Omega Diagnostics Group PLC
Annual Report 2009

Plain-text annual report

www.omegadiagnostics.com Delivering strong results i O m e g a D a g n o s t i c s G r o u p P L C A n n u a l R e p o r t a n d A c c o u n t s 2 0 0 9 Omega Diagnostics Group PLC Subsidiary Companies are Omega Diagnostics Ltd, Genesis Diagnostics Ltd and Cambridge Nutritional Sciences Ltd Omega Diagnostics Group PLC Omega House Hillfoots Business Village Alva FK12 5DQ Scotland United Kingdom Tel: +44 (0)1259 763030 Fax: +44 (0)1259 761853 Email: odl@omegadiagnostics.co.uk Omega Diagnostics Ltd Formed in 1987, ODL specialises in infectious diseases, particularly Syphilis, TB and Dengue Fever. www.omegadiagnostics.com G E N E S I S Genesis Diagnostics Ltd Formed in 1994, Genesis is one of the UK’s leading manufacturers of high quality ELISA based diagnostic kits. The Company specialises in the research, development and production of kits to aid the diagnosis of autoimmune and infectious diseases, and for the detection of immune reactions to food. www.elisa.co.uk Cambridge Nutritional Sciences Ltd Formed in 2001, CNS provides clinical analysis to the general public, clinics and health professionals as well as supplying the consumer Food Detective™ test. www.cambridge-nutritional.com Omega Diagnostics Group PLC Annual Report and Accounts 2009 Advisers Nominated Adviser and Broker Cenkos Securities Ltd 6.7.8 Tokenhouse Yard London EC2R 7AS Auditors Ernst & Young LLP Ten George Street Edinburgh EH2 2DZ Solicitors Brodies LLP 15 Atholl Crescent Edinburgh EH3 8HA Share Registrar Share Registrars Limited Suite E First Floor, 9 Lion and Lamb Yard Farnham Surrey GU9 7LL PR Wallbrook PR Ltd 4 Lombard Street London EC3V 9HD Country of Incorporation Omega Diagnostics Group PLC England & Wales Registered No. 5017761 Omega Diagnostics Group PLC is an AIM-quoted public company on the London Stock Exchange. Omega sells a wide range of products, primarily in the immunoassay, in-vitro diagnostics (IVD) market, through a strong distribution network in over 100 countries. Omega operates in a niche market in supplying tests for specific infectious diseases, autoimmune disease and food intolerance. year on year ... Sales £5.4m +56% £2,032k 07 £3,492k 08 £5,438k 09 Gross profit £3.3m +76% £831k 07 £1,898k 08 £3,344k 09 Gross profit 61.5% 61.5% 09 54.4% 08 40.9% 07 Operating profit £573k +92% £298k 08 £573k 09 (£886k) 07 Overview Annual Report and Accounts 2009 www.omegadiagnostics.com 1 The Highlights of 2009 Reported revenue up 56% and 20% like-for-like Sales growth in established and new markets Operating profits almost doubled in year Launch of new colourimetric version of the microarray technology Launch of macroarray-based Food Detective™ kit into multiple territories Strategy Our business strategy remains unchanged. Omega aims to deliver organic growth from recently acquired products, markets and technologies. Omega will also continue to pursue acquisition opportunities which are earnings enhancing or strategically placed in major growth markets. Read more on our Strategy and Growth page 2 Growth Overview 01 The Highlights of 2009 02 Our Strategy 04 Global Reach 06 08 Our Key Products 10 Chairman’s Statement Investing in Technology Business Review 12 Chief Executive’s Review 16 Financial Review 19 Board of Directors Financial Statements 28 Consolidated Income Statement 29 Consolidated Balance Sheet Consolidated Statement 30 of Changes in Equity 31 Consolidated Cash Flow Statement 32 Company Balance Sheet 33 Company Statement of Changes in Equity 34 Company Cash Flow Statement 35 Notes to the Financial Statements 60 Notice of Annual General Meeting IBC Advisers Governance 20 Directors’ Report 22 Directors’ Remuneration Report 24 Corporate Governance Report 26 Statement of Directors’ Responsibilities Audit Report 27 Independent Auditor’s Report to the members of Omega Diagnostics Group PLC 2 Overview Annual Report and Accounts 2009 www.omegadiagnostics.com Our Strategy +10% Growth in sales Omega Diagnostics Ltd Formed in 1987, ODL specialises in infectious diseases, particularly Syphilis, TB and Dengue Fever. G E N E S I S +133% Growth in sales Genesis Diagnostics Ltd Formed in 1994, Genesis is one of the UK’s leading manufacturers of high quality ELISA based diagnostic kits. The Company specialises in the research, development and production of kits to aid the diagnosis of autoimmune and infectious diseases, and for the detection of immune reactions to food. +56% Growth in sales +10% Like-for-like Growth + 32% Like-for-like Growth + 94% Growth in sales Cambridge Nutritional Sciences Ltd Formed in 2001, CNS provides clinical analysis to the general public, clinics and health professionals as well as supplying the consumer Food Detective™ test. + 16% Like-for-like Growth strategy ... Our Strategy for Growth Strategy = Organic Growth + Acquisitions Strategy Omega intends to focus development on an autoimmune microarray and other tests within its area of expertise and to actively market these new products through its extensive distribution network. Product Development + Distribution = Growth Overview Annual Report and Accounts 2009 www.omegadiagnostics.com 3 Product Group Breakdown 1 2 41% 34% 12% 13% 4 3 1 2 £2,262k (2008: £964k) Food intolerance £1,832k (2008: £1,590k) Infectious disease 3 4 £717k (2008: £634k) Other £627k (2008: £303k) Autoimmune disease Working Key Performance Indicators (KPIs) The following KPIs measure the growth of the business on a full like-for-like basis. Our Strategy in action Key Performance Indicators (sales) 1 Drive sales growth in key markets The Group has grown sales in its top three export markets. Spain £635,277 09 +22% £521,257 08 Australia Italy £437,102 08 £338,797 09 +29% £371,478 08 £326,867 09 +14% 2 Drive sales growth of microarray and macroarray platforms The Group has grown sales of its Genarrayt™ assay following roll-out into new markets. Genarrayt™ kit sales (Microarray platform) £573,598 Patient tests 09 +35% 3,151 09 +55% £424,164 08 2,032 08 Genarrayt™ instrument sales (Microarray platform) £146,359 08 (Nil) 09 +100% The Group has grown sales of its Food Detective™ kit overseas to the professional nutritionist market. The Group has grown sales of its Foodprint™ assay service offering tests on over 200 foods. Food Detective™ kit sales (Macroarray platform) Patient tests £314,057 08 £216,958 09 +45% 13,392 09 +134% 5,732 08 Foodprint™ service sales (Microarray platform) Patient tests £246,095 08 £179,381 09 +37% 2,331 09 +47% 1,587 08 4 Overview Annual Report and Accounts 2009 www.omegadiagnostics.com Global Reach We have extensive distribution coverage in over 100 countries with new coverage for the professional nutritionist markets. Where are our future Key Markets? • Microarray test for food intolerance now being evaluated in 10 countries • New autoimmune microarray assay under development for release in 2009/2010 • Macroarray tests for food intolerance being sold across Europe into professional nutritionist markets globally ... £157k +80% (North America) £363k -3% (South/Central America) Global Sales £5.4m Global Growth +56% Headline £3,492k £5,438k 09 08 Headline £4,543k 08 Like-for-like +20% Like-for-like Overview Annual Report and Accounts 2009 www.omegadiagnostics.com 5 Distribution network • All country distribution Microarray distribution Macroarray distribution £2,683k +20% (UK and Europe) Growing £1,023k +15% (Africa and Middle East) £1,212k +27% (Asia and Far East) What is microarray technology? page 7 6 Overview Annual Report and Accounts 2009 www.omegadiagnostics.com Investing in Technology technology ... Arrayjet Marathon printer Overview Annual Report and Accounts 2009 www.omegadiagnostics.com 7 Advancing Microarrays The Marathon Inkjet Microarrayer, as used for the production of Genarrayt™ kits, leverages modern inkjet technology to produce high quality microarrays in high throughput. The piezoelectric print head, when combined with Arrayjet’s proprietary JetSpyder™ sampler, enables comparatively low volumes of protein probes to be aspirated into the print head, which then prints microarrays at speed and on-the-fly. The JetSpyder™ and print head are installed in a high precision, scalable robotics platform which is also modular, with upgrades including increased capacity for microtitre plates and microarray slides. The Marathon Inkjet Microarrayer provides much increased capacity for production and development purposes. 8 Overview Annual Report and Accounts 2009 www.omegadiagnostics.com Our Key Products The Group provides high-quality diagnostic products to hospitals, clinics and laboratories in over one hundred countries – promptly delivered and competitively priced. Infectious Disease PRODUCT INFORMATION What are infectious diseases? Infectious diseases are clinically evident diseases that result from the presence of infectious agents such as microbial agents, including viruses, bacteria, fungi, protozoa, multicellular parasites, and aberrant proteins known as prions. Product information Brucellosis; Chagas Disease; Chlamydia; Dengue Virus; Hepatitis B; Herpes; Rotavirus; Staphylococcus; Streptococcal Disease; Syphilis; Tuberculosis and Typhoid. Gastritis and tests for Pseudomonas aeruginosa bacteria, significant in hospital acquired infections. Food Intolerance PRODUCT INFORMATION What is food intolerance? Food intolerance is an adverse reaction to some sort of food or ingredient that occurs every time the food is eaten, but particularly if larger quantities are consumed. Common offenders include milk products, wheat and other grains that contain gluten. Product information Tests patients for reactions to different foods. Autoimmune Disease PRODUCT INFORMATION What are autoimmune diseases? Autoimmune diseases arise from an overactive immune response of the body against substances and tissues normally present in the body i.e. the body attacks its own cells. Product information Anaemia; Celiac Disease; Crohn’s Disease; Connective Tissue Diseases; Liver Disease; Microarterial Diseases; Thrombotic Disease; Thyroid Disease; Vasculitis; Renal Disease. Infectious Disease Food Intolerance Autoimmune Disease Overview Annual Report and Accounts 2009 www.omegadiagnostics.com 9 Infectious diseases • WHO estimates there may be 50 million dengue infections worldwide every year • It is estimated that 1.6 million deaths Autoimmune diseases • 80 or more chronic disability diseases • Affects ~ 5% European/US population • Total European market for tests worth resulted from TB in 2005 US$440m in 2004 Food intolerance • Estimated that around 45% of UK population adversely affected by food • Cases of food intolerance rising • Customers are Nutritionists and • It is estimated that 12 million new cases • Total European market predicted to reach general public of syphilis occur every year almost US$700m by 2011 Our Products across the globe • India • Brazil • Bangladesh • Iran • South Africa Total Sales £1,832k Our Products across the globe • Italy • Australia • Spain • UK • Cyprus Total Sales £2,262k Our Products across the globe • Iran • Italy • Australia • UK Total Sales £627k 10 Overview Annual Report and Accounts 2009 www.omegadiagnostics.com Chairman’s Statement Dear Shareholder I am pleased to report that the Group has made sustained progress in the year with growth in turnover and profitability across the Group. David Evans Non-executive Chairman 6 July 2009 Strategy The acquisition of Genesis Diagnostics (‘Genesis’) and Cambridge Nutritional Sciences (‘CNS’) has successfully fulfilled one of our strategic aims of acquiring profitable companies with complementary products that drive growth. Turnover has increased across all group divisions and in most of the regions we sell to around the world. The Group has been able to make good use of its expanded distribution network in achieving the roll-out of the Genarrayt™ food intolerance assay where systems have been placed in a number of countries for evaluation purposes and there has also been some cross-selling of the established Genesis autoimmune and Omega Diagnostics Limited (‘ODL’) infectious disease tests into the expanded network. Through its increased sales and marketing resource, new distributors have also been appointed in multiple territories for the Food Detective™ consumer test. Key to continued organic growth will be the delivery of new products utilising the microarray and macroarray platforms and development activity continues with this aim in mind. Financial The results for the year include a full twelve months for Genesis and CNS, albeit, the comparatives only include seven months in the prior year to 31 March 2008. Turnover for the Group increased to £5.4 million (2008: £3.5 million) an increase of 56% reflecting the twelve month contribution from Genesis and CNS. However, it is particularly pleasing to report underlying like-for-like growth in turnover of 20% despite difficult economic conditions. The Group achieved an EBITDA before exceptional items of £915k (2008: £417k) and operating profit before exceptional items increased to £653k (2008: £298k), again with the benefit of a full year from Genesis and CNS. In terms of our results as compared to the external market forecast, the Group achieved an adjusted profit before tax of £531k (2008: £82k). This figure is arrived at by taking headline profit before tax of £267k and then adding back analyst-adjusted items including IFRS-related net discount charges of £7k, exceptional costs of £80k, amortisation of intangible assets of £99k and share-based payment charges of £78k. As such, these results are in line with the external market forecast. Net finance costs have increased to £306k (2008: £175k), mainly as a result of a translation loss on US dollar borrowings, given the weakening of sterling against the US dollar over the course of the year. Profit after tax amounted to £221k (2008: £238k) which resulted in earnings per share of 1.4p versus earnings per share of 2.4p in the previous year. A planned acquisition last year had to be aborted as it was not possible to raise sufficient funds in deteriorating financial markets to meet the vendors’ price expectations. The Group has incurred an exceptional cost of £80k in relation to this aborted transaction. Whilst this may be seen as disappointing, the Group still believes that acquisition opportunities exist which are capable of being funded and the Board continues to pursue this aspect of its strategy as a viable way of achieving growth for the Group and increasing shareholder value. Balance sheet The Group has intangible assets of £4.9 million (2008: £5.1 million) at the year-end comprised of goodwill of £3.1 million and intangible assets of £1.8 million, separately identified in line with current IFRS. The Group has performed an impairment review under current accounting standards and is comfortable with the carrying value of its intangible assets given the growth and results for the year just ended. Overview Annual Report and Accounts 2009 www.omegadiagnostics.com 11 Turnover for the Group increased to £5.4 million representing a headline growth of 56% and like-for-like growth of 20%. Net debt (total borrowings less cash) reduced to £1.64 million from £1.75 million, despite the translation loss on currency borrowings referred to above which amounted to £0.19 million. Research and development The Group successfully developed an improved version of the Genarrayt™ microarray system for food intolerance which allows laboratories to use significantly cheaper instrumentation to interpret results. This has helped the roll-out of this assay for evaluation purposes which I have referred to earlier and where enhanced customer acceptance is expected as a result. The Group will continue to direct a large part of its effort in broadening the range of tests that can be performed on the microarray platform where the immediate priority exists to develop a panel of autoimmune tests. Elsewhere, the Group has expanded its range of control products which is seen as potentially beneficial in times of increasing monitoring of assay performance. Board and management As announced during the year, Dr Mike Walker resigned on 11 November 2008 and the Board recorded its thanks to him at that time. A number of senior management appointments were made, either in the year, or just after to ensure the Group remains sufficiently resourced to achieve its objectives and I would like to thank all employees for their hard work in helping to achieve the results we have reported. Outlook Trading in the first three months of the year is in line with current management expectation. As we move forward throughout the year we anticipate additional growth being generated through a combination of organic and acquisitive growth. Organic growth: The primary route and level of organic growth is dependent upon the rate of placement of new Genarrayt™ systems, which itself is dependent upon the upgrading of our manufacturing methods, a process which is ongoing. Acquisitive growth: Our propensity to grow through acquisition is dependent upon the availability of finance and suitable opportunities. A number of high quality value enhancing opportunities are currently being evaluated. I look forward to updating you throughout the year. David Evans, CA Non-executive Chairman 6 July 2009 12 Business Review Annual Report and Accounts 2009 www.omegadiagnostics.com Chief Executive’s Review Strategy update Many companies in our field develop products which have great potential but few take these products onto the global market. With Omega, the routes to market already existed, having been developed over many years. When we acquired Genesis Diagnostics and Cambridge Nutritional Sciences in September 2007, we completed one of our strategic aims in acquiring profitable companies and growth-generating products complementary to our existing product range. We also knew that we had well developed products but that their commercial success was unfulfilled. Moving from low existing sales to full global product launch has been the main effort throughout the year. During the year, due to the turmoil in worldwide financial markets, we were unable to complete on a major acquisition of another company in our field. Although the costs involved for the aborted acquisition were reduced through indemnity cover it is unfortunate that we were unable to deliver on this part of our strategy. This made it even more important that we concentrated on delivering the growth in both turnover and profit margin that you see reported in these results. However, we still believe that viable acquisition opportunities exist and we are still pursuing this strategy in order to build critical mass and increase shareholder value. When we acquired Genesis Diagnostics and Cambridge Nutritional Sciences in September 2007, we knew that we had well developed products but that their commercial success was unfulfilled. Andrew Shepherd Chief Executive 6 July 2009 I am pleased to report that the Group has seen a major increase in revenue for the year to £5.4 million, some 56% ahead of last year’s figures (2008: £3.5 million). On a full like-for-like basis, turnover has increased by 20% combined, and individually across all three trading entities, reflecting the increased sales and marketing effort throughout the year. Omega Diagnostics Limited (‘ODL’) ODL has seen growth in most regions around the world, particularly in Africa/Middle East and Asian regions. Sales for the year increased to £2.3 million (2008: £2.1 million) representing growth of 10% in the year which, for a mature product range in a mature market, represents a good result. A growth rate of this level has not been seen at ODL for many years and is due to the increased sales resource being applied throughout the year with some cross-selling opportunities being exploited between the Omega and Genesis distribution bases. Genesis Diagnostics (‘Genesis’) Genesis has seen growth in sales to £2.5 million (2008: £1.9 million) representing a 32% increase on a like-for-like basis. This growth has been fuelled by the roll-out into a number of territories of the Genarrayt™ assay system for food intolerance. Twenty two new systems have been installed in ten countries with many systems still subject to evaluation which, if successful, will result in increased sales of reagent kits going forward. Sales of Genarrayt™ food intolerance systems reached £146k (2008: £nil) with sales of reagent kits reaching £574k (2008: £424k). To handle the increase in Genarrayt™ business, we recently invested further in more advanced technology Business Review Annual Report and Accounts 2009 www.omegadiagnostics.com 13 We have increased sales through an intensive sales and marketing effort resulting in a major increase in turnover and profit margin despite a global economic downturn. high throughput non-contact microarray printing equipment. This has increased our production capacity five-fold and now provides increased capabilities not only for increased production but development of new arrays of clinical and commercial importance. Cambridge Nutritional Sciences (‘CNS’) As with the Genesis Genarrayt™ system, CNS has been involved in the extended launch of the Food Detective™ home test for food intolerance into many countries around the world, particularly in Europe, through companies that specialise in sales to the professional nutritionist market. The re-branding of the product, with the resulting launch at The Allergy Show in Olympia, London in June 2008, allowed a much more focussed promotional activity, the result of which has been to locate and appoint exclusive distributors in 18 countries. These cover the major European markets but also extend to the Middle East, Asia, Australia and Latin America. Sales of Food Detective™ have increased to £314k (2008: £217k) representing a 45% increase with over a doubling in product volume. More distributors from other countries are in discussion with further appointments expected to be made throughout the year. Some countries do require extended periods for product registration with their regulatory/import authorities but it is hoped that registration in these key markets can be achieved in the year. However, it must be noted that the UK retail pharmacy market has not been accessed as anticipated due to adverse pricing conditions for the retail market but further efforts are being made to increase sales in our home market through the same professional markets being addressed by the international distributors. The other aspect of the CNS business is testing services for food intolerance and other linked medical conditions. After concentrating on the launch of Food Detective™ our focus now moves towards developing the testing side of the business. Further manpower resources have been employed with a view to accessing a much wider market, both in the UK and in several European markets that are now being serviced by our Food Detective™ distributors. These distributors are now offering the laboratory services as a value-added proposition to the nutritionist customer base. Distribution network In addition to the distributors which serve our clinical products market we have now also developed the distribution base for the Food Detective™ product which represents an alternative route to professional/consumer markets. These additional distributors are also seeking new products to broaden their product offering so further opportunities exist in these markets for newly developed products. Our investment in additional key marketing appointments in 2008 has also been pivotal in achieving the significant increase in sales on a global basis. Further appointments in product support positions have been made, especially for the support of the roll-out of the Genarrayt™ microarray systems. 14 14 Business Review Annual Report and Accounts 2009 www.omegadiagnostics.com Chief Executive’s Review (continued) Business Review Annual Report and Accounts 2009 www.omegadiagnostics.com 15 We have also developed the distribution base for the Food Detective™ product which represents an alternative route to market. Research and development Work was completed on the new colourimetric version of the Genarrayt™ microarray which significantly reduces the cost of scanning the results from the earlier fluorimetric version. Laboratories can now install Genarrayt™ without a major capital expense which has always been an impediment to the installation of new technologies. With the emphasis now being placed on the production of much higher volumes of Genarrayt™ further investment was made in acquiring a non-contact microarray printer which increases the production capacity five-fold. Additional human resource has been allocated to production and product support duties. Recent staff appointments in technical support and R&D mean that we will be able to spend more time developing additional products on the Genarrayt™ microarray platform. One such test will be an array for autoimmune disease, a key product area for the Group. This year has also seen the launch of the Autonomy Control™ range of quality control sera for autoimmune disease testing. Quality control and proficiency testing is now mandatory in most clinical laboratories worldwide and this range complements our offering of Autoimmune ELISA products. This is the first range of independent controls available commercially which will work across all test platforms from all manufacturers. It is hoped to expand this product range to cover other clinical areas in the future. Also, in line with developing products for this niche market, development was also completed on a new test kit called Pathozyme™ ElisaSure that checks the quality performance of laboratory equipment and laboratory staff. In an environment of increasing quality monitoring and national and international quality accreditation schemes, we believe that this market has good potential in the future. Outlook Overall, the global market for IVD products has reached $37 billion with a growth rate of 7% and, according to informed industry sources, the diagnostics industry is seen as relatively ‘recession proof’ with no sign of falling sales. Bearing in mind that we are still launching new products into new markets, we currently do not anticipate any adverse effect on sales growth. During the year, the Group has made good progress in core sales activity but only limited progress in its stated strategy of ‘growth by acquisition’. During the second half of the year an attempt was made to acquire a much larger company in our field, but this failed due to the ever worsening economic climate. It is hoped that this situation will change in the near future and that our aspirations and desire to build a much larger group will be fulfilled. Andrew Shepherd Chief Executive 6 July 2009 FoodDetective ™ Easy to use food intolerance self test with immediate results Bloated after eating certain foods? Tired at certain times of the day? Suffer headaches for no apparent reason? These are all symptoms of food intolerance. Could you be suffering from food intolerance? Find out, test yourself today! 16 Business Review Annual Report and Accounts 2009 www.omegadiagnostics.com Financial Review The prior year comparative results only include seven months of post-acquisition trading from Genesis and CNS but where relevant, true like-for-like comparisons are provided in the Overview section of this Annual Report. The Group has achieved a profit before tax of £266,893 (2008: £123,708). Kieron Harbinson Group Finance Director 6 July 2009 Trading activities Revenue Revenue for the year was £5,438,313 representing an increase of 56% over the previous year (2008: £3,491,580) and includes growth in six out of the seven major regions for which we report. Gross profit Gross profit for the year was £3,344,264 (2008: £1,897,894) resulting in an increased gross margin percentage of 61.5% (2008: 54.4%). This increase in margin was expected, as explained in last year’s annual report, due to the higher margin products and services provided by Genesis and CNS contributing for a full twelve months. However, the margin has also increased due to the result in Omega Diagnostics Ltd (‘ODL’) where margin growth of over four percentage points was achieved. Administration costs Administration costs were £2,691,545 (2008: £1,599,657), reflecting a full year’s charge within Genesis and CNS of £1,252,045 (2008: £708,874). The increase is mainly due to higher levels in staff needed to support the sales growth, particularly with the Genarrayt™ assay and the Food Detective™ test. Also included within administration costs is a foreign exchange gain from trading activities of £94,652 (2008: £4,141 loss), amortisation of intangible assets of £98,750 (2008: £57,604) and share-based payment charges of £77,948 (2008: £nil). An exceptional administration cost of £80,301 (2008: £nil) was incurred relating to an aborted acquisition opportunity. The Company was able to limit its exposure to 30% of the total costs incurred, by obtaining indemnities from other parties. At the year end, £16,905 was still to be received from one of these parties and this sum has been received since the year end. Due to the one-off nature of these costs, they have been classified as an exceptional administration cost on the face of the income statement. Research and development Included within administration costs is expenditure on research and development activities which in the year amounted to £226,068 (2008: £136,672). In the year, the new colourimetric microarray-based kit was completed providing a system which requires a much less expensive scanning system to interpret results than its predecessor. This system has subsequently been placed for evaluation in ten new countries, and this is expected to drive the growth of Genarrayt™ kit sales in the current year. In autoimmune disease testing, development was completed of the Autonomy Control™ range of sera which are used in clinical laboratories worldwide to verify assay performance. In the coming year, development will focus on bringing to the market a new panel of autoimmune tests on the Genarrayt™ microarray platform. This project will be aided by the investment in a new state-of-the-art microarray inkjet printing technology which applies non-contact inkjet fluidics with the ability to dispense accurate volumes in picolitres. Operating profit The Group generated operating profits of £572,968 (2008: £298,237) having benefited from a full year of trading contribution from Genesis and CNS. Profit before tax The profit before tax was £266,893 (2008: £123,708). Finance costs for the year totalled £312,232 (2008: £187,421) with the increase principally being due to the foreign exchange loss on the retranslation of foreign currency borrowings of £188,295 (2008: £13,449). Interest payable amounted to £117,262 (2008: £97,379) which, despite including a full year’s charge on loans, was proportionately lower due to the more benign interest rate environment. Also included within finance costs are net charges relating to discount factors and fair value adjustments in accordance with IFRS of £6,675 (2008: £64,888). Business Review Annual Report and Accounts 2009 www.omegadiagnostics.com 17 The Group has achieved 20% like-for-like growth in sales while operating profit has almost doubled having benefited from a full year of trading from Genesis and CNS. Taxation There is a tax charge of £45,852 (2008: £113,807 tax credit) in the year, comprising a charge for current tax of £51,160 (2008: £38,128 credit) and a deferred tax credit of £5,308 (2008: £75,679 credit) equating to an effective tax rate of 17.2%. Prior year adjustments to the tax charge arise when there are differences between estimated figures chargeable to tax and final tax computations. Earnings per share There was a basic earnings per share (EPS) after exceptional costs of 1.4p (2008: 2.4p) reflecting the higher average number of shares in issue throughout the year. Basic EPS before exceptional costs was 2.0p (2008: 2.4p). Acquisitions Deferred consideration payments On 12 August 2008, the Company issued 757,213 ordinary shares of 4 pence each to the original shareholders in ODL. These shares were valued at 80 pence per share in settlement of the earn-out amount of £605,772 in accordance with the terms of that acquisition agreement. On 16 April 2008 and 12 March 2009, the company made cash payments respectively of £38,010 and £67,827 in settlement of agreed earn-out targets in respect of the acquisition of Genesis and CNS. The Company also made a cash payment of £61,634 on 12 September 2008, in respect of the same acquisition agreement, which was a deferred sum payable on the first anniversary date after completion. All three amounts have been included on the consolidated cash flow statement under outflow on acquisition of subsidiary. Aborted acquisition During the latter half of last year, the Company was involved in the planned acquisition of another company which required Omega to raise new funds to complete the acquisition. The funding environment deteriorated throughout the process, due to the turmoil in worldwide financial markets, and the Company concluded that due to those challenging circumstances it was not possible to raise sufficient funds to continue with the proposed transaction. The Company incurred costs, of £265,920, in connection with the aborted transaction but it was able to significantly reduce the impact of these costs by obtaining indemnities from third parties for these costs. Among these third parties were Dr Mike Walker and David Evans, directors of the Company, who agreed to cover 30% and 10% of the costs respectively. As a result, the financial impact of the aborted transaction to the Company has been limited to £80,301. 18 Business Review Annual Report and Accounts 2009 www.omegadiagnostics.com Financial Review (continued) In the coming year, development will focus on bringing to the market a new panel of autoimmune tests on the Genarrayt™ microarray platform. Due to the one-off nature and value of these costs, they have been separately disclosed and treated as an exceptional item in the income statement so that they do not impact on the results from normal trading operations. Treasury operations Currency management The Group conducts its operations in three main currencies being sterling, euros and US dollars. In the case of transactions in euros and US dollars, the Group may be exposed to fluctuations in the rates of exchange against sterling. Where possible, the Group operates a natural hedge by entering into transactions of both a buying and selling nature that limits the risk of adverse exchange rate losses. Following the purchase of Genesis and CNS, the Group continues to generate a net surplus in US dollars from its trading activities. Given this situation, in March 2008, the Company converted half of its then outstanding sterling loan, with Bank of Scotland, into US dollars. This enabled the Group to benefit from US interest rates which were lower than interest rates in the UK at that time. However, the strengthening of the US dollar against sterling throughout the year has given rise to a foreign exchange translation loss of £188,295 (2008: £13,449). In part, this has been offset by the gain of £94,652 referred to above under Administrations costs. Interest rate management Following conversion of a part of the sterling loan into US dollars (see Currency management above), the Group limited its exposure to interest rate fluctuations by entering into certain derivative financial instruments. In the case of the remaining sterling loan, the Group entered into an agreement with Bank of Scotland whereby the base rate element of the interest charge has been capped at 5.5% for the entire remaining term. In the case of the US dollar loan, the Group entered into two agreements with Bank of Scotland, one to cap the interest rate based on US Libor at 5% and one to operate a floor rate on US Libor of 2.25%. Under IFRS, these derivative financial instruments are required to be disclosed at their fair values as either assets or liabilities and there has been a fair value adjustment charge through the income statement of £9,871 (2008: £230). Accordingly, at the balance sheet date, the Group had assets of derivative financial instruments of £599 (2008: £3,419) and liabilities of derivative financial instruments of £10,700 (2008: £3,649). Cash flow Net cash inflow for the year was £100,043 (2008: £134,691) which meant that at the year end, the Group had cash and cash equivalents of £612,554 (2008: £512,511). The Group’s conversion of operating profit into operating cash has remained efficient with cash generated from operations of £668,276 (2008: £438,435) as the Group has benefited from a full year of trading from Genesis and CNS. The Company incurred deferred consideration payments in respect of the acquisition of Genesis and CNS of £167,471 as detailed earlier in this report. In total, the Group’s net debt position has decreased to £1,635,013 (2008: £1,753,270). Capital management The Group funds its operations with a mixture of short and long term borrowings or equity as appropriate with a view to maximising returns for shareholders whilst safeguarding the ability to continue to operate as a going concern. Capital expenditure The Group incurred £134,433 (2008: £157,721) on plant and machinery fixed assets. Most purchases comprised smaller value replacement items and general IT equipment upgrades. The single largest investment, of £107,500, was the purchase of a new inkjet printer for laying minute amounts of material onto a microarray slide. This new non-contact form of printing replaces the older contact printing machine and significantly increases the manufacturing and development capacity of the Group in this area. This investment has been financed by way of a new finance lease, repayable over 36 months. Kieron Harbinson Group Finance Director 6 July 2009 Business Review Annual Report and Accounts 2009 www.omegadiagnostics.com 19 Board of Directors David Evans, CA Non-executive Chairman Aged 49, David Evans has considerable experience within the diagnostics industry. As Financial Director he was a key member of the team that floated Shield Diagnostics Limited in 1993. He became Chief Executive Officer responsible for the merger of Shield Diagnostics Group plc with Axis Biochemicals ASA of Norway in 1999 to create Axis-Shield plc. In addition to his role as Non-executive Chairman of Omega, he is Non-executive Chairman of Immunodiagnostic Systems Holdings plc and Epistem Holdings Plc, which are both AIM-quoted medical groups operating in different industrial areas from Omega. Andrew Shepherd, BSc. (Hons) Chief Executive Aged 53, Andrew Shepherd is the Founder and Managing Director of Omega Diagnostics Limited. He has been involved in the medical diagnostics industry for the last 34 years. He started his career in 1974 by holding technical positions at G.D. Searle Limited and subsequently attended university, graduating with a Bachelor of Science in biology. He then moved into a sales and marketing position at Cambridge Life Sciences plc in 1981, before establishing his first diagnostics company, Cambridge Biomedical Limited, in 1982. In 1986 he moved to Scotland to join Bioscot Limited and, shortly afterwards, established Omega. Mr Shepherd used his technical experience and knowledge of exporting to oversee the growth of the export of Omega products to in excess of £2 million per annum. Omega now exports to over 100 countries around the world, and he travels regularly to many of the countries in which Omega customers are based. Mr Shepherd was also recently a member of the Bill and Melinda Gates Foundation’s (BMGF) Global Health Diagnostics Forum, which provided guidance to BMGF in advising on technology and future investments in worldwide diagnostics programmes for developing countries. The Forum published a number of scientific papers in a Nature magazine supplement in November 2006 (www.nature.com/diagnostics). Kieron Harbinson, FCCA Finance Director Aged 44, Kieron Harbinson joined Omega in August 2002 as Finance Director. He is responsible for finance, information technology, human resources and operations planning. Mr Harbinson joined Scotia Holdings PLC in 1984. He qualified as an accountant in 1991, and became a Fellow of the Association of Chartered Certified Accountants in 1997. He remained with the company for approximately 14 years, during which time he held various roles including Group Financial Controller and Chief Accountant. These roles enabled him to acquire a broad range of knowledge in a high-growth technology company, plus experience in corporate acquisitions, disposals and intellectual property matters. In addition he gained experience in various debt and equity transactions, and was involved in raising over £100 million for the company. He was also head of Tax and Treasury, responsible for a treasury programme of cash investments of over £50 million and management of currency exposures. Mr Harbinson then joined Kymata Limited, a start-up optoelectronics company, as Finance Director. Over a period of 18 months, he was involved in raising approximately US$85 million of venture capital funding. He was responsible for implementing financial controls and accounting systems, and by the time he left in 2000 the company had grown to over 200 employees. The company was sold in 2001 to Alcatel for €134 million. Michael Gurner, FCA Non-executive Director Aged 64, Michael Gurner led the flotation of the Company on AIM as Chairman and Chief Executive. He reviewed numerous potential acquisition candidates before the Company entered into the acquisition agreement with Omega Diagnostics Limited. He qualified as a Chartered Accountant in 1967, before embarking on a career in merchant banking with Keyser Ullmann, including M&A activities with the Ryan Group of Companies and holding senior management positions, including Managing Director of a fully listed company, Continuous Stationery plc, an acquisitive business forms manufacturer between 1986 and 1991. During this time, he was responsible for acquisitions, including Prontaprint, the photographic print retail chain, and led the turnaround of its performance in the ensuing 18 months. Thereafter Mr Gurner focused on turning around under-performing and ailing businesses, in association with Postern Executive Group Limited (‘Postern’), a leading UK turnaround specialist which provided management teams for troubled companies. At Postern’s request, he joined the board of several companies which were successfully turned around. David Evans, CA Non-executive Chairman Aged 49, David Evans has considerable experience within the diagnostics industry. Andrew Shepherd, BSc (Hons) Chief Executive Aged 53, Andrew Shepherd is the Founder and Managing Director of Omega Diagnostics Limited. Kieron Harbinson, FCCA Finance Director Aged 44, Kieron Harbinson joined Omega in August 2002 as Finance Director. Michael Gurner, FCA Non-executive Director Aged 64, Michael Gurner led the flotation of the Company on AIM as Chairman and Chief Executive. 20 Governance Annual Report and Accounts 2009 www.omegadiagnostics.com Directors’ Report The Directors present their Annual Report and Group financial statements for the year ended 31 March 2009. Principal activities The principal activity of the Company is as a holding company. The principal activity of the Group is the manufacture, development and distribution of medical diagnostic products. Results and dividends The result for the year is a profit of £221,041 (2008: profit of £237,515) which has been taken to reserves. The Directors do not propose to pay a dividend. The results are discussed in more detail in the Financial Review on pages 16 to 18. The Company has taken advantage of the exemption allowed under section 230 of the Companies Act 1985 and has not presented its own income statement in these financial statements. The Company loss for the year ended 31 March 2009 is £33,739 (2008: profit of £104,537). Business review and future development A review of business and future development is discussed in more detail in the Chairman’s Statement, Chief Executive’s Review and Financial Review commencing on pages 10, 12 and 16 respectively. Key performance indicators are disclosed on page 3. Other KPIs with comparatives are discussed in the aforementioned reports. Research and development Research and development activity has increased in the year, with a full year’s charge from Genesis and CNS. Details of research and development activity are contained in the Chairman’s Statement, Chief Executive’s Review and Financial Review on pages 10 to 18. Costs in the year amounted to £226,068 (2008: £136,672). Directors The names of the Directors who have served the Company throughout the year are: David Evans Michael Gurner Kieron Harbinson Andrew Shepherd Michael Walker (resigned 11 November 2008) Biographies of all Directors still serving at the year-end are on page 19. Directors’ interests The beneficial interests of Directors who have served throughout the year are listed in the Directors’ Remuneration Report on pages 22 and 23. There are no non-beneficial interests held by Directors. On 6 April 2009, Michael Gurner purchased 20,000 shares in the Company, taking his holding to 121,671 ordinary shares. There have been no other changes to any Director’s interests in the shares of the Company between 31 March 2009 and the date of this report. Major interests in shares As at 4 June 2009, the Company had been notified that the following shareholders held more than 3% of the Company’s issued ordinary share capital: Dr Michael Walker Williams de Broe Brewin Dolphin Securities Andrew Shepherd Scottish Enterprise Henderson Global Investors Ltd Number of 4p ordinary shares Percentage 4,461,220 2,903,234 2,610,842 1,319,830 679,792 666,666 28.54% 18.57% 16.70% 8.44% 4.35% 4.26% Supplier payment policy It is the Company’s policy to agree the terms of payment with its suppliers, to ensure its suppliers are made aware of those terms and to pay in accordance with them. Trade creditors of the Company at 31 March 2009 were equivalent to 71 days (2008: 66 days) based on the average daily amount invoiced by suppliers during the year. Governance Annual Report and Accounts 2009 www.omegadiagnostics.com 21 Employees The Company encourages communication with its employees and favours an environment where staff can put forward their ideas, suggestions and concerns on any matter that involves them. The Company gives full and fair consideration to applications for employment made by disabled people, having regard to their particular aptitudes and abilities. Where an employee becomes disabled in the course of their employment, where possible, arrangements will be made for appropriate retraining to match their abilities with their duties. Principal risks and uncertainties The Board meets regularly to review operations and to discuss risk areas. The Corporate Governance Report contains details of the Group’s system of internal control. Note 23 to the accounts contains details of financial risks faced by the Group. The Board is also aware of non-financial risk areas including: General economic conditions The Group may be faced with changes in the general economic climate in each territory in which it operates that may adversely affect the financial performance of the Group. Factors which may contribute include the level of direct and indirect competition against the Group, industrial disruption, rate of growth of the Group’s sectors and interest rates. The Group seeks to mitigate this risk by conducting operations on a broad geographic basis and by introducing new technologies to remain innovative. Regulatory risk The manufacturing, marketing and use of the Group’s products are subject to regulation by government and regulatory agencies in many countries. Of particular importance is the requirement to obtain and maintain approval for a product from the applicable regulatory agencies to enable the Group’s products to be marketed. Approvals can require clinical evaluation of data relating to safety, quality and efficacy of a product. The Group seeks to mitigate regulatory risk by conducting its operations within recognised quality assurance systems and undergoes external assessment to ensure compliance with these systems. Acquisition risk The success of the Group depends upon the ability of the Directors to assimilate and integrate the operations, personnel, technologies and products of acquired companies. The Group seeks to mitigate this risk by selecting companies which meet certain selection criteria and by conducting a detailed due diligence review. Donations The Company made a charitable donation of £130 (2008: £nil) and no political donations (2008: £nil) during the year. Auditors The auditors, Ernst & Young LLP, have indicated their willingness to continue in office and a resolution for their reappointment will be proposed at the forthcoming Annual General Meeting. Directors’ statement as to disclosure of information to auditors The Directors who were members of the Board at the time of approving the Directors’ Report are listed on page 20. Having made enquiries of fellow Directors and of the Company’s auditors, each of these Directors confirms that: • to the best of each Director’s knowledge and belief, there is no information (that is, information needed by the Group’s auditors in connection with preparing their report) of which the Company’s auditors are unaware; and • each Director has taken all the steps a director might reasonably be expected to have taken to be aware of relevant audit information and to establish that the Company’s auditors are aware of that information. By order of the Board Kieron Harbinson Company Secretary 6 July 2009 22 Governance Annual Report and Accounts 2009 www.omegadiagnostics.com Directors’ Remuneration Report The Directors present their Remuneration Report as follows: Remuneration Committee The Remuneration Committee is comprised of Michael Gurner, as Chairman, and David Evans. The committee meets as and when required to determine and agree with the Board the policy for the remuneration of the Company’s Chief Executive, Chairman, Executive Directors and the Company Secretary. The objective of this policy shall be to ensure that members of the executive management of the Company are provided with appropriate incentives to encourage enhanced performance and are, in a fair and reasonable manner, rewarded for their individual contributions to the success of the Company. No Director or manager shall be involved in any decisions as to their own remuneration. Remuneration policy The Company’s policy is that the remuneration arrangements, including pensions, for subsequent financial years should be sufficiently competitive to attract, retain and motivate high quality executives capable of achieving the Company’s objectives, thereby enhancing shareholder value. Incentive schemes/share option schemes On 30 August 2007 shareholders approved the Company’s EMI Share Option Scheme. The Company has issued 1,442,467 options under the EMI Share Option Scheme in the year to Directors and senior managers to align their interests with those of shareholders. David Evans was issued with an option over 390,822 ordinary shares of the Company under an unapproved option scheme. Directors’ service contracts Andrew Shepherd entered into a service contract with the Company on 23 August 2006, under which he was appointed as Chief Executive on an annual salary of £85,000. His salary was increased to £125,000 per annum from 1 April 2008. The agreement will continue until terminated by either party giving to the other not less than twelve months’ notice in writing. Kieron Harbinson entered into a service contract with the Company on 23 August 2006, under which he was appointed as Finance Director and Company Secretary on an annual salary of £72,500. His salary was increased to £90,000 per annum from 1 April 2008. The agreement will continue until terminated by either party giving to the other not less than three months’ notice in writing. David Evans was appointed a Non-executive Director of the Company on 19 September 2006 and, as previously agreed, was entitled to an annual fee of £25,000 from 1 April 2008. The agreement will continue until terminated by either party giving to the other not less than one month’s notice in writing. Michael Gurner was appointed a Non-executive Director of the Company on 19 September 2006 and he is entitled to an annual fee of £15,000. This fee was increased to £20,000 per annum from 1 January 2009. The agreement will continue until terminated by either party giving to the other not less than one month’s notice in writing. Michael Walker was appointed a Non-executive Director of the Company on 3 September 2007 and was entitled to an annual fee of £15,000. He resigned as a Director on 11 November 2008. Directors’ emoluments Consolidated Executive Andrew Shepherd Kieron Harbinson Non-executive David Evans Michael Gurner Michael Walker Fees/basic salary £ Bonuses £ Benefits in kind £ Total 2009 £ 125,000 90,000 25,000 16,250 9,212 – – – – – – – – – – 125,000 90,000 25,000 16,250 9,212 Total 2008 £ 85,000 72,500 – 15,000 8,750 The amounts paid in the year towards Directors’ pension contributions were as follows. Governance Annual Report and Accounts 2009 www.omegadiagnostics.com 23 Directors’ pension contributions Andrew Shepherd Kieron Harbinson 2009 £ 8,375 5,083 2008 £ 2,125 3,125 Andrew Shepherd is a Non-executive Director of Omega Resources Limited, a company providing recruitment agency services. He does not receive any remuneration for this position. Directors’ interests in the 4p ordinary shares of Omega Diagnostics Group PLC David Evans Michael Gurner Kieron Harbinson Andrew Shepherd The Directors have no interest in the shares of subsidiary companies. Directors’ share options 31 March 2009 31 March 2008 110,000 101,671 58,317 1,319,830 110,000 101,671 38,883 918,697 At 1 April 2008 Granted during the year Lapsed during the year Exercised during the year At 31 March 2009 Option price Date of grant Earliest exercise date Expiry date David Evans Andrew Shepherd Kieron Harbinson – – – 390,822 703,480 468,987 – – – – – – 390,822 703,480 468,987 19p 19p 19p 10/12/2008 10/12/2009 10/12/2018 10/12/2008 10/12/2009 10/12/2018 10/12/2008 10/12/2009 10/12/2018 David Evans was issued with an option under the Unapproved Option Scheme and Andrew Shepherd and Kieron Harbinson were issued with options under the Company’s EMI Option Scheme. The share price at 31 March 2009 was 17p. The highest and lowest share price during the year was 34.5p and 17p respectively. Under the terms of a warrant, Michael Gurner is entitled to subscribe for 45,835 ordinary shares of 4p each between 1 April 2008 and 19 September 2009. The warrant will lapse after 19 September 2009 if it has not been exercised by that date. Approved by the Board Michael Gurner Non-executive Director 6 July 2009 24 Governance Annual Report and Accounts 2009 www.omegadiagnostics.com Corporate Governance Report The Board of Directors The Board currently comprises: one Non-executive Chairman; one Non-executive Director; and two Executive Directors, who are the Chief Executive and the Finance Director. David Evans, Non-executive Chairman and Michael Gurner, Non-executive Director are considered by the Board to be independent in character and judgement. Michael Gurner is the senior independent Non-executive Director. The Board meets at regular intervals and is responsible for setting corporate strategy, approving the annual budget, reviewing financial performance, agreeing the renewal of and any new banking/treasury facilities and approving major items of capital expenditure. The Board is provided with appropriate information in advance of Board meetings to enable it to discharge its duties effectively. During the financial year, the Board met on thirteen occasions. Michael Walker, who resigned as a Non-executive Director on 11 November 2008, attended seven out of eight meetings that he was entitled to attend. Andrew Shepherd attended twelve out of the thirteen meetings. The three remaining Directors were present at all the meetings held throughout the year. The Chairman has additional Non-executive Directorships of the following companies: Bgenuine Tech KK DxS EBT Limited Epistem Holdings Plc Immunodiagnostic Systems Holdings plc Microtest Matrices Limited Onyx Scientific Limited Quotient Diagnostics Limited Scancell Holdings plc Vindon Scientific plc The Audit Committee The Audit Committee has met on three occasions during the year and once since the year-end. The Committee is comprised of David Evans, as Chairman, and Michael Gurner and has primary responsibility for monitoring the quality of internal controls, ensuring that the financial performance of the Company is properly measured and reported on, and for reviewing reports from the Company’s auditors relating to the Company’s accounting and internal controls, in all cases having due regard to the interests of shareholders. The Committee shall also review preliminary results announcements, summary financial statements, significant financial returns to regulators and any financial information contained in certain other documents, such as announcements of a price-sensitive nature. The Committee shall consider and make recommendations to the Board, to be put to shareholders for approval at the Annual General Meeting, in relation to the appointment, reappointment and removal of the Company’s external auditors. The Committee shall also oversee the relationship with the external auditors including approval of remuneration levels, approval of terms of engagement and assessment of their independence and objectivity. In so doing, they will take into account relevant UK professional and regulatory requirements and the relationship with the auditors as a whole, including the provision of any non-audit services. Ernst & Young LLP have been auditors to Omega Diagnostics Limited (‘ODL’) since 2000 and were appointed as Auditors to the Company following completion of the reverse takeover of ODL in September 2006. The Committee has reviewed the effectiveness of the Company’s system of internal controls and has considered the need for an internal audit function. At this stage of the Company’s size and development, the Committee has decided that an internal audit function is not required, as the Company’s internal controls system in place is appropriate for its size. The Committee will review this position on an annual basis. The Committee shall also review the Company’s arrangements for its employees raising concerns, in confidence, about possible wrongdoing in financial reporting or other matters. The Committee shall ensure that such arrangements allow for independent investigation and follow-up action. The Remuneration Committee The Remuneration Committee has met on one occasion during the year. The Committee is comprised of Michael Gurner, as Chairman, and David Evans and has primary responsibility for determining and agreeing with the Board the remuneration of the Company’s Chief Executive, the Executive Directors, the Company Secretary and such other members of the Executive management as it is designated to consider. The remuneration of the Non-executive Directors shall be a matter for the Chairman and the Executive Directors of the Board. No Director or manager shall be involved in any decisions regarding their own remuneration. Governance Annual Report and Accounts 2009 www.omegadiagnostics.com 25 Internal control The Board is responsible for the Company’s system of internal control and for reviewing its effectiveness throughout the year. Such a system can only provide reasonable assurance against misstatement or loss. The Board monitors financial controls through the setting and approval of an annual budget and the regular review of monthly management accounts. Management accounts contain a number of indicators that are designed to reduce the possibility of misstatement in financial statements. Where the management of operational risk requires outside advice, this is sought from expert consultants, and the Company receives this in the areas of employment law and health and safety management. The Company is compliant with industry standard quality assurance measures and undergoes regular external audits to ensure that accreditation is maintained. Communication with shareholders The Board recognises the importance of communication with its shareholders. The Company maintains informative websites for Genesis, ODL and CNS containing information likely to be of interest to existing and new investors. In addition, the Company retains the services of financial PR consultants, providing an additional contact point for investors. The Board encourages shareholder participation at its Annual General Meeting, where shareholders can be updated on the Company’s activities and plans. Going concern The Board has reviewed the going concern concept for the preparation of financial statements. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operation for the foreseeable future, and have therefore adopted the going concern basis in the preparation of these financial statements. By order of the Board Kieron Harbinson Company Secretary 6 July 2009 26 Governance Annual Report and Accounts 2009 www.omegadiagnostics.com Statement of Directors’ Responsibilities The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards as adopted by the European Union. The Directors are required to prepare Group and Company financial statements for each financial year which present fairly the financial position of the Group and Company and the financial performance and cash flows of the Group and Company for that period. In preparing those Group and Company financial statements, the Directors are required to: • select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance; and • state that the Group and Company has complied with IFRSs, subject to any material departures disclosed and explained in the financial statements. The Directors are responsible for keeping proper accounting records which disclose, with reasonable accuracy at any time, the financial position of the Group and Company and enable them to ensure that the Group and Company financial statements comply with the Companies Act 1985. They are also responsible for safeguarding assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Audit Report Annual Report and Accounts 2009 www.omegadiagnostics.com 27 Independent Auditor’s Report to the members of Omega Diagnostics Group PLC We have audited the consolidated financial statements (the ‘financial statements’) of Omega Diagnostics Group PLC for the year ended 31 March 2009 and the Company financial statements for the year ended 31 March 2009 which comprise the Consolidated Income Statement, the Consolidated and Company Balance Sheets, the Consolidated and Company Cash Flow Statements, the Consolidated and Company Statements of Changes in Equity and the related Notes 1 to 23. These financial statements have been prepared under the accounting policies set out therein. This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. 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 Auditors’ Report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The Directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you whether, in our opinion, the information given in the Directors’ Report is consistent with the financial statements. The information given in the Directors’ Report includes that specific information presented in the Financial Review that is cross-referenced from the Results and dividends section of the Directors’ Report, and that specific information presented in the Chairman’s Statement and Chief Executive’s Review that is cross-referenced from the Business review and future development section of the Directors’ Report, and that specific information that is presented in the Directors’ Remuneration Report that is cross-referenced from the Directors’ interests section of the Directors’ Report. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only the Highlights of 2009, Our Strategy, Global Reach, Investing in Technology, Our Key Products, the Chairman’s Statement, the Chief Executive’s Review, the Financial Review, Board of Directors, Directors’ Report, Directors’ Remuneration Report and the Corporate Governance Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion: • the financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s and the Company’s affairs as at 31 March 2009 and of the Group’s profit for the year then ended; • the financial statements have been properly prepared in accordance with the Companies Act 1985; and • the information given in the Directors’ Report is consistent with the financial statements. Ernst & Young LLP Registered Auditors Edinburgh 6 July 2009 28 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Consolidated Income Statement for the year ended 31 March 2009 Continuing operations Revenue Cost of sales Gross profit Administration costs Other income – government grants and related assistance Exceptional administration costs Operating profit Finance costs Finance income – interest receivable Profit before taxation Tax (charge)/credit Profit for the year Earnings Per Share (EPS) Basic EPS on profit for the year – before exceptional items – after exceptional items Diluted EPS on profit for the year – before exceptional items – after exceptional items Note 2009 Total £ 2008 Total £ 7 5,438,313 (2,094,049) 3,491,580 (1,593,686) 3,344,264 (2,691,545) 1,897,894 (1,599,657) 550 19 (80,301) – – 7 5 7 6 22 572,968 298,237 (312,232) 6,157 (187,421) 12,892 266,893 123,708 (45,852) 113,807 221,041 237,515 2.0p 1.4p 2.0p 1.4p 2.4p 2.4p 2.2p 2.2p Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 29 Consolidated Balance Sheet as at 31 March 2009 ASSETS Non-current assets Intangibles Property, plant and equipment Deferred taxation Derivative financial instruments Current assets Inventories Trade and other receivables Income tax receivable Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity Issued capital Retained earnings Total equity Liabilities Non-current liabilities Other financial liabilities Long-term borrowings Deferred taxation Derivative financial instruments Total non-current liabilities Current liabilities Short-term borrowings Other financial liabilities Trade and other payables Income tax payable Total current liabilities Total liabilities Total equity and liabilities David Evans Non-executive Chairman 6 July 2009 Kieron Harbinson Finance Director 6 July 2009 Note 2009 £ 2008 £ 9 10 15 23 11 12 16 20 13 15 23 13 20 14 4,879,700 639,446 107,530 599 5,111,747 592,647 124,310 3,419 5,627,275 5,832,123 762,380 1,254,963 4,055 612,554 2,633,952 8,261,227 627,037 1,085,291 – 512,511 2,224,839 8,056,962 5,011,769 (646,548) 4,365,221 4,405,998 (945,537) 3,460,461 – 1,875,263 575,065 10,700 204,476 1,976,912 591,366 3,649 2,461,028 2,776,403 372,304 131,580 871,725 59,369 288,869 733,327 726,325 71,577 1,434,978 1,820,098 3,896,006 4,596,501 8,261,227 8,056,962 30 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Consolidated Statement of Changes in Equity for the year ended 31 March 2009 Note Share capital £ Share premium £ Retained earnings £ Total £ Balance at 31 March 2007 860,175 374,121 (1,183,052) 51,244 Issue of share capital for cash consideration Issue of share capital for non-cash consideration Fair value adjustment to issue of share capital for non-cash consideration Profit for the year ended 31 March 2008 16 16 16 293,333 1,450,778 178,449 1,159,917 – – – 1,744,111 1,338,366 89,225 89,225 – – – 237,515 237,515 Balance at 31 March 2008 1,331,957 3,074,041 (945,537) 3,460,461 Issue of share capital for non-cash consideration 16 30,289 575,482 – 605,771 Profit for the year ended 31 March 2009 Share-based payments – – – – 221,041 221,041 77,948 77,948 Balance at 31 March 2009 1,362,246 3,649,523 (646,548) 4,365,221 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 31 Consolidated Cash Flow Statement for the year ended 31 March 2009 Cash flows generated from operations Profit for the year Adjustments for: Taxation Finance costs Finance income Operating profit before working capital movement (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories Increase/(decrease) in trade and other payables (Gain)/loss on sale of property, plant and equipment Depreciation Amortisation of intangible assets Share-based payments Taxation paid Net cash flow from operating activities Investing activities Finance income Purchase of property, plant and equipment Sale of property, plant and equipment Outflow on acquisition of subsidiary Net cash used in investing activities Financing activities Finance costs Proceeds from issue of share capital New loans Loan repayments Finance lease repayments Net cash (used in)/from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Note 2009 £ 2008 £ 221,041 237,515 10 9 8 45,852 312,232 (6,157) 572,968 (169,672) (135,343) 205,913 (350) 85,484 98,750 77,948 (67,422) 668,276 6,157 (26,933) 2,500 (167,471) (185,747) (67,603) – – (264,259) (50,624) (382,486) 100,043 512,511 612,554 (113,807) 187,421 (12,892) 298,237 234,858 64,919 (279,257) 520 61,554 57,604 – – 438,435 12,892 (157,721) 6,500 (2,896,258) (3,034,587) (126,637) 1,744,111 1,354,924 (241,555) – 2,730,843 134,691 377,820 512,511 32 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Company Balance Sheet as at 31 March 2009 ASSETS Non-current assets Investments Deferred taxation Derivative financial instruments Current assets Trade and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity Issued capital Retained earnings Total equity Liabilities Non-current liabilities Other financial liabilities Long-term borrowings Derivative financial instruments Total non-current liabilities Current liabilities Short-term borrowings Other financial liabilities Trade and other payables Income tax payable Total current liabilities Total liabilities Total equity and liabilities David Evans Non-executive Chairman 6 July 2009 Kieron Harbinson Finance Director 6 July 2009 Note 2009 £ 2008 £ 21 15 23 12 7,676,225 7,809,522 16,214 599 19,953 3,419 7,693,038 7,832,894 786,271 114,866 901,137 749,422 76,862 826,284 8,594,175 8,659,178 16 6,001,444 (137,167) 5,864,277 5,395,673 (181,376) 5,214,297 20 13 23 13 20 14 – 1,738,941 10,700 201,985 1,858,998 3,649 1,749,641 2,064,632 290,710 131,580 556,478 1,489 980,257 241,325 733,327 405,597 – 1,380,249 2,729,898 3,444,881 8,594,175 8,659,178 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 33 Company Statement of Changes in Equity for the year ended 31 March 2009 Note Share capital £ Share premium £ Retained earnings £ Total £ Balance at 31 March 2007 1,232,457 991,514 (285,913) 1,938,058 Issue of share capital for cash consideration Issue of share capital for non-cash consideration Fair value adjustment to issue of share capital for non-cash consideration Profit for the year ended 31 March 2008 16 16 16 293,333 1,450,778 178,449 1,159,917 – – – 1,744,111 1,338,366 89,225 89,225 – – – 104,537 104,537 Balance at 31 March 2008 1,704,239 3,691,434 (181,376) 5,214,297 Issue of share capital for non-cash consideration 16 30,289 575,482 – 605,771 Loss for the year ended 31 March 2009 Share-based payments – – – – (33,739) (33,739) 77,948 77,948 Balance at 31 March 2009 1,734,528 4,266,916 (137,167) 5,864,277 34 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Company Cash Flow Statement for the year ended 31 March 2009 Cash flows generated from operations (Loss)/profit for the year Adjustments for: Taxation Finance costs Finance income Operating profit before working capital movement Increase in trade and other receivables Increase/(decrease) in trade and other payables Share-based payments Net cash flow from operating activities Investing activities Finance income Outflow on acquisition of subsidiary Net cash used in investing activities Financing activities Finance costs Proceeds from issue of share capital New loans Loan repayments Net cash (used in)/from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2009 £ 2008 £ (33,739) 104,537 5,228 300,944 (838) 271,595 (36,849) 212,516 77,948 525,210 (19,953) 178,251 (7,491) 255,344 (337,834) (26,869) – (109,359) 838 (167,471) (166,633) 7,491 (3,114,103) (3,106,612) (56,314) – – (264,259) (320,573) 38,004 76,862 114,866 (117,468) 1,744,111 1,200,000 (120,000) 2,706,643 (509,328) 586,190 76,862 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 35 Notes to the Financial Statements for the year ended 31 March 2009 1 AUTHORISATION OF FINANCIAL STATEMENTS The financial statements of Omega Diagnostics Group PLC for the year ended 31 March 2009 were authorised for issue by the board of directors on 6 July 2009, and the balance sheets were signed on the board’s behalf by David Evans and Kieron Harbinson. Omega Diagnostics Group PLC is a Public Limited Company incorporated in England. The Company’s ordinary shares are traded on the AIM Market. 2 STATEMENT OF COMPLIANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (‘IFRS’) The financial statements have been prepared in accordance with IFRS, as adopted by the European Union, as they apply to the financial statements of the Group and Company for the year ended 31 March 2009 respectively. 3 SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The accounting policies which follow set out those policies which have been applied consistently to all periods presented in these financial statements. These financial statements are presented in sterling. Changes in accounting policy The accounting policies adopted are consistent with those of the previous financial year. Basis of consolidation The Group financial statements consolidate the financial statements of Omega Diagnostics Group PLC and the entities it controls (its subsidiaries). Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights. Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries used in the preparation of the consolidated financial statements are based on consistent accounting policies. All inter-company balances and transactions, including unrealised profits arising from them, are eliminated. Use of estimates and judgements The preparation of these financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. 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 and in any future periods affected. The significant areas of estimation and uncertainty and critical judgements in applying the accounting policies that have the most significant effect on the amounts recognised in the financial information are discussed below. Further judgements, assumptions and estimates are set out in the Group financial statements. Valuation of intangible assets Management judgement is required to estimate the useful lives of intangible assets having reference to future economic benefits expected to be derived from use of the asset. Economic benefits are based on the fair values of estimated future cash flows. Impairment of goodwill Goodwill is tested annually for impairment. The test considers future cash flow projections of cash generating units that give rise to the goodwill. Where the discounted cash flows are less than the carrying value of goodwill, an impairment charge is recognised for the difference. Further analysis of the estimates and judgements are disclosed in Note 9. Deferred tax assets Management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with an assessment of the effect of future tax planning strategies. The carrying value of the deferred tax asset at 31 March 2009 is £107,530 (2008: £124,310). Further details are contained in Note 15. Earn-out valuation Management judgement is required to determine the financial liability to be recognised in respect of the earn-out. Management bases their estimation on the sales levels expected over the relevant period on historic data, current market conditions and the likelihood of future budgets being achieved. At 31 March 2009 the Genesis Earn-out has a carrying value of £131,580 (2008: £329,540). As the earn-out is based on 7% of sales of certain products, the earn-out amount may vary depending on the level of sales achieved. 36 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 3 SIGNIFICANT ACCOUNTING POLICIES (continued) Presentation currency and foreign currencies The financial statements are presented in UK pounds sterling. Transactions in currencies other than sterling are recorded at the prevailing rate of exchange at the date of the transaction. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities that are denominated in foreign currencies are translated at the rates prevailing at the date of the transaction. Gains and losses arising on retranslation are included in the net profit or loss for the year. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and net of discounts and sales-related taxes. Sales of goods are recognised when the significant risks and rewards of ownership are transferred to the customer. This will be when goods have been dispatched and the collection of the related receivable is reasonably assured. Revenue relates to the sale of medical diagnostic kits. Goodwill Business combinations are accounted for under IFRS 3 using the purchase method. Any excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities is recognised in the balance sheet as goodwill and is not amortised. After initial recognition, goodwill is stated at cost less any accumulated impairment losses, with the carrying value being reviewed for impairment, at least annually and whenever events or changes in circumstances indicate that the carrying value may be impaired. For the purpose of impairment testing, goodwill is allocated to the related cash generating units monitored by management, usually at business segment level or statutory company level as the case may be. Where the recoverable amount of the cash-generating unit is less than its carrying amount, including goodwill, an impairment loss is recognised in the income statement. Intangible assets Intangible assets acquired as part of a business combination are recognised outside goodwill if the asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably. Following initial recognition at fair value at the acquisition date, the historic cost model is applied, with intangible assets being carried at cost less accumulated amortisation and accumulated impairment losses. Intangible assets with a finite life have no residual value and are amortised on a straight line basis over the expected useful lives, with charges included in administration costs, as follows: Technology assets – 20 years The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is charged so as to write off the cost of assets to their estimated residual values over their estimated useful lives, on a straight line basis as follows: Leasehold improvements – 10 years, straight line with no residual value Plant and machinery Motor vehicles – 8-10 years, straight line with no residual value – 5 years, straight line with no residual value The carrying values of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable, and are written down immediately to their recoverable amount. Useful lives are reviewed annually and where adjustments are required, these are made prospectively. Impairment of assets The Group and Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, the Group and Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered to be impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their net present value, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to that asset. Impairment losses on continuing operations are recognised in the income statement in those expense categories consistent with the function of the impaired asset. Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 37 3 SIGNIFICANT ACCOUNTING POLICIES (continued) Government grants Government grants are recognised when it is reasonable to expect that the grants will be received and that all related conditions will be met, usually on submission of a valid claim for payment. Government grants in respect of capital expenditure are credited to a deferred income account and are released to the income statement over the expected useful lives of the relevant assets by equal annual instalments. Borrowing costs Borrowing costs are recognised in the income statement in the period in which they are incurred, except in the case of arrangement fees for long-term borrowings, where the fee is amortised to the income statement using the effective interest rate method. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is defined as standard cost or purchase price and includes all direct costs incurred in bringing each product to its present location and condition. Net realisable value is based on estimated selling price less any further costs expected to be incurred prior to completion and disposal. Leasing and hire purchase commitments Assets held under finance leases and hire purchase contracts are capitalised in the balance sheet and are depreciated over the shorter of their lease period and useful life. The corresponding lease or hire purchase obligation is capitalised in the balance sheet as a liability. The interest element of the rental obligation is charged to the income statement over the period of the lease and represents a constant proportion of the balance of capital repayments outstanding. Rentals applicable to operating leases, where substantially all the benefits and risks remain with the lessor, are charged against profits on a straight line basis over the period of the lease. Research and development costs Expenditure on research, which is incurred up to the point of manufacturing validation, is written off as incurred. Thereafter, expenditure on product development which meets certain criteria is capitalised and amortised over its useful life. The manufacturing validation stage is when it is probable that the product will generate future economic benefits, and the following criteria have been met: technical feasibility; intention and ability to sell the product; availability of resources to complete the development of the product; and the ability to measure the expenditure attributable to the product. The useful life of the intangible asset is determined on a product by product basis, taking into consideration a number of factors. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Exceptional items The group presents as exceptional items on the face of the income statement, those material items of income and expense which, because of the nature and expected infrequency of the events giving rise to them, merit special presentation to allow shareholders to understand better the elements of financial performance in the year, so as to facilitate comparison with prior periods and to assess better trends in financial performance. Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at banks and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of any outstanding bank overdrafts. Trade receivables Trade receivables are recognised and carried at the lower of original invoice amount and recoverable amount. A provision for doubtful amounts is made when there is objective evidence that collection of the full amount is no longer probable. Balances are written off when the probability of recovery is assessed as remote. Payment terms vary from payment in advance to 90 days. Share-based payments Equity-settled transactions For equity-settled transactions, the group measures the award by reference to the fair value at the date at which they are granted and it is recognised as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award. Fair value is determined using an appropriate pricing model. In valuing equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of the Company (market conditions). No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. 38 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 3 SIGNIFICANT ACCOUNTING POLICIES (continued) At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the achievement or otherwise of non-market conditions and of the number of equity instruments that will ultimately vest or, in the case of an instrument subject to a market condition, be treated as vesting as described above. The movement in cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity. Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the cost based on the original award terms continues to be recognised over the original vesting period. In addition, an expense is recognised over the remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair value of the original award and the fair value of the modified award, both as measured on the date of the modification. No reduction is recognised if this difference is negative. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in the income statement for the award is expensed immediately. Any compensation paid up to the fair value of the award at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement. Pension contributions Contributions to personal pension plans of employees on a defined contribution basis are charged to the income statement in the year in which they are payable. Income taxes Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date. Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions: • where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; • in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and • deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or the liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise, income tax is recognised in the income statement. Financial instruments Financial assets, liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. Trade receivables do not carry any interest and are stated at their fair value as reduced by appropriate allowances for estimated irrecoverable amounts. Trade payables are not interest-bearing and are stated at their fair value. Interest-bearing loans and overdrafts are recorded at the proceeds received, less any repayments. Accrued interest is presented as part of the loans and overdrafts balances. A financial asset or liability is generally derecognised when the contract that gives rise to it is settled, sold, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and recognition of the new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised. Financial liabilities have been recognised at the present value of the consideration expected to be payable by discounting the expected future cash flows at prevailing interest rates. At initial recognition, the quantum of liability to be recognised will depend upon management’s expectation, at that date, of the amount that would ultimately be payable. Where there is a change to the expectation of an amount of deferred financial liability, the change is reflected through the income statement. Any changes to contingent financial liabilities are reflected through goodwill. Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 39 3 SIGNIFICANT ACCOUNTING POLICIES (continued) The Group uses derivative financial instruments to reduce its exposure to fluctuations in interest rates, both in sterling and US dollars. The Group does not hold or issue derivatives for speculative or trading purposes. Derivative financial instruments are recognised as assets and liabilities measured at their fair values at the balance sheet date. The fair value of interest rate contracts is determined by reference to market values for similar instruments that have similar maturities. Changes in fair value are recognised in the income statement included in finance costs, due to the fact that hedge accounting has not been applied. Under IAS 39, these derivatives are classified as financial assets and liabilities at fair value through profit and loss. Financial assets and liabilities that are held for trading and other assets and liabilities designated as such on inception are included in this category. Financial assets and liabilities are classified as held for trading if they are acquired for sale in the short-term. Derivatives are also classified as held for trading unless they are designated as hedge instruments. Assets are carried in the balance sheet at fair value with gains or losses recognised in the income statement. Company’s investments in subsidiaries The company recognises its subsidiaries in investments at cost. The carrying value of investments is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. New standards and interpretations not applied IASB and IFRIC have issued the following standards and interpretations. International Accounting Standards IFRS 1/IAS 27 Amendment – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate IFRS 2 (revised) Share-based payments (vesting conditions and cancellations) IFRS 3 (revised) Business Combinations IFRS 8 Operating Segments IAS 1 (revised) Presentation of Financial Statements: A revised presentation IAS 23 IAS 27 Borrowing Costs – Revised Consolidated and separate financial statements IAS 32/IAS 1 Amendment – Puttable Financial Instruments and Obligations Arising on Liquidation IAS 39 Eligible Hedged Items International Financial Reporting Interpretations Committee (IFRIC) IFRIC 13 IFRIC 15 IFRIC 16 IFRIC 17 IFRIC 18 Customer Loyalty Programmes Agreements for the Construction of Real Estate Hedges of a Net Investment in a Foreign Operation Distributions of Non-Cash Assets to Owners Transfer of Assets from Customers Effective date* 1 January 2009 1 January 2009 1 July 2009 1 January 2009 1 January 2009 1 January 2009 1 July 2009 1 January 2009 1 January 2009 Effective date* 1 July 2008 1 January 2009 1 October 2008 1 July 2009 1 July 2009 * The effective dates stated here are those given in the original IASB/IFRIC standards and interpretations. As the Group prepares its financial statements in accordance with IFRS as adopted by the European Union, the application of new standards and interpretations will be subject to their having been endorsed for use in the EU via the EU Endorsement mechanism. In the majority of cases this will result in an effective date consistent with that given in the original standard or interpretation but the need for endorsement restricts the Group’s discretion to adopt standards early. The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s financial statements in the period of initial application. IFRS 3 (revised) will apply to business combinations arising from 1 January 2010. This will require recognition of subsequent changes in the fair value of contingent consideration in the income statement rather than against goodwill. In addition, transaction costs will be required to be recognised immediately in the income statement. 40 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 4 SEGMENT INFORMATION (continued) The Group’s activities are in one business segment: diagnostic testing kits. There are no other significant classes of business, either singularly or in aggregate. Accordingly, the Group’s primary segment reporting is by business segment, with geographical reporting being the secondary format. This structure has been adopted as it is consistent with the Group’s internal organisational and management structure, and with its system of internal financial reporting to key management, the purposes of evaluating performance, and making decisions about future allocations of resources. Business segments Segment revenues Segment result operating profit There are no unallocated expenses. Assets and liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information Segment capital expenditure Segment depreciation Segment amortisation of intangibles Segment impairment of trade receivables Segment earn out (credit) Segment share-based payments 2009 £ 2008 £ 5,438,313 3,491,580 572,968 298,237 7,519,584 741,643 8,261,227 871,725 3,024,281 3,896,006 134,433 85,484 98,750 455 – 77,948 7,416,722 640,240 8,056,962 726,325 3,870,176 4,596,501 157,721 61,554 57,604 1,192 (164,228) – Geographical segments The Group’s geographical segments are based on the location of its markets and customers. Sales to external customers disclosed in geographical segments are based on the geographical location of its customers. The analysis of segment assets and capital expenditure is based on the geographical location of the assets. Revenues UK Eurozone Other Europe North America South/Central America Asia and Far East Africa and Middle East 2009 £ 2008 £ 534,157 1,952,073 197,065 156,542 362,776 1,212,651 1,023,049 5,438,313 381,778 1,026,038 143,676 53,250 373,939 777,064 735,835 3,491,580 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 41 4 SEGMENT INFORMATION (continued) Segment assets UK Unallocated assets Total assets Segment liabilities UK Unallocated liabilities Total liabilities Capital expenditure UK 2009 £ 2008 £ 7,519,584 741,643 8,261,227 7,416,722 640,240 8,056,962 871,725 3,024,281 3,896,006 726,325 3,870,176 4,596,501 134,433 157,721 Unallocated assets comprise cash, income tax receivable and deferred taxation, derivative financial instruments and professional fees incurred in respect of potential acquisitions. Unallocated liabilities comprise interest-bearing loans, borrowings, other financial liabilities, derivative financial instruments, deferred taxation, income tax payable. 5 FINANCE COSTS Consolidated Interest payable on loans and bank overdrafts Exchange difference on loans Unwinding of discounts Fair value adjustment to acquisition Fair value adjustment to financial derivatives Finance leases Company Interest payable on loans and bank overdrafts Exchange difference on loans Unwinding of discounts Fair value adjustment to acquisition Fair value adjustment to financial derivatives 2009 £ 2008 £ 96,120 188,295 64,583 (57,907) 9,871 11,270 312,232 2009 £ 96,102 188,295 64,583 (57,907) 9,871 300,944 101,623 13,449 64,888 – 230 7,231 187,421 2008 £ 99,684 13,449 64,888 – 230 178,251 42 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 6 TAXATION Consolidated (a) Income tax expense Current tax – current year Current tax – prior year adjustment Deferred tax – current year Deferred tax – prior year adjustment Tax charge/(credit) for the year Consolidated (b) Reconciliation of total tax charge Factors affecting the tax charge for the year: Profit before tax Effective rate of taxation Profit before tax multiplied by the effective rate of tax Effects of: Expenses not deductible for tax purposes and permanent differences Transfers from previously unrecognised deferred tax asset Research and development tax credits Tax over-provided in prior years Tax charge/(credit) for the year Company (a) Income tax expense Current tax – current year Deferred tax – current year Deferred tax – prior year adjustment Tax charge/(credit) for the year (b) Reconciliation of the total tax charge Factors affecting the tax charge for the year: (Loss)/profit before tax Effective rate of taxation 2009 £ 2008 £ 59,274 (8,114) 19,293 (24,601) 45,852 2009 £ – (38,128) (82,087) 6,408 (113,807) 2008 £ 266,893 123,708 28% 30% 74,730 37,112 55,495 (16,214) (35,444) (32,715) 45,852 2009 £ 1,489 21,895 (18,156) 5,228 (57,806) (32,818) (30,445) (29,850) (113,807) 2008 £ – (19,953) – (19,953) (28,511) 84,584 28% 30% (Loss)/profit before tax multiplied by the effective rate of tax (7,983) 25,375 Effects of: Expenses not deductible for tax purposes Transfers from previously unrecognised deferred tax asset Tax over-provided in prior years Tax charge/(credit) for the year 47,581 (16,214) (18,156) 5,228 19,535 (64,863) – (19,953) Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 43 7 REVENUE AND EXPENSES Consolidated Revenues Revenue – sales of goods Finance income Total revenue No revenue was derived from exchange of goods or services in either of the two years. Consolidated Operating profit is stated after charging/(crediting) Depreciation Amortisation of intangibles Net foreign exchange (gains)/losses Write-down of inventories Research and development costs Impairment of trade receivables Operating lease rentals Share-based payments Auditors’ remuneration 2009 £ 2008 £ 5,438,313 3,491,580 6,157 12,892 5,444,470 3,504,472 2009 £ 2008 £ 85,484 98,750 (94,652) – 226,068 455 174,556 77,948 61,554 57,604 4,141 11,502 136,672 1,192 130,026 – – Fees payable to the company’s auditors for the audit of the annual accounts 15,000 15,000 – Fees payable to the company’s auditors for other services – Taxation – Local statutory audit of subsidiaries – Local statutory audit of the parent company – All other services All research and development costs were charged directly to administration costs in the income statement. Staff costs The average monthly number of employees (including directors) was: Consolidated Operations Management and administration Employee numbers Their aggregate remuneration comprised: Wages and salaries Social security costs Pension costs Share-based payments 20,950 17,500 2,500 – 17,700 17,500 2,500 8,000 2009 number 2008 number 35 21 56 2009 £ 17 19 36 2008 £ 1,423,073 140,265 45,355 77,948 852,799 114,219 15,280 – 1,686,641 982,298 44 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 7 REVENUE AND EXPENSES (continued) Equity-settled share-based payments Consolidated and Company The share-based payment plans are described below. There have been no cancellations or modifications to any of the plans since their inception. EMI Option Scheme and Unapproved Option Scheme: The plans are equity-settled plans and the fair value is measured at the grant date. Under the above plans, share options are granted to directors and employees of the company. The exercise price of the option is equal to the market price of the shares on the date of grant. The options vest one year after the date of grant and are not subject to any performance criteria. The fair value of the options is estimated at the grant date using the Black-Scholes pricing model taking into account the terms and conditions upon which the instruments were granted. The contractual life of each option granted is ten years and there is no cash settlement alternative. 1,833,289 share options were granted on 10 December 2008. All of these are still outstanding, and none are exercisable, at the year end. The weighted average fair value of options granted during the year was 15.84p with a remaining contractual life of 9.75 years at 31 March 2009. The following table lists the inputs to the model used for the year end 31 March 2009. Dividend yield Expected volatility Risk free interest rate Expected life of option Share price at date of grant 2009 2008 0% 84% 2% 10 years – 19p – – – The expected life of the options is based on management’s assumption of the options’ life due to the lack of any historical data on the exercise period of these options. The assumption takes into account the experience of employees and directors and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that historical volatility over a period similar to the life of the option is indicative of future trends, which may not necessarily be the actual outcome. Directors’ remuneration Consolidated Fees Emoluments Contributions to personal pension Members of a defined contribution pension scheme at the year end: Company Fees Emoluments 2009 £ 2008 £ 50,462 215,000 13,458 278,920 2 2009 £ 50,462 215,000 265,462 23,750 157,500 5,250 186,500 2 2008 £ 23,750 157,500 181,250 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 45 8 ACQUISITION OF SUBSIDIARIES On 3 September 2007, the Group acquired 100% of the voting shares of Genesis Diagnostics Ltd (‘Genesis’) and Cambridge Nutritional Sciences Ltd (‘CNS’), both unlisted companies based in Cambridgeshire, UK. Genesis is an established business in the medical diagnostics industry developing, producing and selling a range of test kits specialising in the areas of autoimmune disease, infectious disease and food intolerance. CNS provides a testing service for food intolerance and various other diseases. The acquisition was accounted for using the purchase method of accounting, and the consolidated financial statements included the results of Genesis and CNS in the prior year for the seven-month period from the acquisition date. The fair values of the identifiable assets and liabilities of Genesis and CNS at the date of acquisition were: Intangible assets Property, plant and equipment Inventories Trade and other receivables Cash and cash equivalents Borrowings Trade and other payables Deferred tax liability Net assets Goodwill on acquisition Fair value of consideration Acquisition costs Total £ 1,975,000 395,504 428,319 617,515 382,073 (45,500) (289,428) (601,199) 2,862,284 3,194,351 6,056,635 5,978,303 78,332 6,056,635 Cost of the acquisition The total acquisition cost of £6,056,635 comprised the following: a cash payment of £3,200,000; 4,461,220 shares in the Company with a fair value of £1,427,590 based on the market price at acquisition; loan notes totalling £1,100,000 discounted to a fair value of £959,539; an earn-out based on the future performance of certain products, estimated at £400,000 discounted to a present value of £329,540; a deferred cash payment of £61,634 payable 12 months after completion; and acquisition costs of £78,332. The earn-out accrues at 7% of sales of the relevant products over the three-year period from 1 November 2006 to 31 October 2009, and is payable in three annual instalments once relevant amounts are finally agreed. Funding To fund the cost of the acquisition, the Group raised £2,200,000 (before expenses of £455,889) via the placing of 7,333,333 new ordinary shares at a price of 30p per share. In addition, the Group borrowed £1.2 million under a senior term loan facility from its principal banker, repayable over five years. The loan carried interest at 2.5% over base rate for the first year and fell to 2% over base rate thereafter as the Group remained within agreed covenants. The vendors of Genesis and CNS were issued loan notes of £1,100,000 repayable in three equal instalments on anniversary dates in 2012, 2013 and 2014. Interest accrues at base rate and is payable with the final instalment. Cash outflow on acquisition Net cash acquired with Genesis and CNS Acquisition costs Cash paid Deferred cash payment Contingent consideration payments Net cash outflow 2009 £ 2008 £ – – – 382,074 (78,332) (3,200,000) (61,634) (105,837) (167,471) – – (2,896,258) 46 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 9 INTANGIBLES Consolidated Cost At 1 April 2007 On acquisition At 31 March 2008 Adjustment related to contingent consideration At 31 March 2009 Accumulated amortisation and impairment At 1 April 2007 Amortisation charge in the year At 31 March 2008 Amortisation charge in the year At 31 March 2009 Net book value 31 March 2009 31 March 2008 Goodwill £ Technology assets £ Total £ – 3,194,351 3,194,351 (133,297) – 1,975,000 1,975,000 – – 5,169,351 5,169,351 (133,297) 3,061,054 1,975,000 5,036,054 – – – – – – 57,604 57,604 98,750 – 57,604 57,604 98,750 156,354 156,354 3,061,054 3,194,351 1,818,646 1,917,396 4,879,700 5,111,747 Impairment testing of goodwill The Group tests goodwill annually for impairment, or more frequently if there are indicators of impairment. The carrying amount of goodwill is indicated in the table above. The recoverable amount of Genesis-CNS has been determined based on a value in use calculation using cash flow projections based on the financial budget approved by the Board covering the period to 31 March 2010. The key assumption used for the budget is the revenue opportunity for existing products and in particular, the opportunity for microarray and macroarray-based products. The discount rate applied to cash flows is 14% reflecting the pre-tax weighted average cost of capital (WACC) for the group. The WACC is the weighted average cost of pre-tax cost of debt financing and the pre-tax cost of equity financing. Cash flows beyond the budget period are extrapolated over the next 4 years using a growth rate of 7% that equates to the current rate of growth seen globally in the IVD industry. Thereafter, a nil growth rate has been assumed for prudence. As a result, there has been no impairment to the carrying value of goodwill. Sensitivity analysis Base forecasts show significant headroom above carrying value. Sensitivity analysis has been undertaken to assess the impact of any reasonably possible change in key assumptions. There is no reasonably possible change that would cause the carrying value to exceed the recoverable amount. The adjustment relating to contingent consideration amounting to £133,297 results from a reassessment of the Genesis/CNS earn out. This is further analysed in Note 20. Other than for the adjustment above, there has been no impairment to the carrying value of goodwill. Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 47 10 PROPERTY, PLANT AND EQUIPMENT Consolidated Cost At 1 April 2007 Additions On acquisition Disposal At 31 March 2008 Additions Disposal At 31 March 2009 Accumulated amortisation and impairment At 1 April 2007 Charge in the year On acquisition Disposal At 31 March 2008 Charge in the year Disposal At 31 March 2009 Net book value 31 March 2009 31 March 2008 Leasehold improvements £ Plant and machinery £ Motor vehicles £ Total £ 81,044 – 49,156 – 130,200 – – 509,284 157,721 662,314 – 1,329,319 134,433 (398) 130,200 1,463,354 28,210 10,972 13,428 – 52,610 13,020 – 454,123 47,046 323,233 – 824,402 69,810 (391) 65,630 893,821 – – 36,378 (7,731) 28,647 – (10,479) 18,168 – 3,536 15,682 (711) 18,507 2,654 (8,336) 12,825 590,328 157,721 747,848 (7,731) 1,488,166 134,433 (10,877) 1,611,722 482,333 61,554 352,343 (711) 895,519 85,484 (8,727) 972,276 64,570 77,590 569,533 504,917 5,343 10,140 639,446 592,647 The net book value of plant and machinery held under finance leases at 31 March 2009 is £280,671 (2008: £196,949). 11 INVENTORIES Raw materials Work in progress Finished goods and goods for resale 2009 £ 2008 £ 527,509 121,135 113,736 762,380 434,588 132,406 60,043 627,037 48 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 12 TRADE AND OTHER RECEIVABLES Consolidated Trade receivables Prepayments and other receivables 2009 £ 2008 £ 1,070,348 184,615 1,254,963 962,617 122,674 1,085,291 The Directors consider that the carrying amount of trade receivables and other receivables approximates their fair value. Company Prepayments and other receivables Due from subsidiary companies Analysis of trade receivables Consolidated Neither impaired nor past due Past due but not impaired Company Neither impaired nor past due Ageing of past due but not impaired trade receivables Consolidated Up to 3 months Between 3 and 6 months More than 6 months 2009 £ 2008 £ 42,852 743,419 786,271 32,818 716,604 749,422 2009 £ 2008 £ 838,042 232,306 2009 £ 579,744 382,873 2008 £ 743,419 716,604 2009 £ 2008 £ 202,732 23,935 5,639 325,473 57,400 – The Directors consider that the carrying amount of trade receivables and other receivables approximates their fair value. The credit quality of trade receivables that are neither past due nor impaired is assessed internally with reference to historical information relating to counterparty default rates. Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 49 13 INTEREST-BEARING LOANS AND BORROWINGS AND FINANCIAL INSTRUMENTS Consolidated Current Bank loans Obligations under finance leases Non-current Bank loans Obligations under finance leases Other loans Bank loans comprise the following: £1,017,486 variable rate loan 2012 (base rate + 2.0%: 2008 base rate +2.5%) Less current instalments Consolidated Other loans comprise the following: Vendor loan – 2014 (base rate) 2009 £ 2008 £ 290,710 81,594 372,304 241,325 47,544 288,869 726,776 136,322 1,012,165 1,875,263 852,124 117,914 1,006,874 1,976,912 1,017,486 1,017,486 (290,710) 726,776 1,093,449 1,093,449 (241,325) 852,124 2009 £ 2008 £ 1,012,165 1,012,165 1,006,874 1,006,874 The term loans are secured by a floating charge over the assets of the Group. Cross guarantees between Omega Diagnostics Group PLC, Omega Diagnostics Limited, Genesis Diagnostics Limited and Cambridge Nutritional Sciences Limited are in place, and Omega Diagnostics Group PLC has given the Bank of Scotland a debenture secured over the assets of the Company. Two Directors have also provided personal guarantees of £100,000 in support of the term loan. There are two Bank of Scotland term loans of £420,000 (2008: £540,000) and US$855,540 (2008: US$1,099,980) repayable in equal monthly instalments of £10,000 and US$20,370, both with a maturity date of 4 September 2012. In September 2008, the interest margin decreased from 2.5% to 2.0% as the Group remained within all its bank covenants throughout the first year of the loans. Company Current Bank loans Non-current Bank loans Other loans Bank loans comprise the following: £1,017,486 variable rate loan 2012 (base rate + 2.0%: 2008 +2.5%) Less current instalments 2009 £ 2008 £ 290,710 290,710 241,325 241,325 726,776 1,012,165 1,738,941 852,124 1,006,874 1,858,998 1,017,486 1,017,486 (290,710) 726,776 1,093,449 1,093,449 (241,325) 852,124 50 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 13 INTEREST-BEARING LOANS AND BORROWINGS AND FINANCIAL INSTRUMENTS (continued) Company Other loans comprise the following: Vendor loan – 2014 (base rate) 14 TRADE AND OTHER PAYABLES Consolidated Trade payables Social security costs Accruals and other payables 2009 £ 2008 £ 1,012,165 1,012,165 1,006,874 1,006,874 2009 £ 2008 £ 667,967 42,582 161,176 871,725 346,241 35,143 344,941 726,325 Trade payables and other payables comprise amounts outstanding for trade purchases and ongoing costs. The Directors consider that the carrying amount of trade payables approximates their fair value. Company Trade payables Accruals and other payables Due to subsidiary companies 2009 £ 2008 £ 91,885 67,718 396,875 556,478 25,016 224,492 156,089 405,597 Trade payables and other payables comprise amounts outstanding for trade purchases and ongoing costs. The Directors consider that the carrying amount of trade payables approximates their fair value. 15 DEFERRED TAXATION The deferred tax asset is made up as follows: Consolidated Decelerated capital allowances Temporary differences Tax losses carried forward Company Tax losses carried forward Temporary differences 2009 £ 2008 £ 18,228 23,061 66,241 107,530 2009 £ – 16,214 16,214 35,442 1,708 87,160 124,310 2008 £ 19,953 – 19,953 A deferred tax asset has been recognised for the carry forward of unused tax losses to the extent that it is probable that future taxable profits will be available against which the unused tax losses can be utilised. Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 51 15 DEFERRED TAXATION (continued) The deferred tax liability is made up as follows: Consolidated Fair value adjustments on acquisition Accelerated capital allowances 16 SHARE CAPITAL Company Authorised share capital Ordinary shares of 4 pence each Deferred shares of 0.9 pence each Issued and fully paid share capital At the beginning of the year Consolidation of shares on 40:1 basis Issued during the year At the end of the year Shares allotted for cash Aggregate nominal value Share premium Expense of issue Consideration received Shares allotted for non-cash consideration Aggregate nominal value Share premium Increase in issued capital Consolidated Issued and fully paid share capital At the beginning of the year Consolidation of shares on 40:1 basis Issued during the year At the end of the year 2009 £ 2008 £ 564,481 10,584 575,065 579,058 12,308 591,366 2009 number 2008 number 77,500,000 77,500,000 600,000,000 600,000,000 14,875,694 123,245,615 – 3,081,140 757,213 15,632,907 11,794,554 14,875,694 £ – – – – 30,289 575,482 605,771 2009 number £ 293,333 1,906,667 (455,889) 1,744,111 178,449 1,249,142 1,427,591 2008 number 14,875,694 123,245,615 – 3,081,140 757,213 15,632,907 11,794,554 14,875,694 52 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 16 SHARE CAPITAL (continued) Shares allotted for cash Aggregate nominal value Share premium Expense of issue Consideration received Shares allotted for non-cash consideration Aggregate nominal value Share premium Increase in issued capital £ – – – – £ 293,333 1,906,667 (455,889) 1,744,111 30,289 575,482 605,771 178,449 1,249,142 1,427,591 The Company granted warrants to those shareholders in Quintessentially English plc, on the register just prior to the reverse transaction in 2006. These warrants entitle those shareholders to subscribe for a total of 139,710 new ordinary shares. The warrants have an exercise price of 80p per share and an expiry date of 19 September 2009. During the year, the Company granted options over 1,833,289 ordinary shares at an exercise price of 19p per share. The options will expire if not exercised within ten years of the date of grant. In accordance with the Omega earn-out, additional shares were issued to the original shareholders of Omega Diagnostics Limited in settlement of the earn-out of £605,771. The number of new ordinary shares issued was 757,213. 17 COMMITMENTS AND CONTINGENCIES Operating lease commitments Future minimum rentals payable under non-cancellable operating leases are as follows: Consolidated Land and buildings: Within 1 year Within 2 to 5 years Other: Within 1 year Within 2 to 5 years After 5 years 2009 £ 2008 £ 163,374 374,559 163,374 537,933 10,599 22,311 – 10,546 23,906 1,800 Land and buildings leases in force for Omega Diagnostics Ltd premises extend to June 2011, at which point they may be re-negotiated. The land and buildings leases in force for the premises of Genesis Diagnostics Ltd and Cambridge Nutritional Sciences extend to March 2013, at which point they may be re-negotiated. Other leases are in force for office equipment items and extend to time periods ranging from June 2009 to March 2014. The leases may be extended at the expiry of their term. Performance bonds The Group has performance bonds and guarantees in place amounting to £30,000 at 31 March 2009 (2008: £30,000). Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 53 18 RELATED PARTY TRANSACTIONS Remuneration of key personnel The remuneration of the Directors, who are the key management personnel of Omega Diagnostics Group PLC, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures: Short-term employee benefits Share-based payments Post-employment benefits 2009 £ 2008 £ 265,462 77,948 13,458 345,388 181,250 – 5,250 186,500 Included within short-term employee benefits are amounts paid to MBA Consultancy of £25,000 (2008: £nil), a company controlled by David Evans and £16,250 (2008: £15,000) to Alberdale Catalyst Ltd, a company controlled by Michael Gurner. Other related party transactions During the year there have been transactions between the parent Company, Omega Diagnostics Limited, Genesis Diagnostics Limited and Cambridge Nutritional Sciences, largely relating to payment of fees. The amounts outstanding at the year end are as follows: At 31 March 2009 ODG £ ODL £ Genesis £ CNS £ Omega Diagnostics Group PLC (Entity) – (743,419) Omega Diagnostics Limited Genesis Diagnostics Limited Cambridge Nutritional Sciences Limited At 31 March 2008 743,419 (187,660) (209,215) ODG £ – (59,394) 7,163 ODL £ Omega Diagnostics Group PLC (Entity) – (716,604) Omega Diagnostics Limited Genesis Diagnostics Limited Cambridge Nutritional Sciences Limited 716,604 (34,032) (122,057) – (14,740) 10,000 During the year there were transactions between the Company and its subsidiaries as follows: Balance at 1 April 2008 Charges to subsidiary companies Charges from subsidiary companies Transfers of cash to subsidiary companies Transfers of cash from subsidiary companies Balance at 31 March 2009 187,660 59,394 – 96,035 Genesis £ 34,032 14,740 – (40,057) 209,215 (7,163) (96,035) – CNS £ 122,057 (10,000) 40,057 – 2009 £ 2008 £ 560,515 111,753 959,658 (290,286) 802,509 (1,685,851) 346,544 644,302 (180,958) 665,418 (680,000) 560,515 Related party transactions in connection with the aborted transaction are disclosed in Note 19 below. There were no balances outstanding at the year end. Note 13 discloses personal guarantees made by two of the Directors in support of the bank term loan. Under the Omega earn-out (see Note 16), two of the Directors were issued with 420,567 ordinary shares in the Company with a market value of £127,222 at the time of issue. 54 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 19 EXCEPTIONAL ITEMS Exceptional administration costs During the year to 31 March 2009, the Company was involved in the planned acquisition of another company which required the Company to raise new funds to complete the acquisition. The funding environment deteriorated throughout the process, due to the turmoil in worldwide financial markets and, in early November, the Company concluded that due to these challenging circumstances it was not possible to raise sufficient funds to complete the transaction. The Company incurred costs of £265,920 in connection with the aborted transaction but it was able to significantly reduce the impact of these costs to 30% of the total by obtaining indemnities from third parties for 70% of these costs. Among these third parties were Dr Mike Walker and David Evans who agreed to cover 30% and 10% of the costs respectively under an agreement entered into on 3 September 2008. As a result the financial impact of the aborted transaction to the Company has been limited to £80,301. Due to the one-off nature and value of these costs, they are separately disclosed and treated as an exceptional item in the income statement so that they do not impact on the results from normal trading operations. 20 OTHER FINANCIAL LIABILITIES Consolidated and Company Earn-out relating to Omega As at 1 April 2007 Fair value adjustment through finance costs Fair value adjustment through administration costs Earn-out relating to Omega as at 31 March 2008 Earn-out relating to Genesis-CNS acquisition during the year As at 31 March 2008 As at 1 April 2008 Fair value adjustment to Genesis-CNS earn-out through finance costs Fair value adjustment to Genesis-CNS earn-out through goodwill Genesis-CNS earn-out paid in year Shares allotted for non-cash consideration to settle Omega earn-out As at 31 March 2009 The earn-out relating to Genesis/CNS amounting to £131,580 is contained within current financial liabilities. 21 INVESTMENTS Company The Company’s investments in subsidiaries which are all 100% owned are comprised of the following: Investment in Omega Diagnostics Limited Investment in Genesis Diagnostics Limited Investment in Cambridge Nutritional Sciences Limited Investment in Bealaw (692) Limited Investment in Bealaw (693) Limited £ 705,112 64,888 (164,228) 605,772 329,540 935,312 935,312 41,173 (133,296) (105,837) (605,772) 131,580 2009 £ 2008 £ 1,752,884 1,845,065 4,078,274 1 1 1,752,884 1,933,930 4,122,706 1 1 7,676,225 7,809,522 The movement in the cost of the investment in Genesis Diagnostics Ltd of £88,865 reflects the change to the earn-out calculation under IFRS 3. The movement in the cost of the investment in Cambridge Nutritional Sciences Ltd of £44,432 reflects the change to the earn-out calculation under IFRS 3. Bealaw (692) Limited and Bealaw (693) Limited are both dormant companies which have never traded. Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 55 22 EARNINGS PER SHARE Basic earnings per share are calculated by dividing net profit for the year attributable to ordinary equity holders of the Group by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share are calculated by dividing the net profit attributable to ordinary equity holders of the Group by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. Diluting events are excluded from the calculation when the average market price of ordinary shares is lower than the exercise price. Net profit attributable to equity holders of the Group Basic average number of shares Omega earn-out Diluted weighted average number of shares 2009 £ 2008 £ 221,041 237,515 2009 Number 2008 Number 15,356,991 – 9,921,322 757,213 15,356,991 10,678,535 Earnings per share before exceptional items The Group presents as exceptional items on the face of the income statement, those material items of income and expense which, because of the nature and the expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in the year, so as to facilitate comparison with prior periods and to assess better trends in financial performance. To this end, basic and diluted earnings per share are also presented on this basis using the weighted average number of ordinary shares, both basic and diluted. Net profit before exceptional items attributable to equity holders of the Group is derived as follows: Net profit attributable to equity holders of the Group Exceptional items Profit before exceptional items attributable to equity holders of the Group 23 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 2009 £ 221,041 80,301 301,342 2008 £ 237,515 – 237,515 The Group’s principal financial instruments comprise loans, finance leases and cash. The main purpose of these financial instruments is to manage the Group’s funding and liquidity requirements. The Group has other financial instruments, such as trade receivables and trade payables, which arise directly from its operations. The principal financial risks to which the Group is exposed are those relating to foreign currency, credit, liquidity and interest rate. These risks are managed in accordance with Board-approved policies. Foreign currency risk The Group buys and sells goods and services in currencies other than the functional currency of its operations. The Group has US dollar and euro denominated bank accounts. Where possible, the Group will offset currency exposure where purchases and sales can be made from these foreign currency bank accounts. The Group’s non-sterling revenues, profits, assets, liabilities and cash flows can be affected by movements in exchange rates. It is Group policy not to engage in any speculative transaction of any kind. As at 31 March 2009, the Group has not entered into any hedge transactions. 56 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 23 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) The following table demonstrates the sensitivity to a possible change in currency rates on the Group’s profit before tax through the impact of sterling weakening against the US dollar, the euro and the Canadian dollar. 2009 Trade and other receivables Trade and other payables Cash and cash equivalents Bank loans 2008 Trade and other receivables Trade and other payables Cash and cash equivalents Bank loans Decrease in currency rate Effect on profit before tax and equity £ 5% 5% 5% 5% 5% 5% 5% 5% 15,626 (7,510) 16,452 (31,447) 8,147 (3,800) 12,777 (29,129) An increase in currency rate of 5% would have a similar opposite effect. The sensitivity around bank loans above represents the entire impact on the Company’s profit before tax and equity. Credit risk The Group’s credit risk is primarily attributable to its trade receivables. The Group conducts its operations in many countries, so there is no concentration of risk in any one area. In most cases, the Group grants credit without security to its customers. Credit worthiness checks are undertaken before entering into contracts with new customers, and credit limits are set as appropriate. The amounts presented in the balance sheet are net of allowance for doubtful receivables. An allowance for impairment is made where there is an identifiable loss event which, based on previous experience, is evidence of a reduction in the recoverability of cash flows. Capital management An explanation of the Group’s capital management process and objectives is set out in the Capital management section on page 18 of the Financial Review. Liquidity risk The Group’s objective is to maintain a balance between continuity of funding and flexibility of working capital arrangements through the use of bank loans. The Group also maintains its available financial assets to ensure continued liquidity. Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 57 23 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) The table below summarises the maturity profile of the Group’s financial liabilities at 31 March 2009 based on the undiscounted cash flows of liabilities based on the earliest date on which the group can be required to pay. Consolidated 2009 Trade and other payables Obligations under finance lease Bank loans Vendor loan 2008 Trade and other payables Obligations under finance lease Bank loans Vendor loan Less than 3 months £ 3 to 12 months £ 1 to 5 years £ More than 5 years £ Total £ 829,143 20,902 78,784 – – 60,692 233,686 – – 136,322 749,135 733,334 928,829 294,378 1,618,791 629,548 11,536 75,367 – 61,634 36,008 222,207 – – 117,914 932,957 366,666 716,451 319,849 1,417,537 – – – 478,337 478,337 – – – 1,239,128 1,239,128 829,143 217,916 1,061,605 1,211,671 3,320,335 691,182 165,458 1,230,531 1,605,794 3,692,965 The table below summarises the maturity profile of the Company’s financial liabilities at 31 March 2009 based on the undiscounted cash flows of liabilities based on the earliest date on which the Company can be required to pay. Company 2009 Trade and other payables Bank loans Vendor loan 2008 Trade and other payables Bank loans Vendor loan Less than 3 months £ 3 to 12 months £ 1 to 5 years £ More than 5 years £ Total £ 556,478 78,784 – – 233,686 – – 749,135 733,334 635,262 233,686 1,482,469 – – 478,337 478,337 405,597 75,367 – 61,634 222,207 – – 932,957 366,666 480,964 283,841 1,299,623 – – 1,239,128 1,239,128 556,478 1,061,605 1,211,671 2,829,754 467,231 1,230,531 1,605,794 3,303,556 Interest rate risk All of the Group’s borrowings are at variable rates of interest. The Group has an exposure to interest rate risk on changes in US dollar and sterling interest rates. To manage the interest rate risk, the Group has taken out interest rate hedge instruments relative to the two bank loans listed below which will be repaid by September 2012. The change in fair value of these interest rate hedge instruments has been taken to the income statement in full. 58 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notes to the Financial Statements (continued) 23 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) The following table demonstrates the sensitivity to a possible change in interest rates on the Group’s profit before tax through the impact on floating rate borrowings and cash balances. Consolidated 2009 Cash and cash equivalents Bank loans Vendor loan 2008 Cash and cash equivalents Bank loans Vendor loan Increase in basis points Effect on profit before tax and equity £ 25 25 25 25 25 25 (1,406) (2,639) (2,750) (1,113) (1,442) (1,604) A decrease of 25 basis points would have a similar opposite effect. The following table demonstrates the sensitivity to a possible change in interest rates on the Company’s profit before tax through the impact on floating rate borrowings and cash balances. Company 2009 Cash and cash equivalents Bank loans Vendor loan 2008 Cash and cash equivalents Bank loans Vendor loan Increase in basis points Effect on profit before tax and equity £ 25 25 25 25 25 25 (240) (2,639) (2,750) (829) (1,442) (1,604) A decrease of 25 basis points would have a similar opposite effect. Fair values The carrying amount for all categories of financial assets and liabilities disclosed on the balance sheet and in the related notes to the accounts is equal to the fair value of such assets and liabilities as at both 31 March 2009 and 31 March 2008. The monetary value attributable to these financial assets and liabilities is the same value that has been disclosed in the related notes to the accounts. The valuation methods used to fair value the financial assets and liabilities have been disclosed in Note 3 of the Notes to the Financial Statements under the heading of Financial instruments. The carrying amount recorded in the balance sheet of each financial asset as at 31 March 2009 and 31 March 2008, including derivative financial instruments, represent the Group’s maximum exposure to credit risk. Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com 59 23 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) Derivative financial instruments Consolidated and Company Included in non-current assets Interest rate instruments Included in non-current liabilities Interest rate instruments The derivative financial instruments comprise: a) an interest rate cap of 5.5%, the floating rate option being Bank of England daily base rate. b) an interest cap and floor of 5.0% and 2.25% respectively, the floating option rate being USD-Libor. The Group does not hold or issue derivatives for speculative or trading purposes. 2009 £ 2008 £ 599 3,419 10,700 3,649 60 Financial Statements Annual Report and Accounts 2009 www.omegadiagnostics.com Notice of Annual General Meeting Notice is hereby given that the Annual General Meeting of the Company will be held at the offices of the Company, Omega House, Hillfoots Business Village, Alva FK12 5DQ on 27 August 2009 at 11am for the following purposes: Ordinary business 1. To receive the reports of the Directors and the Auditors and the audited accounts for the year ended 31 March 2009. 2. To reappoint Ernst & Young LLP as Auditors of the Company to hold office until the conclusion of the next general meeting at which accounts are laid before the Company and that their remuneration be fixed by the Directors. 3. To re-elect Mr Michael Gurner as a Director of the Company. 4. That the Directors be and are generally and unconditionally authorised for the purposes of section 80 of the Companies Act 1985 (Act) to exercise all powers of the Company to allot relevant securities (within the meaning of that section) up to an aggregate nominal amount of £312,658.12, provided that this authority shall (unless renewed, varied or revoked by the Company in general meeting) expire at the completion of the next following annual general meeting of the Company, but the Company may, before such expiry, make an offer or agreement which would or might require relevant securities to be allotted after such expiry, and the Directors may allot relevant securities in pursuance of such offer or agreement notwithstanding that the authority conferred by this resolution has expired. This authority is in substitution of all previous authorities conferred upon the Directors pursuant to section 80 of the Act, but without prejudice to the allotment of any relevant securities already made or to be made pursuant to such authorities. Special business 5. That subject to the passing of resolution 4 the Directors be and they are empowered pursuant to section 95 of the Companies Act 1985 (the ‘Act’) to allot equity securities (as defined in the Act) wholly for cash pursuant to the authority conferred by resolution 4 and/or where the allotment constitutes an allotment of equity securities by virtue of section 94(3A) of the Act, as if section 89(1) of the Act did not apply to any such allotment, provided that this power shall be limited to the allotment of equity securities: (i) in connection with an offer of such securities by way of rights to holders of ordinary shares in proportion (as nearly as may be practicable) to their respective holdings of such shares, but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or any legal or practical problems under the laws of any territory, or the requirements of any regulatory body or stock exchange; and (ii) otherwise than pursuant to sub-paragraph (i) above up to an aggregate nominal amount of £213,797.44 and shall expire at the completion of the next following annual general meeting of the Company, save that the Company may, before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of any such offer or agreement notwithstanding that the power conferred by this resolution has expired. By order of the Board Kieron Harbinson Company Secretary 6 July 2009 Notes: 1. A member entitled to attend and vote at the meeting convened by the notice set out above is entitled to appoint a proxy to exercise all or any of your rights to attend, speak and vote at the meeting. You may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares. A proxy need not be a member of the company. A form of proxy is enclosed. To be effective, it must be deposited at the office of the Company’s Registrars, Share Registrars Limited, Suite E, First Floor, 9 Lion and Lamb Yard, West Street, Farnham, Surrey GU9 7LL, so as to be received not later than 48 hours before the time appointed for holding the Annual General Meeting. Completion of the proxy does not preclude a member from subsequently attending and voting at the meeting in person if he or she so wishes. Copies of contracts of service of directors with the company or with any of its subsidiary undertakings, will be available for inspection at the registered office of the company during normal business hours (Saturdays and public holidays excepted) from the date of this notice until the conclusion of the AGM. In accordance with Regulation 41 of the Uncertificated Securities Regulations 2001, only those members entered on the company’s register of members not later than 25 August 2009 or, if the meeting is adjourned, shareholders entered on the company’s register of members not later than 48 hours before the time fixed for the adjourned meeting shall be entitled to attend and vote at the meeting. 2. 3. 4. Registered in England and Wales number 5017761 www.omegadiagnostics.com Omega Diagnostics Group PLC Omega House Hillfoots Business Village Alva FK12 5DQ Scotland United Kingdom Tel: +44 (0)1259 763030 Fax: +44 (0)1259 761853 Email: odl@omegadiagnostics.co.uk Advisers Nominated Adviser and Broker Cenkos Securities Ltd 6.7.8 Tokenhouse Yard London EC2R 7AS Auditors Ernst & Young LLP Ten George Street Edinburgh EH2 2DZ Solicitors Brodies LLP 15 Atholl Crescent Edinburgh EH3 8HA Share Registrar Share Registrars Limited Suite E First Floor, 9 Lion and Lamb Yard Farnham Surrey GU9 7LL PR Wallbrook PR Ltd 4 Lombard Street London EC3V 9HD Country of Incorporation Omega Diagnostics Group PLC England & Wales Registered No. 5017761 Omega Diagnostics Group PLC is an AIM-quoted public company on the London Stock Exchange. Omega sells a wide range of products, primarily in the immunoassay, in-vitro diagnostics (IVD) market, through a strong distribution network in over 100 countries. Omega operates in a niche market in supplying tests for specific infectious diseases, autoimmune disease and food intolerance. year on year ... Sales £5.4m +56% £2,032k 07 £3,492k 08 £5,438k 09 Gross profit £3.3m +76% £831k 07 £1,898k 08 £3,344k 09 Gross profit 61.5% 61.5% 09 54.4% 08 40.9% 07 Operating profit £573k +92% £298k 08 £573k 09 (£886k) 07 www.omegadiagnostics.com Delivering strong results i O m e g a D a g n o s t i c s G r o u p P L C A n n u a l R e p o r t a n d A c c o u n t s 2 0 0 9 Omega Diagnostics Group PLC Subsidiary Companies are Omega Diagnostics Ltd, Genesis Diagnostics Ltd and Cambridge Nutritional Sciences Ltd Omega Diagnostics Group PLC Omega House Hillfoots Business Village Alva FK12 5DQ Scotland United Kingdom Tel: +44 (0)1259 763030 Fax: +44 (0)1259 761853 Email: odl@omegadiagnostics.co.uk Omega Diagnostics Ltd Formed in 1987, ODL specialises in infectious diseases, particularly Syphilis, TB and Dengue Fever. www.omegadiagnostics.com G E N E S I S Genesis Diagnostics Ltd Formed in 1994, Genesis is one of the UK’s leading manufacturers of high quality ELISA based diagnostic kits. The Company specialises in the research, development and production of kits to aid the diagnosis of autoimmune and infectious diseases, and for the detection of immune reactions to food. www.elisa.co.uk Cambridge Nutritional Sciences Ltd Formed in 2001, CNS provides clinical analysis to the general public, clinics and health professionals as well as supplying the consumer Food Detective™ test. www.cambridge-nutritional.com Omega Diagnostics Group PLC Annual Report and Accounts 2009 

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