payment transactions. This is
inclusive of both the equity-settled share option scheme and the 2013 LTIP.
34.
reTIremeNT BeNeFIT SchemeS
Defined contribution schemes
The Group operates defined contribution retirement benefit schemes for all employees. Where there are employees who leave the schemes
prior to vesting fully, the contributions payable by the Group are reduced by the amount of forfeited contributions.
The employees of the Group’s subsidiaries in the US are members of a state-managed retirement benefit scheme operated by the US
government. 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 £365k (2019: £329k) represents contributions payable to these schemes by the Group at rates
specified in the rules of the schemes. As at 30 April 2020, contributions of £50k (2019: £23k) due in respect of the current reporting period
had not been paid over to the scheme.
35.
FINANcIAl INSTrumeNTS
Financial Instruments
The Group’s principal financial instruments are cash and trade receivables.
The Group has exposure to the following risks from its operations:
capital risk
The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return
to shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy has remained unchanged between
2019 and 2020.
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 30.
83
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
35.
FINANcIAl INSTrumeNTS (CONtINUED)
capital risk (continued)
The Group is not subject to any externally imposed capital requirements.
The Group’s primary source of capital is equity. By pricing products and services commensurately with the level of risk and focusing on the
effective collection of cash from customers, the Group aims to maximise revenues and operating cash flows.
Cash flow is further controlled by ongoing justification, monitoring and reporting of capital investment expenditures and regular monitoring
and reporting of operating costs. Working capital fluctuations are managed through employing the revolving credit facility available, which
at the year-end was £4.9m (2019: £3.0m). Details of the revolving credit facility have been included in note 25.
The Group considers that the current capital structure will provide sufficient flexibility to ensure that appropriate investment can be made,
if 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 pounds sterling. The Group also holds cash and cash equivalents in non-sterling denominated bank accounts.
The following table shows the denomination of the year end cash and cash equivalents balance:
£ sterling
US$ (sterling equivalent)
€ (sterling equivalent)
2020
£’000
8,285
612
547
2019
£’000
24,229
(4,156)
543
Had the foreign exchange rate between sterling, US$ and € changed by 3% (2019: 4%), this would affect the loss for the year and net
assets of the Group by £493k (2019: £1,483k including the prior year adjustment). 3% (2019: 4%) is considered a reasonable assessment
of foreign exchange movement as this has been the movement noted between 2019 and 2020 (2018 and 2019).
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 20.
Amounts recoverable on contract arise following revenue recognised over time in line with IFRS 15. The balance of £172k at 30 April 2020
will convert into invoiced revenues following product dispatch to the customer. The Group retain physical possession of the inventory,
which passes to the customer on payment of invoice. Under these contracts, the Group retains the right to be compensated at a minimum
for the full value of the contract in the event of early termination.
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.
As a result of COVID-19, the Group has adopted the simplified approach when measuring the trade receivable expected credit losses.
To measure the expected credit losses, trade and other receivables have been grouped based on market and geographical region. The
expected loss rates are reviewed annually, or when there is a significant change in external factors potentially impacting credit risk, and are
updated where management’s expectations of credit losses change. Management have increased the expected loss rates for trade and
other receivables by £13,062k, which has been summarised further in note 8.
84
Annual Report & Accounts 2020
KromeK Group plc
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
35.
FINANcIAl INSTrumeNTS (CONtINUED)
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. Further,
the Group has a US dollar overdraft facility with a right to offset, which allows US dollars to be drawn at any time provided that the Group
maintain sufficient credit balances on other currency accounts to facilitate an offset. Following the offset, the Group has to be in a minimum
net credit position of £100 at any time. It is management’s intent to offset this overdraft with other credit balances. The purpose of this
offset account is to allow the Group operational flexibility in meeting its multicurrency liabilities and to be able to utilise credit from its
multicurrency customers. The Group has sufficient cash reserves to facilitate this right of offset.
The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment
periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which
the Group can be required to pay. The table includes both interest and principal cash flows. The contractual maturity is based on the
earliest date on which the Group may be required to pay.
Weighted
average
effective
interest rate
%
Less
than
1 month
£’000
1-3
months
£’000
3 months
to 1 year
£’000
1-5 years
£’000
5+ years
£’000
Total
£’000
revolving credit Facility
at 30 April 2019
other Borrowing Facilities
at 30 April 2019
lease obligations
at 30 April 2019
revolving credit and capex
Facility at 30 April 2020
other Borrowing Facilities
at 30 April 2020
lease obligations
at 30 April 2020
3.1
5.3
5.0
3.3
5.2
5.4
-
11
21
32
-
14
26
40
-
33
65
98
-
28
53
81
3,000
-
-
3,000
89
527
1,786
2,446
187
1,183
2,755
4,211
3,276
3,500
127
245
1,710
1,400
537
4,541
9,657
-
-
4,900
706
1,206
2,638
4,168
3,872
3,143
2,638
9,774
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 2.
Financial covenants
The total RCF the Group has with HSBC has three covenants:
• A maximum cap on the net debt / EBITDA ratio. This is tested on a quarterly basis ending 31 January, 30 April, 31 July and 31 October.
Following the renegotiation of this covenant with HSBC, it will first be tested for the quarter ending 31 July 2021 having secured a
covenant holiday in the quarters ending 31 October 2020, 31 January 2021 and 30 April 2021;
• a maximum cap on the EBIT / finance charges ratio. This is tested on an annual basis ending 30 April. Following the renegotiation of
this covenant with HSBC, it will first be tested for the 12 months ending 30 April 2022 having secured a covenant holiday for the year
ending 30 April 2021; and
• a minimum tangible net worth of the Group’s balance sheet. The tangible net worth is defined as shareholders’ funds less intangible
assets plus non-redeemable preference shares. This is tested on a quarterly basis on 31 October 2020, 31 January 2021 and 30 April
2021.
85
KromeK Group plc
Annual Report & Accounts 2020
Notes to the consolidated financial statements (continued)
For the year ended 30 April 2020
35.
FINANcIAl INSTrumeNTS (CONtINUED)
Financial covenants (continued)
There is also a further covenant specifically relating to the working capital element of the RCF the Group has with HSBC as follows:
•
the working capital element of the RCF is not to exceed a maximum cap of the combined total of Group inventories and trade
receivables less than 90 days old. This is tested on a quarterly basis ending 31 January, 30 April, 31 July and 31 October.
categories of financial instruments
Financial assets
Investment in money market accounts
Cash and bank balances
Loans and receivables
Financial liabilities
Amortised cost
2020
£’000
-
9,444
6,969
2019
£’000
1,250
20,616
18,802
(18,957)
(14,513)
Fair Values of Financial Assets and Financial liabilities
The following hierarchy classifies each class of financial asset or liability depending on the valuation technique applied in determining its
fair value:
Level 1: The fair value is calculated based on quoted prices traded in active markets for identical assets of liabilities.
Level 2: The fair value is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly. The fair value of a financial instrument is the price that would be received to sell and asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
Level 3: The fair value is based on inputs for the asset or liability that are not based on observable market data (unobservable inputs).
In these financial statements, all of the above financial instruments are considered to be Level 2 in the fair value hierarchy. There have
been no transfers between categories in the current or preceding year. The fair value of financial instruments held at fair value have been
determined based on available market information at the balance sheet date of 30 April 2020.
36.
relATeD pArTY TrANSAcTIoNS
Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation
and are not disclosed in this note. Transactions between the Group and its related parties are disclosed below.
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.
37.
eVeNTS AFTer The BAlANce SheeT DATe
As a result of COVID-19, the Group’s US operations successfully secured £0.8m of Paycheck Protection Program Loans in the US.
Other than the renegotiation of the Group’s banking covenants as disclosed in note 2, there have been no further events after the reporting
date that require disclosure in line with IAS10 events after the reporting period.
86
Annual Report & Accounts 2020
KromeK Group plc
Company statement of financial position
As at 30 April 2020
Non-current assets
Investment in subsidiaries
Amounts due from subsidiary company
Investment in money market account
current assets
Trade and other receivables
Cash and cash equivalents
Total assets
current liabilities
Trade and other payables
Borrowings
Net current assets
Non-current liabilities
Borrowings
Total liabilities
Net assets
equity
Share capital
Share premium account
Merger reserve
Accumulated losses
Total equity
Note
3
5
6
7
7
11
12
13
2020
£’000
4,000
60,284
-
64,284
196
6,020
6,216
70,500
(342)
(3,500)
(3,842)
2,374
(1,400)
(1,400)
(5,242)
65,258
3,446
61,600
3,221
(3,009)
65,258
2019
£’000
4,000
46,902
1,250
52,152
157
16,943
17,100
69,252
(349)
(3,000)
(3,349)
13,751
-
-
(3,349)
65,903
3,446
61,600
3,221
(2,364)
65,903
The loss for the year was £645k (2019: loss £679k).
The financial statements of Kromek Group plc (registered number 08661469) were approved by the Board of Directors and authorised
for issue on 6 October 2020. They were signed on its behalf by:
Dr Arnab Basu mBe
Chief Executive Officer
87
KromeK Group plc
Annual Report & Accounts 2020
Company statement of changes in equity
For the year ended 30 April 2020
equity attributable to equity holders of the company
Share capital
£’000
Share
premium
account
£’000
merger
reserve
£’000
Accumulated
losses
£’000
Total
equity
£’000
Balance at 1 may 2018
2,604
42,625
3,221
(1,685)
46,765
Loss for the year and total comprehensive losses for
the year
Issue of share capital net of expenses
-
842
-
18,975
-
-
(679)
(679)
-
19,817
Balance at 30 April 2019
3,446
61,600
3,221
(2,364)
65,903
Loss for the year and total comprehensive loss for
the year
Issue of share capital net of expenses
-
-
-
-
-
-
(645)
-
(645)
-
Balance at 30 April 2020
3,446
61,600
3,221
(3,009)
65,258
88
Annual Report & Accounts 2020
KromeK Group plc
Company statement of cash flows
For the year ended 30 April 2020
Note
10
Net cash used in operating activities
Investing activities
Investment receipts from money market account
Interest received
Net cash generated from investing activities
Financing activities
Borrowings received
Borrowings repaid
Net proceeds from issue of share capital
Loans made to Group companies
Net interest paid
Net cash from financing activities
Net (decrease)/increase in cash and cash equivalents
cash and cash equivalents at beginning of year
2020
£’000
(630)
1,250
11
1,261
2,100
(200)
-
(13,382)
(72)
(11,554)
(10,923)
16,943
2019
£’000
(650)
-
-
-
-
-
19,817
(3,934)
(68)
15,815
15,165
1,778
cash and cash equivalents at end of year
6,020
16,943
89
KromeK Group plc
Annual Report & Accounts 2020
Notes to the Company financial statements
For the year ended 30 April 2020
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 2 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 6 to the consolidated financial statements.
3.
SuBSIDIArIeS
Details of the Company’s direct and indirect subsidiaries as at 30 April 2020 are as follows:
Name
Kromek Limited (Direct)
Kromek Germany Limited
(Indirect through Kromek Limited)
Kromek, Inc.
(Indirect through Kromek Limited)
NOVA R&D, Inc.
(Indirect through Kromek Limited)
eV Products, Inc.
(Indirect through Kromek Limited)
Place of incorporation
(or registration) and operation
NETPark, Sedgefield,
TS21 3FD, United Kingdom
NETPark, Sedgefield,
TS21 3FD, United Kingdom
143 Zehner School Road,
Zelienople, PA 16063,
United States of America
833 Marlborough Avenue,
Riverside CA 92507,
United States of America
143 Zehner School Road,
Zelienople, PA 16063,
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.
At 1 May 2019
At 30 April 2020
£,000
4,000
4,000
The economic impact of COVID-19 has created uncertainty in the markets in which the Company’s investments operate, which is
considered to be an indicator of impairment. Management have considered this, in conjunction with the full impairment review that has
been undertaken on the Group’s cash-generating units of which the Company’s investments form part. The results of this review are
disclosed in note 14 within the consolidated financial statements, including a sensitivity analysis. In this review no impairment has been
identified with regard to the Company’s investments in subsidiaries.
At 30 April 2020 the Company was owed £60,284k from its immediate subsidiary company, Kromek Limited. This has been classified as
a receivable due in more than one year on the face of the balance sheet as this most accurately reflects the likely repayment timeframe
of the balance outstanding. This assessment and amount is based on the future discounted cash flows of Kromek Limited. The loan is
unsecured and interest free. At 30 April 2019 the balance was £46,092k.
Amounts owed by Group undertakings have been assessed in line with IFRS 9 and an assessment is made of the expected credit loss.
No expected credit loss was identified based on the future cash inflows of receivables.
90
Annual Report & Accounts 2020
KromeK Group plc
Notes to the Company financial statements (continued)
For the year ended 30 April 2020
4.
STAFF coSTS
The average monthly number of employees (excluding non-executive directors) was:
2020
Number
2019
Number
Research and development, production
Sales and marketing
Administration
Their aggregate remuneration comprised:
Wages and salaries
Social security costs
Pension scheme contributions
5.
TrADe AND oTher receIVABleS
Prepayments
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
2
1
4
7
2020
£’000
565
71
23
659
2020
£’000
196
196
2020
£’000
283
59
342
2
1
3
6
2019
£’000
400
50
22
472
2019
£’000
157
157
2019
£’000
326
23
349
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.
91
KromeK Group plc
Annual Report & Accounts 2020
Notes to the Company financial statements (continued)
For the year ended 30 April 2020
7. BorroWINGS
Details regarding the borrowings of the Company are disclosed in note 25 to the consolidated financial statements.
8.
FINANcIAl ASSeTS
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.
9.
FINANcIAl lIABIlITIeS
Trade and other payables
Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for
trade purchases is 30 days. The carrying amount of trade payables approximates to their fair value.
10. NoTeS To The STATemeNT oF cASh FloWS
2020
£’000
(645)
61
(584)
(39)
(7)
(630)
2020
£’000
3,446
-
3,446
2019
£’000
(679)
68
(611)
(117)
78
(650)
2019
£’000
2,604
842
3,446
Loss for the year
Adjustments for:
Finance costs
Operating cash flows before movements in working capital
Increase in receivables
(Decrease)/Increase in payables
Net cash used in operating activities
11.
ShAre cApITAl
Allotted, called up and fully paid:
344,635,089 (2019: 260,435,618) Ordinary shares of £0.01 each
12,000 (2019: 84,199,741) Ordinary shares issued at £0.01 each
Total 344,647,089 (2019: 344,635,089) Ordinary shares of £0.01 each
92
Annual Report & Accounts 2020
KromeK Group plc
Notes to the Company financial statements (continued)
For the year ended 30 April 2020
12. ShAre premIum AccouNT
Balance at 1 May 2019
Premium arising on issue of equity shares
Expenses arising on issue of equity shares
Balance at 30 April 2020
13. AccumulATeD loSSeS
Balance at 1 May 2019
Net loss for the year
Balance at 30 April 2020
2020
£’000
61,600
-
-
61,600
£’000
(2,364)
(645)
(3,009)
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.
93
KromeK Group plc
Annual Report & Accounts 2020
Notes to the Company financial statements (continued)
For the year ended 30 April 2020
14. FINANcIAl INSTrumeNTS (CONtINUED)
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
Total
£’000
-
-
-
-
3,000
-
3,500
1,400
-
-
3,000
4,900
revolving credit Facility
at 30 April 2019
revolving credit Facility and
capex Facility at 30 April 2020
Financial covenants
The total RCF the Company has with HSBC has three covenants:
• A maximum cap on the net debt / EBITDA ratio. This is tested on a quarterly basis ending 31 January, 30 April, 31 July and 31 October.
Following the renegotiation of this covenant with HSBC, it will first be tested for the quarter ending 31 July 2021 having secured a
covenant holiday in the quarters ending 31 October 2020, 31 January 2021 and 30 April 2021;
• a maximum cap on the EBIT / finance charges ratio. This is tested on an annual basis ending 30 April. Following the renegotiation of
this covenant with HSBC, it will first be tested for the 12 months ending 30 April 2022 having secured a covenant holiday for the year
ending 30 April 2021; and
• a minimum tangible net worth of the Group’s balance sheet. The tangible net worth is defined as shareholders’ funds less intangible
assets plus non-redeemable preference shares. This is tested on a quarterly basis on 31 October 2020, 31 January 2021 and 30 April
2021.
There is also a further covenant specifically relating to the working capital element of the RCF the Company has with HSBC as follows:
•
the working capital element of the RCF is not to exceed a maximum cap of the combined total of Group inventories and trade
receivables less than 90 days old. This is tested on a quarterly basis ending 31 January, 30 April, 31 July and 31 October.
94
Annual Report & Accounts 2020
KromeK Group plc
Notes to the Company financial statements (continued)
For the year ended 30 April 2020
15.
ulTImATe coNTrollING pAreNT AND pArTY
In the opinion of the Directors, there is no ultimate controlling parent or party.
16.
eVeNTS AFTer The BAlANce SheeT DATe
Other than the renegotiation of the Group’s banking covenants as disclosed in note 2, 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
No dividends were paid in the period in respect of ordinary shares held by the Company’s Directors.
95
KromeK Group plc
Annual Report & Accounts 2020
96
Directors, Secretary and Advisers
DIRECTORS
Dr A Basu
Mr D Bulmer
Sir P Williams
Mr L H N Kinet
Mr J H Whittingham
Mr C Wilks
COMPANY SECRETARY
Mr D Bulmer
REGISTERED OFFICE
BANKERS
HSBC Bank plc
1 Saddler Street
Durham
DH1 3NR
AUDITOR
KPMG LLP
Statutory Auditor
15 Canada Square
London
E14 5GL
LEGAL ADVISER
Eversheds Sutherland
Bridgewater Place
Water Lane
Leeds
LS11 5DR
NEtPark
thomas Wright Way
Sedgefield
tS21 3FD
NOMINATED ADVISER AND
BROKER
Cenkos Securities plc
6.7.8. tokenhouse Yard
London
EC2R 7AS
REGISTRAR
Link Asset Services
34 Beckenham Road
Beckenham
BR3 4tU
PUBLIC RELATIONS ADVISER
Luther Pendragon
48 Gracechurch Street
London
EC3V 0EJ
Kromek Group plc
NEtPark, thomas Wright Way,
Sedgefield, County Durham, tS21 3FD, UK