Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Accelerating growth Strategic Report Operational and Financial Highlights Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 We have developed a strategy for accelerated growth Operational highlights Appointment of Colin King as Chief Operating Officer on 3 August 2015 Food intolerance segment delivering the fastest growth in revenue at the highest gross margin Completion of the fit-out of the laboratory and manufacturing facility in Pune, India, with prototype devices made for a range of malaria rapid tests We have a method of running Visitect® CD4 test devices which indicates functionality up to 35°C Automated Allergy programme ready for commercial launch, with 41 allergens optimised and successfully evaluated at sites across Europe Financial highlights Sales (£m) Gross profit (£m) Gross profit (%) Adjusted profit before tax (£m) £12.7m 5% £8.1m 6% 63.8% 0.4% £1.4m 11.6 12.1 12.7 7.4 7.7 8.1 63.6 63.4 63.8 1.4 1.4 1.1 14 15 16 14 15 16 14 15 16 14 15 16 Find up-to-date information at www.omegadiagnostics.com Omega Diagnostics Group PLC Omega Diagnostics Group PLC @OmegaDiagnostic Contents Strategic Report IFC Operational and Financial Highlights 02 At a Glance 04 Our Strategy 05 Our Business Model 06 Chairman’s Statement 08 Products and Markets Overview 14 Chief Executive’s Review 18 Risks and Risk Management 20 Financial Review Governance 22 Board of Directors 23 Senior Management Team 24 Corporate Governance Report 26 Directors’ Remuneration Report 28 Directors’ Report 29 Statement of Directors’ Responsibilities Financial Statements 30 31 Independent Auditors’ Report Consolidated Statement of Comprehensive Income 31 Adjusted Profit Before Taxation 32 Consolidated Balance Sheet 33 Consolidated Statement of Changes in Equity 34 Consolidated Cash Flow Statement 35 Company Balance Sheet 36 Company Statement of Changes in Equity 37 Company Cash Flow Statement 38 Notes to the Financial Statements 61 Notice of Annual General Meeting 62 Notes to the Notice of Annual General Meeting 63 Advisers 01 www.omegadiagnostics.com At a Glance Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 A leading company in the fast growing area of immunoassay, with a global presence in over 100 countries Our range of products Omega Diagnostics Group PLC’s subsidiaries provide high quality in-vitro diagnostics (IVD) products for use in hospitals, blood banks, clinics and laboratories in over 100 countries and specialise in the areas of allergy and autoimmune, food intolerance and infectious diseases. Allergy and autoimmune Food intolerance Infectious disease Main products: − Allergozyme® − Allergodip® − Genesis ELISA − Allersys® Main products: Main products: − Genarrayt®/Foodprint® − Immutrep® Syphilis − Food Detective® − Micropath® bacterial tests − CNS laboratory service − Avitex® latex serology tests The Group develops, manufactures and sells allergy tests for over 600 allergens. It has more than 20 years’ experience in the development of products for the diagnosis of allergies and a substantial understanding and knowledge in the production and standardisation of allergen extracts. The autoimmune panel is a range of enzyme immunoassay (EIA) tests for the detection and quantification of multiple autoimmune diseases. The Group provides a range of tests and instrumentation associated with food intolerance and gut health. Based on quantifying total immunoglobulin G (IgG) reactions to over 220 different foods, these tests are designed to support both health practitioners and individuals who wish to make informed decisions when managing their health. The Group specialises in a range of diagnostic kits for infectious diseases, in particular for syphilis, febrile antigens and latex serology tests. Enzyme immunoassays are available for a variety of viral, bacterial and fungal infections, complemented by a diverse selection of agglutination, fluorescence and rapid tests. Revenue share £3.2m Revenue share £7m Revenue share £2.5m 25% 55% 20% 02 Strategic Report Our global presence A global reach allows the Group to benefit from fast growing economies in emerging markets while simultaneously mitigating challenging economic and political instability in certain regions of the world. Countries where our products are distributed Countries where we have a direct presence Devon Alva Cambridge Located in Devon, England, Co-Tek (South West) Limited manufactures and sells a range of tests for diagnosing bacterial infections. Employees Square footage 2 1,212 Located in Alva, Clackmannanshire, Scotland, Omega Diagnostics Limited manufactures and sells a range of immunoassay tests, predominantly for infectious diseases. Its main product line includes a range of screening and confirmatory tests for syphilis. Many products are capable of being used in resource-limited settings and, when used, do not require instrumentation or laboratory facilities to obtain a result. Employees Square footage 51 23,750 Located in Cambridgeshire, England, Genesis Diagnostics Limited and its sister company Cambridge Nutritional Sciences Limited are amongst the UK’s leading manufacturers of high quality enzyme- linked immunosorbent assay (ELISA) based diagnostic kits to aid the diagnosis of autoimmune and infectious diseases. However, the main focus for the site is for the detection of immune reactions to food often described as food intolerance or food sensitivity using array-based technologies for laboratory and point-of-care markets. Employees Square footage 47 13,540 Reinbek Mumbai Pune Located in Mumbai, India, Omega Dx (Asia) Pvt Limited sells completed products manufactured at the other Omega sites in order to gain direct access to the Indian market. Employees Square footage 18 1,047 Located in Reinbek, Germany, Omega Diagnostics GmbH manufactures and sells a range of allergen tests. Allergozyme® is a paper disc-based ELISA that quantifies the amount of circulating Specific IgE in a patient sample for over 600 different allergens. Allergodip® is an enzyme immunoassay (EIA) for the semi-quantitative determination of Specific IgE in serum/plasma. Employees Square footage 35 15,220 8 For more information see our Products and Markets Overview Located in Pune, India, and part of Omega Dx (Asia) Pvt Limited, the fit-out of the manufacturing facility was completed during the year and the first products made will be a range of malaria rapid tests. Equipment has been installed and has undergone installation and operational qualification. Prototype devices have been manufactured on a small scale and, when tested on samples, indicate a level of performance equivalent to a market-leading product. Employees Square footage 4 20,913 03 www.omegadiagnostics.com Strategic Report Our Strategy Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 A clear strategy to further the Group’s progress Increased confidence for food intolerance testing in a growing health and wellbeing market. Achievements – 19% growth in the year Targets – Continue to grow individual markets – Excellent brand reputation – Strong market position – Focus on unaddressed markets, particularly in North America and China – Add complementary testing products – Product extension and regional panel development To become a leader in allergy IVD testing through automation and mid-tier market targeting. Achievements – 41 allergens optimised Targets – Execute on the plan to increase the number of allergens to 120 over the next three years – Further penetrate the strip/ panel test segment by optimising the performance of Allergodip® and allow quantification via a mobile phone app as well as adding regional panels on the automated allergy platform and ready for commercial launch – Successful external evaluations demonstrating a technology which is easy to use, has a quick time to first result and is efficient and flexible for laboratory use – Significant knowledge built up during the development programme and a skilled team in place Identifying global health opportunities and commercialising novel POC diagnostic tests for significant unmet clinical needs in resource-limited settings. Achievements – Completion of fit-out of manufacturing facility in Pune, India and production of Malaria test pilot batches – Diversify routes to market via the non-governmental organisation (NGO) arena, business to business and private sector – We have a method of running Visitect® CD4 test devices which function up to 35°C – Skilled scientific team in place with capability and capacity for development of rapid diagnostic tests Targets – Continue to expand rapid test manufacturing capabilities – Deliver “diagnostic solutions” that empower digital connectivity and data gathering as the key component of Omega’s global health strategy – Use strong alliances with leading research institutions and commercial partnerships to access future technologies that will drive decentralisation of diagnostics 04 Collaborating with NGO networks to gain mass distribution of products. Achievements – Global health team continues to form key relationships with both global and national NGOs that are pivotal to delivering the sales strategy – Work towards peer-reviewed publication of successful third-party evaluations and in-country implementations by key opinion leaders and institutions – Participation and consultation – Aligned with UN Sustainable in key global health stakeholder groups Targets – Develop new rapid diagnostic tests at the Pune facility which meet the requirements of WHO ASSURED criteria and stakeholder target product profiles Development Goals, to instigate collaborative approaches across NGOs, academia/research and funders that deliver innovative solutions and improve linkage to care (access to POC diagnostics) Strategic Report Our Business Model www.omegadiagnostics.com Leveraging our strengths for accelerated growth 1Build on core competencies 2Accessing strategic opportunities 3Commercialisation Our focus encompasses: We achieve this through: This is accomplished via: – The manufacture of quality IVD products – Generating cash from our core business – Investing in our R&D programme – People and knowledge – Innovation – Licensing – Partnerships – Global network and distribution capability – Direct market presence – NGO/aid agencies 05 Chairman’s Statement Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 We have identified a number of organic growth opportunities for all our business segments which we believe could significantly enhance shareholder value David Evans Non-executive Chairman In summary Good progress in overcoming technical challenges with Visitect® CD4. Completion of fit-out and inauguration of our manufacturing facility in Pune, India. Successful optimisation of 41 allergens for use on the IDS/Allersys® system. Colin King joined us in the year as Chief Operating Officer. Three-year plan developed to accelerate growth. 06 Strategy Point-of-care (POC) testing Visitect® CD4 In terms of our strategic priority with Visitect® CD4, at times, I accept that it probably feels like the development process has taken two steps forward, followed by one step back, but we have persevered in working through the complex technical challenges of optimising the test to function up to 35°C. We now have a method of running test devices which indicates performance in line with our design goals. Our aim is to ensure that we can retain this performance so that the test can be run in the field by community healthcare workers without access to lab facilities. In our trading update of 21 April 2016 we mentioned a shifting of the needle away from being a biological challenge to an engineering challenge. Subsequently, we have further improved our chances of success by demonstrating elimination of the ambient temperature effect with a test design that requires no engineering modification for field use because it does not require off-line sample treatment. This new design has been tested internally and shows no temperature effect over the range 20-35°C. We are currently now undertaking testing at a local hospital site with patient samples. We have also been able to undertake certain pre-verification studies in order to reduce risks beyond a successful optimisation outcome. Field trials will follow completion of the verification and validation phase, which would then lead to a market launch. We have also continued to assess the potential market for this product and we have concluded that: – a large unmet market need still exists for this test; and – we now represent the only current active development prospect for an instrument-free POC CD4 test. We have manufacturing capacity for Visitect® CD4 tests, both in Alva, Scotland, and in our new facility in Pune, India. Pune manufacturing facility During the year, we completed the fit-out of our 20,000 sq. ft. manufacturing facility in Pune, funded in part with a grant contribution of US$0.54 million from UNITAID. In addition to providing capacity for Visitect® CD4, our first products to be made there will be a range of malaria rapid tests. The equipment needed to manufacture rapid tests has now been installed and has undergone installation and operational qualification. Prototype devices have been manufactured on a small scale and, when tested on samples, indicate a level of performance equivalent to a market-leading product, which is very encouraging. When the manufacturing procedures have been finalised, the equipment will complete its production qualification and will enable larger batches of tests to be manufactured for verification and validation, and we have been able to source a number of malaria-positive and negative samples on a commercial scale which can be stored and then used for this purpose when needed. The Group’s strategy is unwavering in terms of providing POC testing for infectious diseases in parts of the world where there remain substantial unmet needs. Allergy automation As reported on 21 April 2016, we have successfully optimised 41 allergens for use on the automated IDS/ Allersys® system which perform and concord with tests Strategic Report on the predicate device, ThermoFisher’s ImmunoCAP® system. We have now tested over 1,000 patient samples in beta evaluations in Spain, Italy and France, with an ongoing evaluation in Germany, and the results will be included in the technical file to support CE marking the products. It has been shown that the combination of our Allersys® reagents on the IDS iSYS instrument provides a technology which is easy to use, has a quick time to first result and is efficient and flexible for laboratory use. It is worth noting that successfully developing over 40 immunoassays for a development spend of £5.5 million is a highly credible achievement by global IVD industry standards of development expenditure. We have identified a clear plan to increase the number of allergens, from 41 to 120, over the next three years to ensure we continue to leverage the significant knowledge built up over the last four years. We also have a fully validated in-house manufacturing system with finished products available on the shelf. Commercialisation discussions are at a detailed and advanced stage with IDS and other partners about how best to launch into the market and we will keep shareholders fully informed on progress. Food intolerance Our flagship products of Genarrayt®/Foodprint® for laboratory use and our Food Detective® for use by Nutritionists have continued to grow from our strategic success in continuing to grow our export markets. Since the acquisition of Genesis/CNS in 2007, Food Detective® has been sold in over 75 countries and Genarrayt®/ Foodprint® has been sold into over 40 countries. We believe there are further significant opportunities for growth in this sector, with increasing numbers of consumers around the world taking more of an active interest in their health and wellbeing. In particular, we believe that China and North America are markets which are largely unaddressed but increasingly suitable for food intolerance testing products and services. Financial performance Group revenue grew by 5% to £12.7 million (2015: £12.1 million) with another strong performance from our Food intolerance division. On average, there was a weaker euro but stronger US dollar rate against sterling throughout the year, so the net currency effect was smaller this year where revenue would have been £0.2 million higher (2015: £0.4 million) on a constant currency basis. Gross profit increased to £8.1 million (2015: £7.7 million), representing a similar level of gross profit margin at 63.8% (2015: 63.4%) and adjusted profit before tax (statutory profit before tax with add backs for amortisation of intangible assets, share-based payment charges and IFRS-related discount charges) was 98.4% of last year’s figure at £1.4 million. Adjusted earnings per share were 1.2 pence (2015: 1.3 pence), the small reduction reflecting a tax charge of £90k in the year versus a tax credit of £55k in the previous year. Statutory earnings per share were 0.5p (2015: 0.7p). The Group’s cash position at the year end was as expected, with cash reserves of £1.3 million (2015: £2.0 million). We continue to monitor our working capital management in the conversion of adjusted operating profit (operating profit excluding share-based payments and amortisation of intangible assets) into operating cash and the conversion factor for the year was 108% (2015: 93%). “ The Group remains in a strong cash position with cash reserves of £1.3 million and a £1.7 million bank overdraft facility.” David Evans Non-executive Chairman Gross margin 63.8% 0.4% Adjusted profit before tax £1.4m Corporate governance The size and structure of the Board and its committees are kept under review to ensure an appropriate level of governance operates throughout the year. The Board is comprised of two Non-executive Directors and four Executive Directors who meet frequently during the year to discuss strategy and to review progress and outcomes against objectives. Board reports containing KPIs, which report on business issues by exception, are circulated in advance of each Board meeting which contribute to a more efficient Board process allowing sufficient time to consider business-critical issues. The Group is not required to comply with the full requirements of the UK Corporate Governance Code (as an AIM-quoted company) but we believe the Board has the skills and the necessary experience to deliver on its plans and objectives in a way that enables Non-executive members of the Board to challenge and advise the Executive team as appropriate. The Audit Committee and the Remuneration Committee are comprised of the two Non-executive Directors and the Board believes the current make-up and the number of committees remain appropriate for a group of our size. Board and employees Colin King joined the Board as Chief Operating Officer on 3 August 2015 and has introduced a number of initiatives to improve processes, communication and plan execution, which has laid the foundations on which we will deliver increased growth with improved management of expectations in the years ahead. We have also increased our scientific teams to overcome the challenges of CD4 and to increase the run rate of the new allergen optimisation alluded to above. The Group now has over 160 employees around the world and, again, I thank them for all their hard work throughout the year, which has delivered growth in revenues every year for at least the last ten years. Outlook We have a robust order book going forward which provides a solid foundation for achieving our first half sales targets. We have demonstrated that our Allersys® reagent range has the potential to create a significant market presence, offering a choice for the first time to laboratory purchasing managers, who have been without a choice for a long time in a segment of the market. We have also demonstrated that Visitect® CD4 now functions up to 35°C, meeting a key design goal parameter. We are now undertaking testing with patient samples to be confident that we have a robust design and we remain positive on bringing a revolutionary product to the market that will have a major impact on improving healthcare outcomes for millions of people. We have a solid and profitable core business. We have also identified a number of organic growth opportunities for all our business segments which we believe could significantly enhance shareholder value. We are evaluating all these opportunities, including those which could be delivered from existing resources, to ensure we are on the right side of under-promising and over-delivering. 24 For more information see our Corporate Governance Report David Evans Non-executive Chairman 24 June 2016 07 www.omegadiagnostics.com Products and Markets Overview Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Providing a range of tests for allergy diagnostics We have successfully optimised 41 allergens for use on the IDS/Allersys® system that are ready for commercial launch Our foundations Our markets In 2010, Omega Diagnostics Group PLC acquired the IVD division of allergy and specific immunotherapy specialist Allergopharma Joachim Ganzer KG, giving access to a range of allergy tests for over 600 allergens. This gave the Group a position in allergy testing that could be exploited in two ways. First, by driving international sales of current products through its existing global distribution network; and second, by delivering a panel of automated allergy tests in conjunction with Immunodiagnostics Systems’ IDS/Allersys® system. Allergy is defined as a hypersensitivity response by the immune system. In the majority of cases, allergic reactions are caused by IgE antibodies. IgE mediated allergies are defined by their rapid onset and can cause a variety of symptoms ranging from mild (rhinitis) to severe (anaphylaxis). The World Allergy Organisation (WAO) estimates that between 30% and 40% of the global population is affected by one or more allergic diseases (e.g. asthma, eczema, rhinitis, urticaria, food allergy or drug allergy). The severity and complexity of these diseases is on the increase due to increased ambient temperatures, air pollution, changing socio-economic factors and migration.1 The allergy diagnostic market is forecast to grow steadily at a compound annual growth rate (CAGR) of 12.67% for the period 2015–2019.2 The market can be broadly divided into two segments: (1) in vivo and (2) in vitro. The in vivo diagnostics market is dominated by skin prick testing (SPT). SPT involves passing a fine needle through a drop of allergen on the skin and assessing the reaction. The in-vitro market is diverse and includes: (1) automated systems, (2) ELISAs, (3) strip/panel tests and (4) lateral flow tests. Alva Reinbek 08 Strategic Report Allergy and autoimmune revenues 2014 £4.0m 2015 £3.6m 2016 £3.2m 2–3 For more information on Allergy and autoimmune Our products Our strategy The current product range is well established and addresses the enzyme-linked immunoassay (ELISA) and strip/panel test segments of the markets. The goal is to build a portfolio of products that enables Omega to compete across the automated, strip testing and POC segments of the allergy market. Allergozyme® is a paper disc-based ELISA that quantifies the amount of circulating Specific IgE in a patient sample for over 600 different allergens. There are a number of automation options available depending on the throughput and work flow of the doctor’s office practice. This product is largely sold into the German domestic market. Allergodip® is an enzyme immunoassay (EIA) for the semi-quantitative determination of Specific IgE in serum/plasma. Eight panels are available that address regional allergen sensitisation patterns. Allersys® is a chemiluminescent immunoassay (CLIA) for the quantitative determination of Total IgE and Specific IgE in serum. These reagent kits will operate on the Immunodiagnostics Systems’ (IDS) iSYS automated instrument in the laboratory segment of the market. To address the automated segment, Allersys® will launch in 2016. To date, 41 of the most commonly tested allergens have been optimised with a plan to increase this to 120 allergens over the next three years. To further penetrate the strip/panel test segment, the Group has been optimising the performance of Allergodip® in order to further shorten assay time, increase the number of allergens and allow quantification via a mobile phone app. The Group has built up experience in mobile technology quantification in the allergy and global health products that will allow Omega to differentiate its products from other offerings in the market. 1 – World Allergy Organisation (WAO), White Book on Allergy, 2011 2 – MarketsandMarkets, Allergy Diagnostics Market, 2014 09 www.omegadiagnostics.com Products and Markets Overview continued Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Providing a range of tests for food intolerance Another year of significant growth, with future focus on unaddressed markets and adding complementary testing products Our foundations Our markets Located in Cambridgeshire, England, Genesis Diagnostics Limited and its sister company Cambridge Nutritional Sciences Limited are subsidiaries of Omega Diagnostics Group PLC. They are amongst the UK’s leading manufacturers of high quality enzyme-linked immunosorbent assay (ELISA) based diagnostic kits. The company specialises in the development and manufacture of kits to aid the diagnosis of autoimmune and infectious diseases. However, the main focus is for the detection of immune reactions to food, often described as food intolerance or food sensitivity. With a core competency in array-based technologies for laboratory and POC markets, Genesis/CNS has built a reputation for quality, innovation and delivery in its 20+ years of experience in the in-vitro diagnostics (IVD) industry. Food intolerance/sensitivity testing is a growing market, with the public being much more aware of their food, what is in it and how it affects their body. The global health and well-being market is expected to grow steadily at a CAGR of 6% for the period 2015–2019 and the primary driver for this is the growing health awareness among consumers.1 From a medical perspective, the role of gut health and its impact on general health and well-being is increasingly understood. In addition, it is recognised that individual patients respond quite differently to standard treatments, giving rise to more personalised analysis and management of their health and well-being. Gut health is a complex area and a multitude of factors, including gut permeability (giving rise to immune reactions to food), microbiome and oxidative stress, often give rise to health conditions that need to be treated through diet and supplementation. The global market for food allergy and sensitivity products is projected to surpass $26.5 billion by the year 2017, driven by the increasing number of food allergies and sensitivities across the world.2 Food allergies affect 220–250 million people worldwide according to the WAO3, with many more suffering from food intolerance and sensitivities. Manufacturers of “free from” food have been reporting double-digit growth in this specific sector.4 In the UK 15% of people gave their reason for eating free-from foods as being because they suspect they have an allergy or intolerance, and 35% stated that it was due to them feeling better or healthier when they did.5 Cambridge 10 Strategic Report Food intolerance revenues 2014 £5.2m 2015 £6.0m 2016 £7.0m 2–3 For more information on Food intolerance Our products Our strategy Food allergy is defined as a rapid and potentially serious response by the body to food. Classic symptoms include rashes, itching and wheezing. Common foods include fish, shellfish and nuts. Allergic reactions are caused by the antibody IgE. Food intolerance/sensitivity can be an immune or non-immune response and usually means that individual elements of certain foods cannot be properly processed and absorbed by our digestive system. Examples include individuals who are unable to digest lactose due to an enzyme deficiency or gluten due to the autoimmune condition coeliac disease. Food intolerance/sensitivity is defined as a slow or gradual response to a food with milder symptoms than an allergy, including bloating, stomach and digestive issues, skin reactions, etc. It is believed that food sensitivity reactions are related to the antibody IgG. It is common for the terminology food intolerance and food sensitivity to be used interchangeably for food IgG reactions. The Company tests for IgG antibodies to detect food sensitivities. It has been shown by various studies that if foods producing high IgG levels are eliminated from the diet, certain symptoms can be reduced. The Food Detective® product is a POC test that allows users to test for food IgG antibodies in the privacy of their own home or practitioners/physicians to run the test in a clinic. This convenient test is simple to use and requires no formal training or specialised equipment. Users can obtain and interpret their own results within 40 minutes. It is the only test of its kind available in the market. The Genarrayt®/FoodPrint® product is a high throughput laboratory test that accurately detects the presence of IgG food-specific antibodies to a wide range of foods. It is an effective diagnostic aid to the treatment of immune response-related food sensitivity. Based on microarray technology, FoodPrint® is a unique product in the marketplace, offering significant benefits over traditional plate-based ELISA tests. The reduced size of the platform means that requirements for sample volume and bench space are minimised, two significant concerns for laboratories preparing to offer these services. 1 – Just Food, Global Health and Wellness Food Market 2015–2019 2 – Food Allergy and Intolerance Product: A Global Strategic Business Report (1st April 2012) 3 – SGS, Hot Source, Issues 2 June 2013 4 – CNBC 5 – Mintel, Chris Brockman, The evolution of the global free-from market, Oct 2015 The Company is in a unique position in the market, offering a distinctive range of food intolerance/sensitivity tests that cover a selection of applications. On the back of these products the brand has developed an excellent reputation with patients and laboratories around the world. Utilising the positioning of the brand and the product range provides a strong foundation, market position and a number of key growth opportunities. Over the years, the Company have steadily built an impressive and stable network of distribution partners with extensive global coverage, serving over 75 countries with a specific skill set within the health and well-being market. These skills include competencies to create and educate markets, use of web and social media platforms as well as employing dedicated nutritional resources within their organisations. The strategy is to continue to grow individual markets through greater product awareness and the extension/regionalisation of panels for unaddressed markets, particularly in North America and China. We will also look to add complementary testing products through partnerships to add to the current basket of goods that also meet the customer’s need for greater information around the health of the gut. 11 www.omegadiagnostics.com Products and Markets Overview continued Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Providing a range of tests for infectious diseases/ global health Completion of the fit-out of the 20,000 sq. ft. manufacturing facility in Pune to meet the Group strategy of providing POC testing for infectious diseases Our foundations Our markets Located in Alva, Scotland, Omega Diagnostics Limited is a subsidiary of Omega Diagnostics Group PLC and manufactures and sells a range of immunoassay tests, predominantly for infectious diseases. Its main product line includes a range of screening and confirmatory tests for syphilis. Many products are capable of being used in resource-limited settings and, when used, do not require instrumentation or laboratory facilities to obtain a result. In recent times the subsidiary has built up a capability and capacity for the development and manufacturing of rapid diagnostic tests (RDTs) for use in resource-poor settings in developing countries. In addition, our Indian subsidiary occupies 20,000 sq. ft. of space at the International Biotech Park in Hinjewadi, Pune. The main purpose was to establish a manufacturing facility to produce RDTs. Verification and validation studies are planned for malaria tests produced at the facility. Global health is defined as the health of populations in a global context or “the area of study, research and practice that places a priority on improving health and achieving equity in health for all people worldwide”. Its core focus is to save lives, reduce or eliminate disease and have an impact on public health. Essentially, the route to market is through a mix of policy makers, aid agencies and financial stakeholders with interactive development strategies that aim to achieve aggressive targets set by the United Nations. Known as the Sustainable Development Goals, the targets for improvements in health and well-being are: a) diagnoses those people at risk; b) provide treatment to people living with disease; and c) end the epidemics of those diseases that place the heaviest burden on people in the poorest regions of the world. National disease control programs utilise WHO for guidance and planning, consequently diagnostic suppliers that develop and supply the tests, devices and instruments must comply with defined performance standards to ensure that products are robust at the point of delivery. Our aim within this matrix is to address the IVD shortfall in that many technologies are inaccessible to the majority of people who need them, particularly in resource-limited settings. These are environments that cannot afford the provision of laboratory space, facilities, uninterrupted (if any) power supply and, occasionally, clean running water. They are not staffed by qualified or skilled technicians but by lay healthcare workers who have little or no technical know-how in the manipulation of diagnostic tests. So the products implemented in such situations need to be as “fool proof” as possible from a usability perspective but they must also be robust enough to withstand ambient tropical temperature and lack of technical resources. Alva 12 Pune Strategic Report Infectious disease revenues 2014 £2.4m 2015 £2.5m 2016 £2.5m 2–3 For more information on Infection disease Our products Our strategy The current portfolio of products includes, amongst others, a range of serological tests for both the screening and confirmation of syphilis, a range of latex serology tests and a range of stained bacterial suspensions to detect, identify and quantify suspected salmonella, brucella or rickettsial infections. In addition, there is an existing range of RDTs under the Visitect brand designed to detect malaria, syphilis, leptospirosis and dengue fever. The Visitect range will be extended by the successful commercialisation of Visitect® CD4 as well as transferring the manufacture of the existing range to our facility in Pune. Since its inception Omega Diagnostics Limited has manufactured in-vitro diagnostics (IVDs) which have been successfully exported for nearly 30 years. However, these products are coming under threat from advances in technology and competitive activity. The formation of Omega’s Global Health division has allowed us to formulate a strategy aimed at delivering innovative diagnostic solutions that address significant unmet diagnostic needs and establish a profitable and growing business with mid to long term outlook. Omega’s partnership with the Burnet Institute has focused efforts in expanding rapid test manufacturing capabilities and providing a means to diversify routes to market via the non-governmental organisation (NGO) arena and associated funding. To achieve our objectives, we utilise strong alliances with leading research institutions and mutually beneficial third-party commercial partnerships enabling access to the most relevant technologies for POC testing. We will focus on lateral flow as the preferred platform which will allow us to exploit Omega’s high quality manufacturing facilities in Alva (UK) and Pune (India). The products we commercialise correlate as closely as possible with WHO ASSURED criteria (affordable, sensitive, specific, user friendly, rapid/robust, equipment free, and deliverable to the end user), that is to say cost-effective diagnostic tests which provide rapid results and enable immediate decision making at the point of healthcare provision. For every test we develop and launch we will package alongside a mobile connectivity solution giving the end user added value by providing test device read, interpretation and reporting functionality, whilst at the same time empowering funders and stakeholders with co-ordinated data handling, manipulation and tracking capabilities. 13 www.omegadiagnostics.com Chief Executive’s Review Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 We are now poised for renewed and invigorated growth through commercialisation of our Visitect® CD4 and Allersys® programmes as well as an aggressive organic growth strategy Andrew Shepherd Chief Executive In summary Group revenue increased by 5% to £12.7 million, despite currency impact. Adjusted profit before tax maintained at £1.4 million. New aggressive organic growth strategy identified. Continued and steady progress towards the resolution of technical issues with CD4. New opportunities identified for the Global Health/Infectious disease business. 14 Dear fellow shareholder During the year we have made solid progress with the core business, mostly driven by the Food intolerance division, which delivered another good year of growth and profitability and which more than mitigated the sales decline we saw in Germany. Operations and organisational change In August 2015, Colin King was appointed as Chief Operating Officer. He brings extensive knowledge and expertise to the Group and has spent the last few months reviewing each of the business units and identifying organic growth opportunities that can be delivered over the next three years. There has been a very positive effort made by all staff at every level in the Group and a true appreciation that we can grow all of our business segments over that period in both turnover and profitability. As part of the business review there have been additions to the operations teams in all of our business units to enable us to take on the new opportunities that have been identified. It is worth noting that most of the opportunities are organic in nature, although we plan to establish a small evaluation unit to fully assess new opportunities before bringing them into the mainstream development programme. We appreciate that our employees are one of our greatest assets and we are ensuring that they are well equipped to execute on the strategic opportunities that we have identified. The appointment of experienced project managers has been key, appreciating that we have fallen short on delivering projects in the past and that we need more control of project processes. Our two current major opportunities, CD4 and the Allersys® allergy development programme, still offer the nearest potential for transformational growth in the future but, in acknowledging the issues that we have faced with the CD4 technology transfer and subsequent initial trial results in India and Kenya, we clearly had to make some internal changes to how we work. Core business Segmental revenue performance Food intolerance The Food intolerance division has again performed well, producing double-digit growth. For this year, total Food intolerance sales increased by 19% to £7.06 million (2015: £5.95 million). Sales of Food Detective® grew by a further 10% in the year to £2.29 million (2015: £2.08 million), with good growth performances in Europe, Latin America and China. Total volumes achieved were 181,000 units (2015: 163,000 units), a growth of 11%. Sales of Genarrayt®/Foodprint® reagents grew by 38% to £3.47 million (2015: £2.52 million), with strong performances in Europe, North America and the Middle East. The top three markets all exceeded annual revenues in excess of £0.5 million and the Strategic Report next five markets measured by revenue all exceeded £0.1 million each. The Group sold a further 18 instruments in the year, taking the cumulative number of installations to 168 instruments in 39 countries, and revenue per instrument (excluding Spain) increased by 27% to £18,175 (2015: £14,354). The higher percentage growth rate of reagent sales (as compared to the overall growth in revenue per instrument) reflects the investment that was made into newer North American and South East Asian markets in the previous year. Our CNS laboratory service showed a decrease of 11% in sales to £0.58 million (2015: £0.65 million). Sales were still dominated by the markets in the UK and Ireland and we produced and sold 7,008 patient reports in the year (2015: 8,241), maintaining an average price of £82.73 per report (2015: £79.33). Food intolerance will continue to be a key growth driver and contributor to the bottom line. This has been reflected in the increase in operational and marketing resource to provide high level scientific and technical support for the CNS product range. The growth trajectory is expected to continue, with this core business supported by increasing the range of products and services in the health and well-being market, which now extends beyond 75 countries. Allergy and autoimmune Sales for the Allergy and autoimmune division are comprised of Allergy sales of £2.57 million (2015: £3.08 million) and sales of Autoimmune products of £0.59 million (2015: £0.53 million), an increase of 11%. The Allergy sales continue to be derived almost exclusively from our Omega Diagnostics GmbH business in Germany, which has experienced a reduction in sales due to continued reimbursement restrictions in all but five of the 17 regions we operate in. The overall reduction in Omega Diagnostics GmbH allergy sales was 12% in euro terms. In reported sterling terms, the reduction was 17% due to the weakening of the euro against sterling rate throughout most of the year, the average rate being 1.368 (2015: 1.275). The modest growth in Autoimmune sales reverses a recent downward trend due principally to growth in India and China. Infectious diseases Infectious diseases sales decreased by 1% to £2.52 million (2015: £2.55 million). Increased turnover in countries such as Bangladesh and Nigeria have been offset by other markets such as Brazil, which has been hit by an economic downturn. These products operate in a very competitive and commoditised market, but we foresee a future increase in sales coming from the introduction of new products such as CD4 and malaria rapid tests coming through the Global Health programme and the Pune operation. “ Colin King brings extensive knowledge and expertise to the Group.” Andrew Shepherd Chief Executive Genarrayt®/ Foodprint® sales £3.5m 38% Food Detective® sales £2.3m 10% 20 For more information see our Financial Review Allergy development Significant efforts continued to be made throughout the year with the optimisation of 41 allergens being achieved in April 2016. All of our Allersys® reagents have been validated on the IDS iSYS analyser, demonstrating performance that matches the market leader. Inventory build is underway for the launch, which is expected to be over the next few months. Work is already being carried out to increase the number of allergen tests, both in house and with our external development partner. With external evaluations having now been completed in Spain, Italy and France, with a fourth evaluation being completed in Germany, we will have sufficient data to allow us to apply the CE Mark to all 41 allergens, a prerequisite for marketing any diagnostic test in Europe and beyond. In addition to the Allersys® programme, we have taken steps to reinvigorate an allergy dipstick product line called Allergodip® by expanding the panel of tests available to include country-specific panels. This, alongside the introduction of a mobile phone app that allows quantification of the test result, will provide us with a much broader product offering and one that will appeal to many of the resource-poor countries where we operate. India, with its plethora of small labs, is a particular target market for this product. Infectious diseases Visitect® CD4 Over the last year, we have concentrated our efforts to resolve the so called ambient temperature effect (ATE). The root cause of this was determined and it was anticipated that we would need to work with design companies to provide a one-step solution to the ATE because a sample pre-treatment step was required. However, we continued to also investigate possible alternative designs and subsequently demonstrated we can manufacture devices which indicate operating performance at temperatures between 20°C and 35°C during in-house testing, without the need for a sample pre-treatment step. This is currently undergoing exhaustive testing with patient samples at a local hospital site. We have continued to engage with the various stakeholders in this area and all the indications are that there is still a substantial market for this product when launched. We still need to undertake clinical field trials and obtain regulatory approvals once we have a finished test. Visitect® CD4 will be the only instrument-free, disposable CD4 test available in the world, having seen two competitors leave the field over the last year. We remain confident that we will deliver a product which generates significant demand throughout the global health community. 15 www.omegadiagnostics.com Chief Executive’s Review continued Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Core business continued Infectious diseases continued Rapid test manufacturing The opening of our new rapid test manufacturing facility in Pune, India, means that we not only have additional manufacturing space for Visitect® CD4 but also for additional rapid tests that can be produced in a low cost manufacturing environment. The manufacturing equipment has been installed and validated and work has commenced on manufacturing a range of malaria tests which will go into field trials during the new financial year. Given our extensive links in the field of global health, other opportunities present themselves on a regular basis, including the development of new tests for dengue fever, a major tropical disease. Outlook Once again, Food intolerance kept up its good performance for both principal products, Food Detective® and Genarrayt®/ Foodprint®, and we expect to see this continuing in the year ahead with the marketing initiatives being planned and executed as part of our organic growth strategy. Reaching the launch stage of the Allersys® allergy tests is another milestone achievement for the Group and we are looking forward to reporting good sales progress over the coming year, together with our continuing goal of delivering Visitect® CD4 to the market. The entire Group has been energised by the arrival of Colin King and we have identified several potential opportunities for accelerated growth over the next three years. We will look to execute on those which deliver the greatest shareholder value. Once again, I would like to thank all the Group employees who have made great efforts throughout the year in delivering progress. We look forward to a year of growth and further progress. Andrew Shepherd Chief Executive 24 June 2016 During the year we have made solid progress with the core business mostly driven by the Food intolerance division, which delivered another good year of growth and profitability Q What made you decide to join Omega? A I hadn’t planned to leave Axis-Shield; however, as I thought about where the company was, I realised that, although the vision I had created was only 90% complete, I was confident that the team I had put in place could complete the journey without me. When I was looking at the revenues of the Omega business I could see there was a clearly significant upside potential from Allersys® and Visitect® CD4 alongside a growing food business. This made me realise that there were exciting times ahead for Omega and I wanted to be part of delivering this step change. Q Has it been what you expected and do you regret moving? A I certainly do not regret moving and, following my first nine months in the job, I am even more excited about the opportunities in front of us now than I was initially. A&Q 16 Strategic Report “ We initiated a three-year business planning exercise across all sites with the key driver being accelerated growth. This process has now been completed and has highlighted opportunities to grow all three operating segments.” Colin King Chief Operating Officer Q What have you achieved to date? A We initiated a three-year business planning exercise across all sites, with the key driver being to accelerate growth. This process has now been completed and has highlighted opportunities to grow all three operating segments (Allergy and autoimmune, Food intolerance and Infectious diseases). On Allergy and autoimmune, following the successful completion of 41 allergens, we are now in the process of accelerating the development project over the next three years to achieve 120 allergens in total, which will give us a fully competitive panel. In addition to this, we have an opportunity within the lower throughput segment with our Allergodip® test, which is a strip-based test – we see opportunities to target China and emerging countries, including India, with the introduction of quantification via a mobile phone app. With regard to Food intolerance, a US and China market strategy is being developed alongside complementary regional food panels which, once completed, will facilitate significant growth. On Infectious disease, along with Visitect® CD4, the Pune facility offers new rapid test opportunities in the coming years which are currently not exploited. An initial review of skills gaps within the organisation has been undertaken and, across all sites, we are introducing dedicated project management, strategic sourcing and additional scientific resource. All of these positions should help us to deliver all of our projects within the planned timescales, including the successful launch of Visitect® CD4. We have not only looked at revenues as part of the three-year business plan, we have also looked at all aspects of our business and identified five key goals, as shown below: – accelerate growth – as per above; – one company – where all employees are aligned with the goals of the business and committed to a process of continuous improvement; – execute and deliver – develop efficient, effective and compliant processes across all areas of the business; – employees – provide a framework where all employees can contribute to the business through effective management and leadership; and – customer focus – maintaining customers at the heart of the organisation. Goals Accelerated growth One company Execute and deliver Employees “Our greatest asset” Customer focus 17 A www.omegadiagnostics.com Risks and Risk Management Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Operating a system of internal control and risk management The long-term success of the Group depends on the continual review, assessment and control of the key business risks it faces. The Group’s current principal risks and uncertainties are briefly outlined below. Risk and description Mitigating actions Change 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 product segments 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. The current general economic climate has been dominated by short-term uncertainty in the lead up to the UK referendum on EU membership. 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 has increased its resource in this area during the year and conducts its operations within recognised quality assurance systems and undergoes external assessment to ensure compliance with these systems. The risk is unchanged in the year in that known changes to the IVD regulations are already being planned for by the Group. Funding risk The success of growing the business can sometimes depend on the ability of the Directors to access external funding, of which there can be no guarantee, beyond the level of existing internal cash generation. The Group seeks to mitigate this risk by maintaining good relationships with a number of funding sources, including shareholders and banks that could provide additional debt facilities. The Group has just renewed its overdraft at an increased level of £1.7 million (2015: £1.0 million). Equity funding markets have seen some volatility with economic and political events affecting IPOs and secondary fundraisings. 18 Strategic Report Key Increase in risk No change in risk Decrease in risk Risk and description Mitigating actions Change Eurozone risk The euro area combines 19 countries with multiple domestic policies all having to operate under common monetary conditions. The legacy of the financial crisis and differing policy choices will continue to weigh more heavily on some than others. The Group monitors those countries under pressure and mitigates the risk in those countries where it has trading relationships with tighter credit control procedures and credit limits where necessary. Economic forecasts for global growth in 2016 continue to be set lower than 2015, but lower energy and commodity prices have provided a boost to some economies in Europe. Development risk The Group has undertaken a similar level of development compared to the prior year with the aim of launching new products in the future. There is no guarantee that development activity will lead to the future launch of products. Such development activity can meet technical hurdles that are unable to be overcome and market and competition activity can render the output from development activities obsolete. Foreign currency risk A significant proportion of the Group’s sales are denominated in euros through Omega Diagnostics GmbH and in US dollars and the growing business through Omega Dx (Asia) in India means that the Group is subject to risks associated with currency movements. Geopolitical tensions also exist in certain parts of the world, which can lead to a tightening of monetary conditions. The Group seeks to mitigate the risk around development activities by ensuring that development programmes are planned in accordance with recognised industry quality standards, managed by people with the requisite skills. The Group also continues to monitor industry trends and customers’ needs to ensure its development targets remain relevant. The Group has completed the optimisation of 41 Allersys® allergens whose performance matches with the market-leading product. The Group has continued to resolve a number of issues with the development of Visitect® CD4 and it remains the only prospective near-term POC solution for the market. Natural hedging is adopted where possible whereby certain goods and services are sourced in euros and US dollars to match liabilities with trading income in these currencies. It is currently the Group’s policy to settle intercompany balances with Omega Diagnostics GmbH and Omega Dx (Asia) within a short timescale. The increased risk relates to the increased levels of foreign currency investment in Omega Diagnostics GmbH and Omega Dx (Asia) that are subject to exchange rate movements. In the year itself, the Group has reported a gain through other comprehensive income as exchange rate movements were favourable compared to the prior year. 19 www.omegadiagnostics.com Financial Review Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 We have remained efficient in terms of converting operating profit into operating cash Kieron Harbinson Group Finance Director In summary Total Group revenue increased by just over 5% to £12.7 million. Overdraft facility increased to £1.7 million from £1.0 million. Conversion rate of operating profit into operating cash of 108%. 20 Financial performance Our core business has again proved to be resilient. Total revenue was up by 5.3% to £12.7 million (2015: £12.1 million), with our Food intolerance division delivering another strong performance, with continued double-digit year-on-year revenue growth. Our Allergy and autoimmune division suffered another fall in revenue due to a reduced level of sales in Germany and our Infectious disease division maintained revenue within 1% of last year’s result. Compared to last year, there was a reduced currency impact in that sales for this year would have been £0.2 million higher (2015: £0.4 million) at constant exchange rates, with a £0.3 million euro-related reduction in sales (weaker euro against sterling) being offset by a US dollar-related gain of £0.1 million (stronger dollar against sterling). Gross profit increased by 6.0% to £8.1 million (2015: £7.7 million), with the gross margin being maintained at 63.8% (2015: 63.4%). Costs, net of other operating income, have risen by £0.6 million to £7.7 million (2015: £7.1 million), the principal reasons being an increase in costs related to an expanded Board of £0.2 million, an increase in staff and rent costs of the Pune, India, facility and an increase in personnel costs in the UK due to increased staff numbers and auto enrolment into pension schemes in line with UK legislation. Adjusted profit before tax (statutory profit before tax of £0.7m with add backs for amortisation of intangibles, share-based payment charges and IFRS-related discount charges) was maintained at the same level as last year at £1.35 million compared to £1.37 million the year before. Segmental performance as presented in the notes to the financial statements still shows that the Food intolerance division is the only profitable segment right now, but our plans to address the shortfall remain the same, with opportunities for Allersys® and Visitect® CD4 as outlined throughout this Strategic Report. Other operating income of £273k through the income statement comprised a further amortised credit of £251k from the UNITAID grant received in a prior year and a final amortised credit of £22k from a Scottish Enterprise Regional Selective Assistance grant first awarded in 2012. Taxation Our UK companies continue to benefit from a benign tax environment that encourages investment in research and development activities. In the year, adjusted tax losses of £1.4 million for the prior year to 31 March 2015 were surrendered for cash, generating a cash rebate of £0.2 million. The losses were surrendered at 14.5% and we took into account the direction of travel of likely corporation tax rates in the future when these losses are likely to offset future profits. We still have cumulative tax losses of £2.9 million for years ended up to 31 March 2014 that are carried forward for future offset. A portion of these losses were not surrendered due to lower surrender rates applying for earlier years. The current year tax charge of £0.1 million (2015: £0.1 million tax credit) would effectively have been neutral had we not carried out this exercise. Earnings per share Adjusted earnings per share were 1.2 pence versus 1.3 pence in the prior year. The difference is due to the tax position, as described above, leading to adjusted Strategic Report profit after tax of £1.26 million versus £1.43 million in the prior year, both calculated on a fully diluted 109.5 million shares in issue. Research and development We continued to invest in research and development at similar levels to last year, spending a total of £1.74 million (2015: £1.81 million), representing 13.7% of Group turnover. Expenditure on our Allersys® project was similar at £0.95 million (2015: £0.98 million) as we maintained our focus on reaching our target of optimising at least 40 allergens for an initial launch. Expenditure on our Visitect® CD4 was also maintained at £0.49 million (2015: £0.48 million) as we achieved a resolution to the previously reported ambient temperature effect and now have a test that functions between 20°C through to 35°C. We also incurred £0.1 million on developing our POC allergy dipstick test, Allergodip®, for use in doctors’ offices. Of the £1.74 million incurred, £1.5 million has been capitalised on the balance sheet in accordance with IAS 38 – Development Costs whilst earlier stage R&D expenditure of £0.26 million (2015: £0.31 million) has been expensed through the income statement. Intangible assets Our intangible assets have grown to a total of £13.5 million (2015: £12.1 million), which includes components of goodwill of £4.6 million, separately identifiable intangible assets of £3.2 million and capitalised development costs of £5.7 million. Goodwill There has been no impairment of goodwill on any of the acquisitions to date. Goodwill of £4.6 million (2015: £4.5 million) has increased by £0.1 million relating to the retranslation of goodwill to £1.2 million (2015: £1.1 million) in acquiring the Allergy IVD business in Germany in 2010. £0.4 million arose on acquiring Co-Tek in 2009 and £3.0 million arose on acquiring Genesis/CNS in 2007. Intangible assets Separately identifiable intangible assets have been recognised on acquisition: £2.0 million on Genesis/CNS, of which £0.8 million has been amortised to date; £0.1 million on Co-Tek, which has been fully amortised; and £1.7 million on Omega Diagnostics GmbH, of which £1.2 million has been amortised to date. A purchased licence of £1.5 million relates to the exclusive global access rights to the IDS iSYS platform for allergy testing, which, to date, has not been amortised. Capitalised development costs £1.5 million of capitalised development costs have been incurred in the year (as outlined above), bringing the cumulative spend to date to £4.1 million on the Allergy iSYS and Allergodip® projects and £1.6 million on the Visitect® CD4 project, neither of which has been amortised to date. The amortisation of these capitalised development costs, along with the purchased licence referred to above, will only start after commercialisation of these assets. As stated on previous occasions, this particular subset of amortisation charges will not be added back in the computation of the Group’s routinely reported adjusted profit before tax. Property, plant and equipment The Group invested a further £0.6 million (2015: £0.7 million) in the year across its operations. The largest element included £0.3 million (2015: £0.1 million) in completing the fit-out of our manufacturing facility in Pune, India, and purchasing the initial phase equipment needed to produce rapid lateral flow tests. £0.1 million (2015: £0.3 million) was spent in Alva, including the purchase of additional bench top equipment for Visitect® CD4, and £0.2 million (2015: £0.2 million) has been invested in Genesis/CNS to increase capacity for our flagship Food intolerance products and to undertake some facility refurbishment. Financing The Group continues to enjoy a good relationship with its principal bankers and, in June of this year, we agreed an overdraft renewal for an increased facility of £1.7 million (2015: £1.0 million) for a further year. This facility remains undrawn at the date of this report and will be utilised for increased working capital purposes as we look to expand our business across all its income streams. Operating cash flow Given the amount we invest in research and development, it is a key priority to manage working capital efficiently and to be effective in converting operating income into cash. Cash inflow from operating activities during the year was £1.45 million (2015: £1.25 million). The Group has achieved a conversion rate of adjusted operating profit (operating profit plus amortisation of intangible assets plus share-based payments) to operating cash of 108% (2015: 93%). As anticipated, we ended the year with cash reserves of £1.30 million (2015: £1.97 million) and net cash of £0.89 million (2015: £1.42 million). Foreign exchange The Group has investments in overseas operations and conducts trading transactions in currencies other than sterling. The principal currencies used and the average foreign exchange rates in the year are as follows: Sterling/US dollar Sterling/euro Sterling/Indian rupee 2015/16 £ 1.50 1.368 98.22 2014/15 £ 1.60 1.275 98.57 Profit and loss account The Group has foreign-denominated bank accounts to allow for the receipt and settlement of amounts in connection with its normal trading operations. These transactions are subject to timing differences between when they are transacted and when they are settled, which can give rise to foreign exchange differences. Foreign-denominated receivables, payables and bank balances are restated into sterling at closing balance sheet dates, which also gives rise to foreign exchange differences. During the year, the Group benefited from an exchange gain of £6,000 (2015: £6,000) on these transactions which has been credited through the income statement. Other comprehensive income The Group has net assets in Germany and India, held in fully owned subsidiaries. The original investments in these subsidiaries are held at historic exchange rates. The difference between these historic balances and their restated amounts at the most recent closing balance sheet rates gives rise to movements which are recorded through other comprehensive income and carried as a balance sheet reserve. During the year, there has been a gain of £261,000 (2015: £524,000 charge) on the retranslation of foreign operations, predominantly in Germany. Although the average euro rate against sterling was weaker in the current year, as shown in the above table, the spot rate at 31 March 2016 was €1.262 = £1 (2015: €1.367 = £1), hence the gain in the year. Kieron Harbinson Group Finance Director 24 June 2016 21 www.omegadiagnostics.com Governance Board of Directors Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 The team to deliver... David Evans Non-executive Chairman A R Andrew Shepherd Chief Executive Kieron Harbinson Finance Director Appointed August 2000 Founder Appointed August 2002 David joined Omega in 2000 as Non-executive Chairman. He 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 holds Non-executive Directorships in a number of other companies. Andrew is the Founder and Chief Executive of Omega. He has worked in the medical diagnostics industry for 42 years. In 1986 he moved to Scotland to join Bioscot Limited and, shortly afterwards, established Omega. He has used his technical experience and knowledge of exporting to oversee the significant growth of the export of Omega products. He is an active member of a number of relevant trade associations, and was 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. Kieron joined Omega in August 2002 as Finance Director. He has a broad experience in technology and related businesses. He started his career with Scotia Holdings PLC in 1984 and remained with the company for 14 years, occupying various senior finance roles. These roles enabled him to acquire 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 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. Jag Grewal Sales and Marketing Director William Rhodes Non-executive Director A R Colin King Chief Operating Officer Appointed June 2011 Appointed 1 May 2013 Appointed 3 August 2015 Jag joined Omega in June 2011 as Group Sales and Marketing Director. He has worked in the medical diagnostics industry for 22 years having started out as a Clinical Biochemist in the NHS. In 1995 he joined Beckman Instruments where he developed a career spanning 15 years in sales and marketing holding a variety of positions in sales, product management and marketing management. In 2009 he left his position of Northern Europe Marketing Manager to join Serco Health where he helped create, the first joint venture within UK pathology between Serco and Guy’s and St Thomas’ Hospital. He is also past Chairman and current treasurer of the British In Vitro Diagnostics Association (BIVDA). During his 14-year career with Becton, Dickinson and Co., one of the world’s leading suppliers of medical, diagnostic and life science research products, Bill held a number of senior leadership positions and, until the end of 2012, was BD’s Senior Vice President, Corporate Strategy and Development, being responsible for BD’s worldwide mergers and acquisitions and corporate strategies. Previously, he was Worldwide President of BD Biosciences, a business segment with turnover of over US$1.0 billion, including the provision of flow cytometry instruments and their associated reagents for CD4 testing used in a wide range of laboratory settings. Prior to working for BD, Bill held senior business development positions with Pfizer Inc. and Johnson and Johnson. 22 Colin joined Omega in August 2015 as Chief Operating Officer. He has worked in the medical diagnostics industry for 21 years, previously working for Axis-Shield. He joined them in 1995 and held a number of positions encompassing planning, supply chain, project management, operations and, ultimately, from 2007 was Managing Director of the Laboratory division. During his time as Managing Director he was responsible for leading their diversification strategy which was successful in maintaining revenues despite retiring two key product revenue lines. Governance Senior Management Team ...accelerated growth Key A Audit Committee R Remuneration Committee Committee Chairman Dr Edward Valente Group Research and Development Director Edward joined Omega in March 2011 as Allergy Systems Director. He has worked in the medical diagnostics industry for 31 years. He started his career with Amersham International in 1983 where he held scientific and managerial positions in clinical diagnostics research and development. He then joined Shield Diagnostics in 1988 and held managerial positions in R&D and marketing. Latterly, he was responsible for market development of new markers, including clinical studies, and design and development of immunoassay products on automated platforms for industry majors. Mike Gordon Group Operations Director Iain Logan Group Financial Controller Mike joined Omega in October 2011 as Group Operations Director. He has worked in the medical diagnostics industry for 31 years. He started his career with Inveresk Research International as a Development Scientist. He then joined Bioscot Ltd working through its transition to Cogent Diagnostics Ltd and onwards to HYCOR BioMedical Ltd. During this time, he has held the positions of Quality Manager, Production Director and, latterly, Production and Logistics Manager for its last corporate owners. During this period, he was responsible for the implementation of ISO 9001 and for successfully navigating the company through the process of US FDA registration and inspection. Iain joined Omega in November 2010 as Group Financial Controller. He qualified as a Chartered Accountant in 2002 with PricewaterhouseCoopers in Edinburgh. He then worked at Murray International Holdings Limited in the head office finance team for three years performing a variety of financial accounting roles. He then moved on to Murray Capital Limited, the investment management company of Murray International Holdings Limited, gaining experience in all aspects of acquisitions, disposals and investment portfolio company analysis and management. His current role primarily covers responsibility for the financial reporting of the Group and management of the Group finance team. Prashant Maniar Managing Director – Omega Dx (Asia) Pvt Limited Jamie Yexley Site Manager – Genesis Diagnostics Limited and Cambridge Nutritional Sciences Limited Karsten Brenzke Site Manager – Omega Diagnostics GmbH Prashant joined Omega Dx (Asia) in October 2011 as Managing Director. He has worked in the diagnostics industry for 25 years. He started his career as Production Head in Cadila Laboratories. He then spent 15 years working for GlaxoSmithKline and ThermoFisher Scientific in various roles, establishing their diagnostic business in India with 14 collaborations with national and multinational companies. In his most recent role he established the Microbial Control business for Lonza India. He has been responsible for the commercial set up of Omega Dx (Asia) Pvt Limited and has transitioned the Group’s business in India from distributor to wholly owned subsidiary. Jamie joined Genesis and CNS in June 1999 as a Production Laboratory Assistant. He was promoted to Production Manager in 2005 and Operations Manager in 2009. He has been instrumental in seeing the Company through a sustained period of rapid growth and change. In 2012 he moved to the role of Site Manager. He has 22 years’ manufacturing experience, with 14 years specifically in the medical diagnostics industry. Educated in Cambridge he has spent his professional career working in the manufacturing industry, starting in an FMCG environment. Throughout his time with the Company he has been responsible for ICT, where he is recognised as the Group’s foremost expert. Karsten joined Omega Diagnostics GmbH in November 2010 as a consultant to facilitate the acquisition of the IVD business from Allergopharma. He was then appointed on a permanent basis initially as Finance Manager before being appointed as Site Manager in May 2012. He has worked for different industry companies in the finance control function, with his longest stay of seven years at Zeppelin Power Systems where he gained experience in mergers and post-merger integration. 23 www.omegadiagnostics.com Corporate Governance Report Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 As an AIM-quoted company, the Group is not required to produce a Corporate Governance Report and does not comply fully with the requirements of the UK Corporate Governance Code. However, the Directors are committed to providing information on an open basis and present their Corporate Governance Report as follows: The Board of Directors The Board currently comprises one Non-executive Chairman, one Non-executive Director and four Executive Directors, who are the Chief Executive, the Chief Operating Officer, the Finance Director and the Sales and Marketing Director. David Evans, Non-executive Chairman, and William Rhodes, Non-executive Director, are considered by the Board to be independent in character and judgement. 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, approving major items of capital expenditure and reviewing and approving acquisitions. 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 eight occasions. Of the eight meetings David Evans, Kieron Harbinson and Andrew Shepherd attended all eight and Jag Grewal and William Rhodes attended seven out of the eight meetings they were entitled to attend. Colin King attended six out of the six meetings he was entitled to attend. The Chairman has additional Non-executive Directorships of the following companies: – Diagnostic Capital Limited – Lochglen Whisky Limited – Fine Art of Golf Limited – OptiBiotix Health plc – Premaitha plc – Integrated Magnetic Systems Limited – Collagen Solutions plc – Relitect Limited Responsibilities of the Board – Setting corporate strategy – Approving the annual budget – Reviewing financial performance – Agreeing the renewal of, and any new, banking/treasury facilities – Approving major items of capital expenditure – Reviewing and approving acquisitions The Board is provided with appropriate information in advance of Board meetings to enable it to discharge its duties effectively. Executive/Non-executive Board membership 1 1 4 Key Non-executive Chairman 1 Non-executive Director 1 Executive Director 4 Board attendance throughout the year David Evans Andrew Shepherd Kieron Harbinson Jag Grewal William Rhodes Colin King Board 8/8 8/8 8/8 7/8 7/8 6/6 Audit Committee Remuneration Committee 3/3 — — — 3/3 — 3/3 — — — 3/3 — The Audit Committee The Audit Committee has met on two occasions during the year and once since the year end. The Committee is comprised of David Evans, as Chairman, and William Rhodes and has primary responsibility for monitoring the quality of internal controls, ensuring that the financial performance of the Group is properly measured and reported on, and for reviewing reports from the Group’s auditors relating to the Group’s accounting and financial reporting, 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 considers and makes recommendations to the Board, to be put to shareholders for approval at the Annual General Meeting, in relation to the appointment, re-appointment and removal of the Group’s external auditors. The Committee also oversees 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 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 Group following completion of the reverse takeover of ODL in September 2006. 24 Governance The Audit Committee continued The Committee has reviewed the effectiveness of the Group’s system of internal controls and has considered the need for an internal audit function. At this stage of the Group’s size and development, the Committee has decided that an internal audit function is not required as the Group’s internal controls system in place is appropriate for its size. The Committee will review this position on an annual basis. The Committee also reviews the Group’s arrangements for its employees to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters. The Committee ensures that such arrangements allow for independent investigation and follow-up action. The Remuneration Committee The Remuneration Committee has met on three occasions during the year. The Committee is comprised of David Evans, as Chairman, and William Rhodes and has primary responsibility for determining and agreeing with the Board the remuneration of the Company’s Chief Executive, Chairman, Executive Directors, 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. Internal control The Board is responsible for the Group’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 Group receives this in the areas of employment law and health and safety management. Communication with shareholders The Board recognises the importance of communication with its shareholders. The Group maintains informative websites for Omega Diagnostics Limited, Cambridge Nutritional Sciences Limited and Omega Diagnostics GmbH containing information likely to be of interest to existing and new investors. In addition, the Group 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 Group’s activities and plans. Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report, which runs from pages 2 to 21. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 20 and 21. In addition, Note 21 to the financial statements includes the Group’s objectives, policies and processes for its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. The Group has recently secured a £1.7 million overdraft facility for a twelve-month period to May 2017 and this, together with a cash-generative core business and the application of working capital discipline, means that the Group maintains cash levels within its business to meet its short and longer-term objectives. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully and fully capitalise on the new product opportunities despite continued uncertainties with the macroeconomic outlook. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing the annual financial statements. By order of the Board The Group is compliant with industry standard quality assurance measures and undergoes regular external audits to ensure that accreditation is maintained. Kieron Harbinson Company Secretary 24 June 2016 25 www.omegadiagnostics.com Directors’ Remuneration Report Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 As an AIM-quoted company, the Group is not required to produce a Remuneration Report that satisfies all the requirements of the Companies Act. However, the Directors are committed to providing information on an open basis and present their Remuneration Report as follows: Remuneration Committee The Remuneration Committee is comprised of David Evans and William Rhodes. The Committee meets as and when required to determine and agree with the Board the policy for the remuneration of the Group’s Chief Executive, Chairman and Executive Directors. The objective of this policy shall be to ensure that members of the Executive management of the Group 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 Group. No Director or manager shall be involved in any decisions as to their own remuneration. Remuneration policy The Group’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 Group’s objectives, thereby enhancing shareholder value. Incentive schemes/share option schemes During the year, Colin King was issued with an option over 1,200,000 ordinary shares of the Group. All of the options were granted on 29 September 2015 and were under the Company’s EMI Option Scheme. Directors’ service contracts Andrew Shepherd entered into a service contract with the Group on 23 August 2006, under which he was appointed Directors’ emoluments as Chief Executive on an annual salary of £85,000. His salary was increased to £131,250 per annum from 1 April 2009, then increased to £145,000 per annum from 1 April 2011 and then further increased to £190,000 per annum on 1 August 2015. 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 Group 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 £94,500 per annum from 1 April 2009, then increased to £115,000 per annum from 1 April 2011 and then further increased to £150,000 per annum on 1 August 2015. The agreement will continue until terminated by either party giving to the other not less than six months’ notice in writing. David Evans was appointed as a Non-executive Director of the Group on 19 September 2006 and 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. Jag Grewal entered into a service contract with the Group on 30 June 2011, under which he was appointed as an Executive Director on an annual salary of £110,000. His salary was increased to £140,000 per annum on 1 August 2015. The agreement will continue until terminated by either party giving to the other not less than three months’ notice in writing. William Rhodes was appointed as a Non-executive Director of the Group on 1 May 2013 and is entitled to an annual fee of £40,000. The agreement will continue until terminated by either party giving to the other not less than one month’s notice in writing. Colin King entered into a service contract with the Group on 3 August 2015, under which he was appointed as Chief Operating Officer on an annual salary of £177,500. Executive Andrew Shepherd Kieron Harbinson Jag Grewal Colin King Non-executive David Evans William Rhodes Fees/basic salary £ 175,000 138,333 130,000 118,333 25,000 40,000 Bonuses £ — — — 17,750 — — Benefits in kind £ — 1,485 4,121 903 — — Total 2016 £ 175,000 139,818 134,121 136,986 25,000 40,000 Total 2015 £ 145,000 116,789 110,000 — 25,000 40,000 626,666 17,750 6,509 650,925 436,789 The amounts paid in the year towards Directors’ pension contributions were as follows: Directors’ pension contributions Andrew Shepherd Kieron Harbinson Jag Grewal Colin King 26 2016 £ 8,750 6,917 6,500 5,917 2015 £ 7,250 5,750 5,500 — 28,084 18,500 Governance Directors’ pension contributions continued Directors’ interests in the 4 pence ordinary shares of Omega Diagnostics Group PLC are as follows: David Evans Kieron Harbinson Andrew Shepherd Jag Grewal Colin King William Rhodes The Directors have no interests in the shares of subsidiary companies. Directors’ share options At 1 April 2015 Granted during the year Lapsed during the year Exercised during the year At 31 March 2016 David Evans William Rhodes 390,822 2,130,406 Andrew Shepherd Kieron Harbinson Jag Grewal 703,480 600,000 800,000 468,987 300,000 640,000 100,000 200,000 610,000 — — — — — — — — — — — Colin King — 1,200,000 — — — — — — — — — — — — — 390,822 — 2,130,406 — 703,480 — 600,000 — 800,000 — 468,987 — 300,000 — 640,000 — 100,000 — 200,000 — 610,000 31 March 2016 3,043,634 426,062 2,708,180 99,913 — — 31 March 2015 3,043,634 426,062 2,708,180 99,913 — — Option price 19.0p 15.25p 19.0p 14.5p 30.5p 19.0p 14.5p 30.5p 13.25p 14.5p 30.5p Date of grant 10/12/08 04/07/13 10/12/08 05/07/12 25/02/14 10/12/08 05/07/12 25/02/14 12/08/11 05/07/12 25/02/14 Earliest exercise date 10/12/09 04/07/16 10/12/09 05/07/15 25/02/17 10/12/09 05/07/15 25/02/17 12/08/12 05/07/15 25/02/17 Expiry date 10/12/18 04/07/23 10/12/18 05/07/22 25/02/24 10/12/18 05/07/22 25/02/24 12/08/21 05/07/22 25/02/24 — 1,200,000 13.0p 29/09/15 29/09/18 29/09/25 During the year, Colin King was issued with options under the Company’s EMI Option Scheme. The share price at 31 March 2016 was 14.38 pence. The highest and lowest share prices during the year were 25.5 pence and 12.875 pence respectively. Approved by the Board David Evans Non-executive Director 24 June 2016 27 www.omegadiagnostics.com Governance Directors’ Report Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 The Directors present their Annual Report and Group Financial Statements for the year ended 31 March 2016. Principal activities The principal activity of the Company is as a holding company. The principal activities of the Group are the manufacture, development and distribution of medical diagnostics products. Results and dividends The result for the year is a profit of £571,912 (2015: £739,046), which has been taken to reserves. The Directors, do not propose to pay a dividend. The results are disclosed in more detail in the Strategic Report on pages 2 to 21. The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented its own income statement in these financial statements. The Company loss for the year ended 31 March 2016 is £50,757 (2015: loss of £434,233). Business review and future development A review of business and future development is discussed in more detail in the Strategic Report. Research and development Details of research and development activity are contained in the Financial Review on pages 20 and 21. Costs in the year amounted to £1,743,354 (2015: £1,807,661). Costs of £258,306 in relation to research activities (2015: £307,149) were expensed through the statement of comprehensive income and costs of £1,485,048 in relation to product development (2015: £1,500,512) were capitalised and included within intangible assets as detailed in Note 8. Directors The names of the Directors who have served the Group throughout the year are: – David Evans – Kieron Harbinson – Andrew Shepherd – Jag Grewal – William Rhodes – Colin King (appointed 3 August 2015) Directors’ interests The beneficial interests of Directors who have served throughout the year are listed in the Directors’ Remuneration Report on pages 26 and 27. There are no non-beneficial interests held by Directors. There have been no changes to any Director’s interests in the shares of the Group between 31 March 2016 and the date of this report. Employees The Group 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 Group 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 Strategic Report contains details of the Group’s system of internal control and risks and uncertainties faced. Note 21 to the financial statements contains details of financial risks faced by the Group. Auditors The auditors, Ernst & Young LLP, have indicated their willingness to continue in office and a resolution for their re-appointment 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 22. 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 Group’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 Group’s auditors are aware of that information. Biographies of all Directors serving at the year end are on page 22. By order of the Board Major interests in shares As at 8 June 2016 the following shareholders held more than 3% of the Group’s issued ordinary share capital: Kieron Harbinson Company Secretary 24 June 2016 Legal & General Investment Management Liontrust Asset Management Richard Sneller Octopus Investments Limited Mobeus Equity Partners LLP Hargreaves Lansdown Stockbrokers Harwood Capital Unicorn Asset Management SG Private Banking Charles Stanley Stockbrokers 28 Number of 4 pence ordinary shares Percentage 14,010,498 8,711,494 6,765,000 6,682,730 6,541,600 5,113,827 4,731,473 4,266,750 3,900,265 3,833,314 12.88% 8.01% 6.22% 6.15% 6.02% 4.70% 4.35% 3.92% 3.59% 3.53% Governance 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 (IFRSs) as adopted by the European Union. The Directors are required to prepare Group and Company financial statements for each financial year end. Under company law, the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position of the Group and Company, financial performance of the Group and cash flows of the Group and Company for that period. In preparing the 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; – state that the Group and Company has complied with IFRSs, subject to any material departures disclosed and explained in the financial statements; and – make judgements and estimates that are reasonable. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and Company’s transactions and 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 2006. 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. 29 www.omegadiagnostics.com Independent Auditors’ Report to the members of Omega Diagnostics Group PLC Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 We have audited the financial statements of Omega Diagnostics Group PLC for the year ended 31 March 2016 which comprise the consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity, consolidated cash flow statement, Company balance sheet, Company statement of changes in equity, Company cash flow statement and the related Notes 1 to 22. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an 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 As explained more fully in the Statement of Directors’ Responsibilities on page 29, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the Group’s and the parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Group Financial Statements to identify material inconsistencies with the audited financial statements and to identify any information that is apparently material based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies, we consider the implications for our report. Opinion on financial statements In our opinion: – the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 March 2016 and of the Group’s profit for the year then ended; – the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; – the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: – adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or – the parent Company financial statements are not in agreement with the accounting records and returns; or – certain disclosures of Directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit. Annie Graham (Senior Statutory Auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor Glasgow 24 June 2016 30 Financial Statements Financial Statements Consolidated Statement of Comprehensive Income for the year ended 31 March 2016 Continuing operations Revenue Cost of sales Gross profit Administration costs Selling and marketing costs Other income Operating profit Finance costs Finance income – interest receivable Profit before taxation Tax (charge)/credit Profit for the year Other comprehensive income to be reclassified to profit and loss in subsequent periods Exchange differences on translation of foreign operations Tax (charge)/credit Other comprehensive income that will not be reclassified to profit and loss in subsequent periods Actuarial gain/(loss) on defined benefit pensions Tax (charge)/credit Other comprehensive income for the year Total comprehensive income for the year Earnings per share (EPS) Basic and diluted EPS on profit for the year Adjusted Profit Before Taxation for the year ended 31 March 2016 Profit before taxation IFRS-related discount charges Amortisation of intangible assets Share-based payment charges Adjusted profit before taxation Earnings per share (EPS) Adjusted EPS on profit for the year Note 2016 £ 2015 £ 7 7 5 7 6 12,743,896 (4,608,383) 12,105,319 (4,431,671) 8,135,513 (5,917,453) (1,821,068) 272,769 7,673,648 (5,278,903) (1,894,844) 173,069 669,761 (24,154) 16,225 661,832 (89,920) 672,970 (30,620) 41,908 684,258 54,788 571,912 739,046 260,960 (29,098) (523,856) 56,068 255,459 (47,533) (270,128) 58,228 439,788 (679,688) 1,011,700 59,358 20 0.5p 0.7p 2016 £ 661,832 17,793 309,163 362,327 2015 £ 684,258 14,941 378,680 295,223 1,351,115 1,373,102 1.2p 1.3p Adjusted profit before taxation is derived by taking statutory profit before taxation and adding back IFRS-related discount charges, amortisation of intangible assets and share-based payment charges. This is not a primary statement. 31 www.omegadiagnostics.com Consolidated Balance Sheet as at 31 March 2016 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Note 2016 £ 2015 £ 8 9 14 18 10 11 12 14 13 18 12 13 13 13,462,355 2,691,722 1,426,205 44,759 12,104,723 2,429,233 1,530,777 — 17,625,041 16,064,733 2,011,495 2,838,269 1,302,257 2,062,095 2,539,851 1,972,137 6,152,021 6,574,083 23,777,062 22,638,816 16,727,516 3,905,909 (446,248) 16,727,516 2,792,842 (707,208) 20,187,177 18,813,150 282,914 1,537,560 — — 315,446 1,266,213 83,394 192,907 1,820,474 1,857,960 127,783 1,641,628 — 237,772 1,542,059 187,875 1,769,411 1,967,706 3,589,885 3,825,666 23,777,062 22,638,816 ASSETS Non-current assets Intangibles Property, plant and equipment Deferred taxation Retirement benefit surplus Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets EQUITY AND LIABILITIES Equity Issued capital Retained earnings Other reserves Total equity Liabilities Non-current liabilities Long-term borrowings Deferred taxation Deferred income Retirement benefit deficit Total non-current liabilities Current liabilities Short-term borrowings Trade and other payables Deferred income Total current liabilities Total liabilities Total equity and liabilities David Evans Non-executive Chairman 24 June 2016 Kieron Harbinson Finance Director 24 June 2016 Omega Diagnostics Group PLC Registered number: 5017761 32 Financial Statements Financial Statements Consolidated Statement of Changes in Equity for the year ended 31 March 2016 Share capital £ Share premium £ Retained earnings £ Translation reserve £ Total £ Balance at 31 March 2014 5,086,756 11,640,760 1,914,405 (183,352) 18,458,569 Profit for the year ended 31 March 2015 Other comprehensive income – net exchange adjustments Other comprehensive income – actuarial loss on defined benefit pensions Other comprehensive income – tax credit Total comprehensive income for the year Share-based payments — — — — — — — — — — — — 739,046 — (270,128) 114,296 583,214 295,223 — (523,856) — — (523,856) — 739,046 (523,856) (270,128) 114,296 59,358 295,223 Balance at 31 March 2015 5,086,756 11,640,760 2,792,842 (707,208) 18,813,150 Profit for the year ended 31 March 2016 Other comprehensive income – net exchange adjustments Other comprehensive income – actuarial gain on defined benefit pensions Other comprehensive income – tax charge Total comprehensive income for the year Share-based payments — — — — — — — — — — — — 571,912 — 255,459 (76,631) 750,740 362,327 — 260,960 — — 571,912 260,960 255,459 (76,631) 260,960 — 1,011,700 362,327 Balance at 31 March 2016 5,086,756 11,640,760 3,905,909 (446,248) 20,187,177 33 www.omegadiagnostics.com Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Note 2016 £ 2015 £ 571,912 739,046 7 8 9 89,920 24,154 (16,225) 669,761 (298,418) 50,600 99,569 — 322,576 309,163 (271,269) 362,327 209,367 (54,788) 30,620 (41,908) 672,970 (123,934) (369,154) 155,701 (1,777) 324,967 378,680 (84,783) 295,223 — 1,453,676 1,247,893 16,225 (620,652) (1,418,536) — 41,908 (701,565) (1,394,146) 8,367 (2,022,963) (2,045,436) (24,154) 104,566 (120,353) (126,734) (21,793) 247,500 (360,000) (89,976) (166,675) (224,269) (735,962) 66,082 1,972,137 (1,021,812) (122,064) 3,116,013 1,302,257 1,972,137 Consolidated Cash Flow Statement for the year ended 31 March 2016 Cash flows generated from operations Profit for the year Adjustments for: Taxation Finance costs Finance income Operating profit before working capital movement Increase in trade and other receivables Decrease/(increase) in inventories Increase in trade and other payables Gain on sale of property, plant and equipment Depreciation Amortisation of intangible assets Movement in grants Share-based payments Taxation received Cash flow from operating activities Investing activities Finance income Purchase of property, plant and equipment Purchase of intangible assets Sale of property, plant and equipment Net cash used in investing activities Financing activities Finance costs New finance leases Loan repayments Finance lease repayments Net cash used in financing activities Net decrease in cash and cash equivalents Effects of exchange rate movements Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 34 Financial Statements Financial Statements Company Balance Sheet as at 31 March 2016 ASSETS Non-current assets Investments Intangibles Deferred taxation Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets EQUITY AND LIABILITIES Equity Issued capital Retained earnings Total equity Liabilities Current liabilities Short-term borrowings Trade and other payables Total current liabilities Total liabilities Total equity and liabilities David Evans Non-executive Chairman 24 June 2016 Kieron Harbinson Finance Director 24 June 2016 Omega Diagnostics Group PLC Registered number: 5017761 Note 19 8 11 2016 £ 2015 £ 12,193,076 1,531,786 — 11,533,366 1,531,786 3,349 13,724,862 13,068,501 4,290,361 597,557 4,441,098 931,928 4,887,918 5,373,026 18,612,780 18,441,527 17,717,191 727,741 17,717,191 416,171 18,444,932 18,133,362 12 13 — 167,848 167,848 167,848 120,353 187,812 308,165 308,165 18,612,780 18,441,527 35 www.omegadiagnostics.com Company Statement of Changes in Equity for the year ended 31 March 2016 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Share capital £ Share premium £ Retained earnings £ Total £ Balance at 31 March 2014 5,459,038 12,258,153 555,181 18,272,372 Loss for the year ended 31 March 2015 Total comprehensive income for the year Share-based payments — — — — — — (434,233) (434,233) (434,233) 295,223 (434,233) 295,223 Balance at 31 March 2015 5,459,038 12,258,153 416,171 18,133,362 Loss for the year ended 31 March 2016 Total comprehensive income for the year Share-based payments — — — — — — (50,757) (50,757) (50,757) 362,327 (50,757) 362,327 Balance at 31 March 2016 5,459,038 12,258,153 727,741 18,444,932 36 Financial Statements Financial Statements Company Cash Flow Statement for the year ended 31 March 2016 Cash flows generated from operations Loss for the year Adjustments for: Taxation Finance costs Finance income Operating loss before working capital movement Decrease/(increase) in trade and other receivables (Decrease)/increase in trade and other payables Share-based payments Net cash flow from operating activities Investing activities Finance income Investment in subsidiaries Net cash used in investing activities Financing activities Loan repayments Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2016 £ 2015 £ (50,757) (434,233) 3,349 — (74,117) (121,525) 150,737 (19,964) 362,327 122,263 8,827 (102,911) (406,054) (334,060) 9,853 295,223 371,575 (435,038) 74,117 (659,710) 102,911 (363,098) (585,593) (260,187) (120,353) (360,000) (120,353) (360,000) (334,371) 931,928 (1,055,225) 1,987,153 597,557 931,928 37 www.omegadiagnostics.com Notes to the Financial Statements for the year ended 31 March 2016 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 1 Authorisation of financial statements The financial statements of Omega Diagnostics Group PLC for the year ended 31 March 2016 were authorised for issue by the Board of Directors on 24 June 2016, 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 AIM. 2 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 and have been prepared in accordance with IFRSs as adopted by the EU and applied in accordance with the provisions of the Companies Act 2006. In relation to IFRS 8 – Operating Segments, the Group has identified the Executive Board as the chief operating decision maker with responsibility for decisions over the allocation of resources to operating segments and for the monitoring of their performance. The Group reports performance of the following three segments: – Allergy and autoimmune; – Food intolerance; and – Infectious disease and Other. Basis of consolidation The Group financial statements consolidate the financial statements of Omega Diagnostics Group PLC and the entities it controls (its subsidiaries). Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. 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 intercompany balances and transactions, including unrealised profits arising from them, are eliminated. Intangible assets Goodwill Business combinations are accounted for under IFRS 3 using the acquisition method. Goodwill represents the 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. Goodwill is not amortised but is subject to an annual impairment review and whenever events or changes in circumstances indicate that the carrying value may be impaired a charge is made to the income statement. After initial recognition, goodwill is stated at cost less any accumulated impairment losses. 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. Other 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 Customer relationships Supply agreements Licences/software – – – – 5–20 years 5–10 years 5 years 5–20 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. Research and development costs Expenditure on research and initial feasibility work is written off through the income statement as incurred. Thereafter, expenditure on product development which meets certain criteria is capitalised and amortised over its useful life. The stage at which it is probable that the product will generate future economic benefits is when 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. 38 Financial Statements 2 Accounting policies continued 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: Land and property Leasehold improvements Plant and machinery Motor vehicles – – – – 33 years, straight line with no residual value ten years, straight line with no residual value three to ten years, straight line with no residual value five 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 assess 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. 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. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured 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. Significant financial difficulty or significantly extended settlement periods are considered to be indicators of impairment. Normal average payment terms vary from payment in advance to 90 days. Balances are written off when the probability of recovery is assessed as remote. 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. Financial instruments Under IAS 39, 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. Financial assets are classified as either: – financial assets at fair value through profit or loss; or – loans and receivables. Other financial liabilities Other financial liabilities, whether used as part of the consideration for acquisitions which include deferred consideration or not, are designated by the Group as financial liabilities at fair value through profit and loss. They are measured 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 in the expectation of future cash flows or interest rates, the change is reflected through the income statement. 39 www.omegadiagnostics.com Notes to the Financial Statements continued for the year ended 31 March 2016 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 2 Accounting policies continued Financial instruments continued Other liabilities Trade payables are not interest bearing and are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Bank borrowings are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. For long-term bank borrowings stated at amortised cost, transaction costs that are directly attributable to the borrowing instrument are recognised as an interest expense over the life of the instrument. A financial asset or liability is generally derecognised when the contract that gives rise to it is settled, sold or 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 assets and liabilities that are held for trading and other assets and liabilities designated as such on inception are included at fair value through profit and loss. Financial assets and liabilities are classified as held for trading if they are acquired for sale in the short term. 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 investments in subsidiaries 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. Presentation currency 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. Foreign currencies 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. The trading results of the overseas subsidiaries are translated at the average exchange rate ruling during the year, with the exchange difference between the average rates and the rates ruling at the balance sheet date being taken to reserves. Any difference arising on the translation of the opening net investment in the overseas subsidiaries and of applicable foreign currency loans are recognised in other comprehensive income and accumulated in the translation reserve. 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. Grants 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. 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. Revenue grants are credited to the income statement as and when the relevant expenditure is incurred. 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. 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 service and performance (vesting conditions), other than conditions linked to the price of the shares of the Company (market conditions). Any other conditions which are required to be met in order for an employee to become fully entitled to an award are considered to be non-vesting conditions. Like market performance conditions, non-vesting conditions are taken into account in determining grant date fair value. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance conditions are satisfied. 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 vesting conditions and of the number of equity instruments that will ultimately vest or, in the case of an instrument subject to a market or non-vesting condition, be treated as vesting as described above. This includes any award where non-vesting conditions within the control of the Group or the employee are not met. The movement in cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity. 40 Financial Statements 2 Accounting policies continued Share-based payments continued Equity-settled transactions continued 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. The Group also operates two defined benefit plans in Germany, which are closed to new members. Obligations under defined benefit plans are measured at discounted present values by actuaries, while plan assets are recorded at fair value. The operating and financing costs of pensions are charged to the income statement in the period in which they arise and are recognised separately. The difference between actual and expected returns on assets during the year, including changes in actuarial assumptions, are recognised in the statement of comprehensive income. 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 and deferred tax is charged or credited in other comprehensive income or directly to equity if it relates to items that are credited or charged in other comprehensive income or directly to equity. Otherwise, income tax and deferred tax are recognised in profit or loss. 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 overleaf. 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 is disclosed in Note 8. 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 and having regard to their strategic planning processes when making these judgements. Prospective products undergo an internal screening process before significant resources are committed to development, increasing the chances of successful commercialisation and the ability to generate future profits. The balance at 31 March 2016, which will be offset against future profits expected to be generated from the prospects for Allersys®, Visitect® CD4, Allergodip® and anticipated output from the Pune facility in India, leads management to conclude to carry the deferred tax asset in full. The carrying value of the deferred tax asset at 31 March 2016 is £1,426,205 (2015: £1,530,777). Further details are contained in Note 14. 41 www.omegadiagnostics.com Notes to the Financial Statements continued for the year ended 31 March 2016 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 2 Accounting policies continued Use of estimates and judgements continued New standards and interpretations not applied IASB and IFRIC have issued the following standards and interpretations, which are considered relevant to the Group, with an effective date after the date of these financial statements. International Accounting Standards (IAS/IFRSs) Annual Improvements to IFRSs 2012–2014 Cycle Amendments to IAS 1 – Disclosure Initiative Amendments to IAS 16 and IAS 38 – Clarification of Acceptable Methods of Depreciation and Amortisation Amendments to IAS 12 – Recognition of Deferred Tax Assets for Unrealised Losses Amendments to IAS 7 – Disclosure Initiative IFRS 15 – Revenue from Contracts with Customers (including amendments) IFRS 9 – Financial Instruments IFRS 16 – Leases * Not yet adopted for use in the European Union. Effective date for periods commencing 1 January 2016 1 January 2016 1 January 2016 1 January 2017* 1 January 2017* 1 January 2018* 1 January 2018* 1 January 2019* The above standards and interpretations will be adopted in accordance with their effective dates and have not been adopted in these financial statements. The Directors anticipate that the adoption of these standards and interpretations will have a limited impact on the Group’s financial statements in the period of initial application. 3 Adoption of new International Financial Reporting Standards The accounting policies adopted are consistent with those of the previous financial year. 4 Segment information For management purposes the Group is organised into three operating divisions: Allergy and autoimmune, Food intolerance, and Infectious disease and Other. The Allergy and autoimmune division specialises in the research, development, production and marketing of in-vitro allergy and autoimmune tests used by doctors to diagnose patients with allergies and autoimmune diseases. The Food intolerance division specialises in the research, development and production of kits to aid the detection of immune reactions to food. It also provides clinical analysis to the general public, clinics and health professionals as well as supplying the consumer Food Detective® test. The Infectious disease division specialises in the research, development, production and marketing of kits to aid the diagnosis of infectious diseases. Corporate consists of centralised corporate costs which are not allocated across the three business divisions. Inter-segment transfers or transactions are entered into under the normal commercial conditions that would be available to unrelated third parties. Business segment information 2016 Statutory presentation Revenue Inter-segment revenue Total revenue Operating costs Operating (loss)/profit Net finance (costs)/income Allergy and autoimmune £ Food intolerance £ 3,254,725 (95,693) 3,159,032 (3,479,086) (320,054) (58,283) 8,681,553 (1,621,862) 7,059,691 (4,572,482) 2,487,209 (2,137) Infectious disease/ Other £ 2,698,113 (172,940) Corporate £ Group £ — — 14,634,391 (1,890,495) 2,525,173 (2,768,799) — (1,253,768) 12,743,896 (12,074,135) (243,626) (21,625) (1,253,768) 74,116 669,761 (7,929) (Loss)/profit before taxation (378,337) 2,485,072 (265,251) (1,179,652) 661,832 Adjusted (loss)/profit before taxation (Loss)/profit before taxation IFRS-related discount charges Amortisation of intangible assets Share-based payment charges (378,337) — 200,335 — 2,485,072 — 98,907 — (265,251) — 9,921 — (1,179,652) 17,793 — 362,327 661,832 17,793 309,163 362,327 Adjusted (loss)/profit before taxation (178,002) 2,583,979 (255,330) (799,532) 1,351,115 42 Financial Statements 4 Segment information continued Business segment information continued 2015 Statutory presentation Revenue Inter-segment revenue Total revenue Operating costs Operating (loss)/profit Net finance (costs)/income Allergy and autoimmune £ Food intolerance £ 3,698,302 (84,478) 3,613,824 (3,851,938) 7,449,037 (1,502,610) 5,946,427 (3,873,796) (238,114) (61,172) 2,072,631 169 Infectious disease/ Other £ 2,712,236 (167,168) 2,545,068 (2,812,507) (267,439) (21,794) Corporate £ Group £ — — 13,859,575 (1,754,256) — (894,108) (894,108) 94,085 12,105,319 (11,432,349) 672,970 11,288 (Loss)/profit before taxation (299,286) 2,072,800 (289,233) (800,023) 684,258 Adjusted (loss)/profit before taxation (Loss)/profit before taxation IFRS-related discount charges Amortisation of intangible assets Share-based payment charges (299,286) — 261,171 — 2,072,800 — 98,901 — (289,233) — 18,608 — (800,023) 14,941 — 295,223 684,258 14,941 378,680 295,223 Adjusted (loss)/profit before taxation (38,115) 2,171,701 (270,625) (489,859) 1,373,102 The segment assets and liabilities are as follows: 2016 Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities 2015 Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Allergy and autoimmune £ 9,914,928 — Food intolerance £ 6,548,151 — Infectious disease/ Other £ 4,573,779 — Corporate £ Group £ 11,742 — 21,048,600 2,728,462 9,914,928 6,548,151 4,573,779 11,742 23,777,062 255,625 — 583,732 — 634,423 — 167,848 — 1,641,628 1,948,257 255,625 583,732 634,423 167,848 3,589,885 Allergy and autoimmune £ 9,074,314 — Food intolerance £ 6,205,627 — Infectious disease/ Other £ 3,840,498 — Corporate £ 15,463 — Group £ 19,135,902 3,502,914 9,074,314 6,205,627 3,840,498 15,463 22,638,816 433,446 — 433,446 558,426 — 558,426 862,075 — 862,075 152,288 — 2,006,235 1,819,431 152,288 3,825,666 Unallocated assets comprise cash, income tax receivable, deferred taxation and derivative financial instruments. Unallocated liabilities comprise interest-bearing loans, borrowings, other financial liabilities, derivative financial instruments, deferred taxation and income tax payable. Information about major customers No single customer accounts for 10% or more of Group revenues. 43 www.omegadiagnostics.com Notes to the Financial Statements continued for the year ended 31 March 2016 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 4 Segment information continued Geographical information The Group’s geographical information is based on the location of its markets and customers. Sales to external customers disclosed in the geographical information 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. 2016 £ 2015 £ 939,635 2,667,102 3,513,511 1,098,320 874,151 548,837 1,480,638 1,621,702 979,964 3,074,157 3,381,582 515,963 904,276 480,138 1,439,271 1,329,968 12,743,896 12,105,319 Trade and other receivables £ Total £ 2,353,170 270,544 214,555 — 16,442,708 3,916,133 689,759 2,728,462 Intangibles £ 11,276,612 2,180,987 4,756 — Property, plant and equipment £ Retirement benefit surplus £ 1,533,967 767,738 390,017 — — 44,759 — — Inventories £ 1,278,959 652,105 80,431 — 13,462,355 2,691,722 44,759 2,011,495 2,838,269 23,777,062 Property, plant and equipment £ Retirement benefit surplus £ Intangibles £ 9,965,739 2,135,073 3,911 — 1,539,531 792,576 97,126 — 12,104,723 2,429,233 — — — — — Inventories £ 1,373,913 614,069 74,113 — Trade and other receivables £ 2,058,699 328,075 153,077 — Total £ 14,937,882 3,869,793 328,227 3,502,914 2,062,095 2,539,851 22,638,816 2016 £ 2015 £ 1,320,827 186,412 134,389 1,948,257 1,762,243 159,255 84,737 1,819,431 3,589,885 3,825,666 297,416 26,289 296,947 537,071 78,125 86,369 620,652 701,565 Revenues UK Germany Rest of Europe North America South/Central America India Asia and Far East Africa and Middle East 2016 Assets UK Germany India Unallocated assets Total assets 2015 Assets UK Germany India Unallocated assets Total assets Liabilities UK Germany India Unallocated liabilities Total liabilities Capital expenditure UK Germany India Total capital expenditure 44 Financial Statements 5 Finance costs Consolidated Interest payable on loans and bank overdrafts Unwinding of discounts Finance leases 6 Taxation Consolidated (a) Tax (charged)/credited in the income statement Current tax – current year Current tax – prior year adjustment Deferred tax – current year Deferred tax – prior year adjustment (b) Tax relating to items charged or credited to other comprehensive income Deferred tax on actuarial (gain)/loss on retirement benefit obligations Deferred tax on net exchange adjustments Total tax (charge)/credit Consolidated (c) Reconciliation of total tax credit Factors affecting the tax charge/(credit) 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 Research and development and deferred tax credits Movement on deferred tax arising from share-based payments Tax repayment on surrender of tax losses in prior year at 14.5% Tax losses surrendered in prior year at 20% Tax underprovided in prior years Adjustment due to different overseas tax rate Impact of UK rate change on deferred tax Tax charge/(credit) for the year 2016 £ 3,104 — 21,050 24,154 2016 £ — 209,368 132,794 (432,082) 2015 £ 4,708 7,792 18,120 30,620 2015 £ — — 62,161 (7,373) (89,920) 54,788 (47,533) (29,098) 58,228 56,068 (76,631) 114,296 2016 £ 2015 £ 661,832 684,258 20% 21% 132,366 143,694 76,734 (250,622) — (209,368) 288,783 143,299 (59,975) (31,297) 65,054 (362,447) 125,613 — — 7,373 (29,449) (4,626) 89,920 (54,788) The reduction in the rate of corporation tax from 21% to 20%, effective from 1 April 2015, was provided for in the Finance Act 2014, which was enacted on 17 July 2014. Finance Act 2015, which was given royal assent on 26 March 2015, provided that the tax rate would reduce further to 19% on 1 April 2017, and 18% on 1 April 2020. The deferred tax balances as at 31 March 2016 have been recognised at a rate of 19% as this is the rate at which the majority of the timing differences are expected to reverse. It should be noted that a further reduction in the tax rate to 17%, effective from 1 April 2020, was announced in the Budget in March 2016; however, this change had not been substantively enacted by the balance sheet date, therefore this is a non-adjusting event. As the timing differences are expected to materially reverse in advance of 1 April 2020, this further reduction should have no material impact on the accounts. 45 www.omegadiagnostics.com Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Notes to the Financial Statements continued for the year ended 31 March 2016 7 Revenue and expenses Consolidated Revenue and other income Revenue – sales of goods Other income Finance income Total revenue and other income Other income is explained in the Financial Review. Consolidated Operating profit is stated after charging/(crediting): Material costs Depreciation Capitalised depreciation Amortisation of intangibles Net foreign exchange gains Grant income Research costs Operating lease rentals Share-based payments Auditors’ remuneration Fees payable to the Company’s auditors for the audit of the annual accounts: Local statutory audit of subsidiaries Local statutory audit of the parent Company Fees payable to the Company’s auditors for other services: Taxation compliance Taxation advisory All research costs noted above 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 2016 £ 2015 £ 12,743,896 272,769 16,225 12,105,319 173,069 41,908 13,032,890 12,320,296 2016 £ 2015 £ 3,359,723 415,119 (92,543) 309,163 (6,481) 272,769 258,306 277,623 362,327 20,000 53,000 5,000 12,500 5,000 3,282,791 444,048 (119,081) 378,680 (5,803) 126,283 307,149 260,501 295,223 20,000 50,000 5,000 12,500 2,000 2016 number 100 57 157 2015 number 87 59 146 2016 £ 4,775,216 586,317 227,281 362,327 2015 £ 4,059,395 506,435 173,807 295,223 5,951,141 5,034,860 Equity-settled share-based payments Consolidated and Company The share-based payment plans are described below. 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 do not require to be the subject of any performance criteria. The scheme rules allow for performance criteria to be applied in appropriate cases. 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. 46 Financial Statements 7 Revenue and expenses continued Equity-settled share-based payments continued Consolidated and Company continued Second Unapproved Option Scheme (SUOS) The plan is an equity-settled plan and the fair value is measured at the grant date. Under the above plan, share options may be granted to third parties for provision of services to 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 three years 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. Third Unapproved Option Scheme (TUOS) The plan is an equity-settled plan and the fair value is measured at the grant date. Under the above plan, share options may be granted to Directors 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 three years after the date of grant and are subject to 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. Under the EMI Option Scheme no options lapsed during the year and a further 1,985,000 were granted. Under the TUOS during the year no options were granted. The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year: Outstanding 1 April Granted during the year under the EMI Option Scheme Granted during the year under the TUOS Exercised during the year Lapsed during the year under the EMI Option Scheme Outstanding at 31 March 2016 Exercisable at 31 March 2016 2016 number 8,998,695 1,985,000 — — — 2016 WAEP 20.96p 16p — — — 2015 number 8,978,695 20,000 — — — 10,983,695 20p 8,998,695 3,753,289 — 2,633,289 2015 WAEP 20.96p 18.5p — — — — — The following table lists the inputs to the model used for the years ended 31 March 2016 and 31 March 2015: Dividend yield Expected volatility Risk-free interest rate Weighted average remaining contractual life Weighted average share price Exercise price Model used EMI Option Scheme and Unapproved Option Schemes 2016 — 64% 5% 6.3 16p 16p Black-Scholes 2015 — 41% 5% 6.7 18.5p 18.5p Black-Scholes 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 2016 £ 65,000 585,925 2015 £ 65,000 371,789 650,925 436,789 28,084 18,500 679,009 455,289 4 3 Information in respect of individual Directors’ emoluments is provided in the Directors’ Remuneration Report on pages 26 and 27. 47 www.omegadiagnostics.com Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Notes to the Financial Statements continued for the year ended 31 March 2016 8 Intangibles Cost At 31 March 2014 Additions Additions internally generated Currency translation Goodwill £ Licences/ software £ Supply arrangements £ Technology assets £ Customer relationships £ Development costs £ Total £ 4,657,522 — — (150,470) 1,716,402 12,715 — (18,034) 515,831 — — (59,356) 2,144,804 — — (19,539) 1,206,886 — — (127,369) 2,693,193 — 1,500,512 (38,250) 12,934,638 12,715 1,500,512 (413,018) At 31 March 2015 4,507,052 1,711,083 456,475 2,125,265 1,079,517 4,155,455 14,034,847 Additions Additions internally generated Currency translation — — 93,108 26,034 — 11,423 — — 36,729 — — 12,090 — — 78,817 — 1,485,048 26,794 26,034 1,485,048 258,961 At 31 March 2016 4,600,160 1,748,540 493,204 2,137,355 1,158,334 5,667,297 15,804,890 Accumulated amortisation At 31 March 2014 Amortisation charge in the year Currency translation At 31 March 2015 Amortisation charge in the year Currency translation At 31 March 2016 Net book value 31 March 2016 31 March 2015 31 March 2014 — — — — — — — 134,236 35,999 (15,793) 335,291 98,001 (45,288) 755,430 129,535 (14,226) 450,466 115,145 (48,672) 154,442 388,004 870,739 516,939 24,010 12,029 67,291 37,909 119,887 11,908 97,975 41,402 — — — — — — 1,675,423 378,680 (123,979) 1,930,124 309,163 103,248 190,481 493,204 1,002,534 656,316 — 2,342,535 4,600,160 1,558,059 — 1,134,821 502,018 5,667,297 13,462,355 4,507,052 1,556,641 68,471 1,254,526 562,578 4,155,455 12,104,723 4,657,522 1,582,166 180,540 1,389,374 756,420 2,693,193 11,259,215 Of the development costs balance above of £5,667,297 (2015: £4,155,455), costs of £1,597,368 (2015: £1,110,537) relate to the Visitect® CD4 project, costs of £3,995,021 (2015: £3,044,918) relate to the Allersys® project and costs of £74,908 (2015: £Nil) relate to the Allergodip® project. Of the licences/software balance above, £1,531,786 (2015: £1,531,786) is held on the balance sheet of the Company and relates to the IDS and CD4 licences. £92,546 of the additions internally generated in the year relates to capitalised depreciation on assets utilised for development activities. Impairment testing of goodwill and intangibles 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 net book value of goodwill above for Genesis-CNS amounts to £3,016,892 (2015: £3,016,892), for Co-Tek amounts to £332,986 (2015: £332,986) and Omega Diagnostics GmbH £1,250,282 (2015: £1,157,174). The recoverable amount of Genesis-CNS and Co-Tek has been determined based on a value in use calculation using cash flow projections based on the actual results for the year ended 31 March 2016 and the financial budget approved by the Board covering the period to 31 March 2017, with projected cash flows thereafter through to March 2021 based on a growth rate of 3% per annum. The key assumptions used in the budget for Genesis-CNS are the sales projections which are predicated on the continued success of Genarrayt® and Food Detective®. The key assumption used in the budget for Co-Tek is the growth in sales of the Company’s Micropath™ range of products. The recoverable amount of Omega Diagnostics GmbH has been determined based on a value in use calculation using cash flow projections based on the actual results for the year ended 31 March 2016 and the financial budget approved by the Board covering the period to 31 March 2019, with projected cash flows thereafter through to March 2021 based on a growth rate of 3% per annum. The budget for Omega Diagnostics GmbH assumes continued sales in the German market and increasing export sales from an extension to the allergens on the Allergodip® test. Given the level of the development spend detailed in Note 8 a value in use calculation has been prepared to support both the Visitect® CD4 and Allersys® project costs. The recoverable amount for Visitect® CD4 has been determined based on projections through to March 2021 assuming an increased number of unit sales each year as the product achieves market acceptance. The projections used assume that management will overcome the technical challenges and bring the product to market. The Visitect® CD4 test represents a unique opportunity to meet a large unmet global health need. The outcome to the development project is likely to lead to a recoverable amount which is either significantly higher or significantly lower than the current carrying amount of the asset, depending on the respective success or otherwise of the development programme. 48 Financial Statements 8 Intangibles continued Impairment testing of goodwill and intangibles continued The recoverable amount for the Allersys® project has been determined based on projections through to March 2021 as well as the inclusion of a terminal value, again assuming an increasing number of tests sold each year as the product increases market acceptance and penetration. In all cases, the Company also makes assumptions in regard to having sufficient production personnel to cope with increased volumes. The discount rate applied to cash flows is 12.94% for the Group, which takes account of other risks specific to each segment such as currency risk, geography and price risk. The discount rate is the weighted average cost of the pre-tax cost of debt financing and the pre-tax cost of equity financing. As a result, there has been no impairment to the carrying value of goodwill or intangibles. Sensitivity analysis The Group has conducted a sensitivity analysis on each of the impairment tests. The Directors believe that any reasonably possible further change in the key assumptions on which the recoverable amount is based would not cause any of the carrying amounts to exceed the relevant recoverable amount. 9 Property, plant and equipment Consolidated Cost At 31 March 2014 Additions Disposals Currency translation At 31 March 2015 Additions Disposals Currency translation At 31 March 2016 Accumulated depreciation At 31 March 2014 Charge in the year Disposals Currency translation At 31 March 2015 Charge in the year Disposals Currency translation At 31 March 2016 Net book value 31 March 2016 31 March 2015 31 March 2014 Land and property £ Leasehold improvements £ Plant and machinery £ 679,795 — — (78,223) 257,572 144,651 — (234) 3,132,210 556,914 (4,480) (78,425) Motor vehicles £ 48,636 — (38,307) (2,693) Total £ 4,118,213 701,565 (42,787) (159,575) 601,572 401,989 3,606,219 7,636 4,617,416 — — 48,403 396,107 (9,186) 10,310 224,545 — 53,225 — — 615 620,652 (9,186) 112,553 649,975 799,220 3,883,989 8,251 5,341,435 60,382 17,670 — (8,157) 69,895 16,466 — 6,944 166,338 17,431 — (223) 1,571,799 402,517 (1,558) (43,662) 183,546 1,929,096 24,020 — 269 372,643 — 38,583 35,783 6,430 (34,641) (1,926) 5,646 1,990 — 615 1,834,302 444,048 (36,199) (53,968) 2,188,183 415,119 — 46,411 93,305 207,835 2,340,322 8,251 2,649,713 556,670 591,385 1,543,667 — 2,691,722 531,677 619,413 218,443 1,677,123 1,990 2,429,233 91,234 1,560,411 12,853 2,283,911 £92,543 (2015: £119,081) of the annual depreciation charge relates to assets utilised for development activities; therefore, this depreciation has been capitalised and included within intangible assets. The net book value of plant and machinery held under finance leases at 31 March 2016 is £569,886 (2015: £519,977). 49 www.omegadiagnostics.com Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Notes to the Financial Statements continued for the year ended 31 March 2016 10 Inventories Raw materials Work in progress Finished goods and goods for resale 11 Trade and other receivables Consolidated Trade receivables Less provision for impairment of receivables Trade receivables – net Prepayments and other receivables 2016 £ 1,314,167 186,850 510,478 2015 £ 1,425,835 161,267 474,993 2,011,495 2,062,095 2016 £ 2,436,065 (14,117) 2,421,948 416,321 2015 £ 2,251,544 (14,117) 2,237,427 302,424 2,838,269 2,539,851 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 Up to three months Between three and six months More than six months 2016 £ 2015 £ 11,742 4,278,619 15,463 4,425,635 4,290,361 4,441,098 2016 £ 2015 £ 2,224,198 197,750 1,977,803 259,624 2016 £ 2015 £ 4,278,619 4,425,635 2016 £ 185,574 10,340 1,836 2015 £ 231,404 20,234 7,986 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. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable and no collateral is held as security. 12 Interest-bearing loans and borrowings and financial instruments Consolidated Current Other loans Obligations under finance leases Non-current Obligations under finance leases 2016 £ 2015 £ — 127,783 127,783 282,914 282,914 120,353 117,419 237,772 315,446 315,446 The Directors consider that the carrying amount of other loans and finance obligations approximates their fair values. 50 Financial Statements 12 Interest-bearing loans and borrowings and financial instruments continued The Group uses finance leases and hire purchase contracts to acquire plant and machinery. These leases have terms of renewal but no purchase options and escalation clauses. Renewals are at the option of the lessee. Future minimum payments under finance leases and hire purchase contracts are as follows: Future minimum payments due: Not later than one year After one year but not more than five years Less finance charges allocated to future periods Present value of minimum lease payments The present value of minimum lease payments is analysed as follows: Not later than one year After one year but not more than five years Consolidated Other loans comprise the following: Vendor loan – 2015 (base rate) Company Current Other loans Company Other loans comprise the following: Vendor loan – 2016 (base rate) 13 Trade and other payables Consolidated Trade payables Social security costs Accruals and other payables 2016 £ 2015 £ 144,548 300,440 444,988 34,291 135,940 338,769 474,709 41,844 410,697 432,865 127,783 282,914 117,419 315,446 410,697 432,865 2016 £ 2015 £ — 120,353 2016 £ 2015 £ — 120,353 2016 £ 2015 £ — 120,353 2016 £ 1,070,258 193,780 377,590 2015 £ 1,106,328 118,751 316,980 1,641,628 1,542,059 In the prior year UNITAID and Scottish Enterprise grant funding totalling £271,269 was included as deferred income on the consolidated balance sheet. 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 2016 £ 46,738 121,110 — 167,848 2015 £ 40,090 112,199 35,523 187,812 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. 51 www.omegadiagnostics.com Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Notes to the Financial Statements continued for the year ended 31 March 2016 14 Deferred taxation The deferred tax asset is made up as follows: Consolidated Decelerated capital allowances Temporary differences Tax losses carried forward 2016 £ — 50,211 1,375,994 2015 £ 1,004 29,439 1,500,334 1,426,205 1,530,777 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. The deferred tax liability is made up as follows: Consolidated Fair value adjustments on acquisition Accelerated capital allowances Other timing differences 15 Share capital Company Authorised share capital Ordinary shares of 4.0 pence each Deferred shares of 0.9 pence each Issued and fully paid ordinary share capital At the beginning and end of the year 2016 £ 278,451 189,099 1,070,010 2015 £ 264,803 186,829 814,581 1,537,560 1,266,213 2016 number 2015 number 184,769,736 123,245,615 184,769,736 123,245,615 108,745,669 108,745,669 During the year ended 31 March 2016, the Company granted options over 1,985,000 ordinary shares at an average exercise price of 16 pence per share. The options will expire if not exercised within ten years of the date of grant. 16 Commitments and contingencies Operating lease commitments Future minimum rentals payable under non-cancellable operating leases are as follows: Consolidated Land and buildings Within one year Within two to five years After five years Other Within one year Within two to five years After five years 2016 £ 2015 £ 425,190 929,658 21,727 61,285 112,080 — 369,409 1,046,883 125,997 59,194 136,478 — Land and buildings leases in force for Omega Diagnostics Limited premises extend to 30 June 2021. The land and buildings leases in force for the premises of Genesis Diagnostics Limited and Cambridge Nutritional Sciences extend to March 2017. The land and buildings leases in force for the Omega Dx (Asia) facility in Pune extend to May 2019. Other leases are in force for office equipment items and extend to time periods ranging from April 2016 to October 2019. The leases may be extended at the expiry of their term. Performance bonds The Group has performance bonds and guarantees in place amounting to £235,306 at 31 March 2016 (2015: £238,116). 52 Financial Statements 17 Related party transactions Remuneration of key personnel The remuneration of 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 2016 £ 1,187,677 280,797 51,952 2015 £ 947,833 276,429 41,032 1,520,426 1,265,294 Included within short-term employee benefits are amounts paid to MBA Consultancy of £25,000 (2015: £25,000), a company controlled by David Evans, and £40,000 (2015: £40,000) paid to Third Day Advisors, a company controlled by William Rhodes. Other related party transactions During the year there have been transactions between the parent Company, Omega Diagnostics Limited (ODL), Genesis Diagnostics Limited (Genesis), Cambridge Nutritional Sciences (CNS), Co-Tek (South West) Limited (Co-Tek), Omega Diagnostics GmbH and Omega Dx (Asia) largely relating to payment of management fees. The amounts outstanding at the year end are as follows: At 31 March 2016 Omega Diagnostics Group PLC Omega Diagnostics Limited Genesis Diagnostics Limited Cambridge Nutritional Sciences Limited Co-Tek (South West) Limited Omega Diagnostics GmbH Omega Dx (Asia) At 31 March 2015 Omega Diagnostics Group PLC Omega Diagnostics Limited Genesis Diagnostics Limited Cambridge Nutritional Sciences Limited Co-Tek (South West) Limited Omega Diagnostics GmbH Omega Dx (Asia) ODG £ ODL £ Genesis £ CNS £ Co-Tek £ GmbH £ (1,177,136) — 2,055,523 (142,748) 2,828,184 — (393,419) — (923,484) 923,484 1,177,136 (2,055,523) 142,748 (2,828,184) (28,891) — 29,214 — 2,035,251 — 393,419 100,171 7,244 39,066 28,891 (100,171) — (180,000) — — — — (2,035,251) — (7,244) — — — (786) 180,000 — 1,357 ODG £ ODL £ Genesis £ CNS £ Co-Tek £ GmbH £ — (2,203,460) — (889,585) (1,504,269) (2,415) (6,876) 75,098 2,203,460 332,792 (35,523) — 1,889,383 — (332,792) 889,585 35,523 1,504,269 — (346,640) — 120,000 — 9,975 346,640 71,810 — 49,409 — (1,889,383) 6,876 — — — — 5,563 2,415 (71,810) (120,000) — — — Dx (Asia) £ — (29,214) (39,066) (1,357) — 786 — Dx (Asia) £ — (75,098) (49,409) (9,975) — (5,563) — During the year there were transactions between the Company and its subsidiaries as follows: Balance at 1 April 2015 Charges to subsidiary companies Transfers of cash from subsidiary companies Balance at 31 March 2016 2016 £ 2015 £ 4,390,114 968,959 (1,080,454) 4,083,768 747,895 (441,549) 4,278,619 4,390,114 18 Retirement benefit obligations The Group operates pension schemes for the benefit of its UK and overseas employees. Details of the defined contribution schemes for the Group’s employees are given below in Note (a). Details of the defined benefit schemes for the Group’s German employees and details relating to these schemes are given below in Note (b). During the year the Group accounted for these pension schemes under IAS 19 – Employee Benefits. (a) Defined contribution schemes The Group makes contributions to personal plans of employees on a defined contribution basis. The Group does not have ownership of the schemes, with individual plans being arrangements between the employee and pension provider. For new hires in Germany, after 1 January 2011, the support fund (LV 1871 Unterstützungskasse e.V.) is the defined contribution scheme used. The total Group contributions for the year amounted to £114,827 (2015: £66,733). 53 www.omegadiagnostics.com Notes to the Financial Statements continued for the year ended 31 March 2016 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 18 Retirement benefit obligations continued (b) Defined benefit schemes The Deutscher Pensionsfonds AG and the LV 1871 Unterstützungskasse e.V. schemes give the rights to defined future benefits. Of these benefits the past service component is based on years of service and salary as of 1 January 2011 and is provided by the Deutscher Pensionsfonds AG. The remaining benefits based on years of service after 1 January 2011 as well as salary increases are provided by the LV 1871 Unterstützungskasse e.V. scheme. These are mainly dependent on the number of earning years and salary level at pension age. The commitments are covered through an insurance company and are compliant with the requirements of German insurance laws. Pension costs relating to each scheme operating in Germany are charged in accordance with IAS 19 – Employee Benefits. Formal valuations of each scheme have been carried out by Towers Watson (Reutlingen) GmbH, who are independent, professionally qualified actuaries, on 29 April 2016 using the following assumptions: 2016 1.50% 2.50% 1.75% 1.75% 2015 1.50% 2.50% 1.75% 1.75% 2016 £ 2015 £ 2,152,951 2,197,710 2,194,832 2,001,925 44,759 (192,907) 2016 £ 123,105 35,225 (32,953) 2015 £ 105,492 50,895 (53,454) 125,377 102,933 2016 £ 351,581 (96,122) 2015 £ (547,241) 277,113 255,459 (270,128) 2016 £ 2,194,832 123,105 35,225 (127,780) (223,801) 176,598 (25,228) 2015 £ 1,695,381 105,492 50,895 (111,691) 658,932 (195,088) (9,089) 2,152,951 2,194,832 Discount rate Future salary increases Future pension increases Price inflation (i) The amounts recognised in the balance sheet are as follows: Defined benefit obligation Fair value of plan assets Net asset/(liability) (ii) The amounts charged/(credited) to operating profit: Current service costs Interest cost on the defined benefit obligation Interest income on plan assets Total included in employee benefits expense The current service costs for the year, £123,105 (2015: £105,492), have been included in administration costs. (iii) The amounts recognised in the consolidated statement of comprehensive income: Actuarial gain/(loss) arising during the period Return on plan assets Total actuarial gain/(loss) on pensions (iv) Changes in the defined obligation during the year: Opening defined benefit obligation Current service cost Interest cost Actuarial (gain)/loss due to: Changes in demographic assumptions Changes in financial assumptions Exchange differences on foreign plans Benefits paid Closing defined benefit obligation The weighted average duration of the defined benefit obligation is 19.6 years. 54 Financial Statements 18 Retirement benefit obligations continued (b) Defined benefit schemes continued (v) Changes in plan assets during the year: Opening fair value of plan assets Interest income Return on plan assets Contributions by employer Exchange differences on foreign plans Benefits paid Closing fair value of plan assets Fair value of plan assets: Equities Bonds/debt instruments Cash/other Total value of plan assets 2016 £ 2,001,925 32,953 (96,122) 123,105 161,077 (25,228) 2015 £ 1,779,751 53,454 277,113 105,492 (204,796) (9,089) 2,197,710 2,001,925 Quoted £ 352,232 1,248,823 596,655 2,197,710 2016 Unquoted £ — — — — Total £ 352,232 1,248,823 596,655 Quoted £ 400,385 820,070 340,327 2015 Unquoted £ — 441,143 — Total £ 400,385 1,261,213 340,327 2,197,710 1,560,782 441,143 2,001,925 (vi) The major categories of plan assets as a percentage of total plan assets: Equities Bonds/debt instruments Cash/other 2016 16% 57% 27% 2015 20% 63% 17% The asset figures above are now weighted with the underlying assets. The Group expects to contribute £125,000 to its defined benefit pension plans in the year ending 31 March 2017. (vii) Mortality assumptions Assumptions regarding future mortality experience are set based on advice in accordance with published statistics and experience in Germany. In the calculations, the mortality rate used is in accordance with Heubeck Richttafeln’s basis of calculation for group pension insurance, 2005G. Other assumptions have been set in accordance with Heubeck Richttafeln’s basis of calculation for group pension insurance, as set out in schedule 2005G. (viii) Sensitivity analysis Changes in assumptions compared with March 2016 actuarial assumptions: Discount rate Increase by 1% Decrease by 1% Inflation rate Increase by 0.5% Decrease by 0.5% Salary increase Increase by 0.5% Decrease by 0.5% Effect on defined benefit obligation 2016 £ (365,948) 481,509 205,067 (240,579) 47,401 (107,891) Effect on defined benefit obligation 2015 £ (388,725) 516,936 217,590 (249,916) 49,176 (108,435) 55 www.omegadiagnostics.com Notes to the Financial Statements continued for the year ended 31 March 2016 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 19 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 Co-Tek (South West) Limited Investment in Bealaw (692) Limited Investment in Bealaw (693) Limited Investment in Omega Diagnostics GmbH Investment in Omega Dx (Asia) Country of incorporation UK UK UK UK UK UK Germany India 2016 £ 1,752,884 1,845,066 4,034,110 480,978 1 1 2,542,321 1,537,715 2015 £ 1,752,884 1,845,066 4,034,110 480,978 1 1 2,542,321 878,005 12,193,076 11,533,366 The further investment in the year relates to continued funding of Omega Dx (Asia). Bealaw (692) Limited and Bealaw (693) Limited are both dormant companies that have never traded. Co-Tek (South West) Limited is exempt from audit under section 479A of the Companies Act 2006. 20 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. Profit attributable to equity holders of the Group Basic average number of shares Share options Diluted weighted average number of shares 2016 £ 2015 £ 571,912 739,046 2016 number 2015 number 108,745,669 780,017 108,745,669 821,093 109,525,686 109,566,762 Adjusted earnings per share on profit for the year The Group presents adjusted earnings per share, which are calculated by taking adjusted profit before taxation and adding the tax credit or deducting the tax charge in order to allow shareholders to understand better the elements of financial performance in the year, so as to facilitate comparison with prior periods and to better assess trends in financial performance. Adjusted profit before taxation Tax (charge)/credit Adjusted profit attributable to equity holders of the Group 2016 £ 2015 £ 1,351,115 (89,920) 1,373,102 54,788 1,261,195 1,427,890 21 Financial instruments The Group’s principal financial instruments comprise loans, finance leases, financial derivatives 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 categories of financial instruments are summarised in the following tables: Assets as per the consolidated balance sheet 2016 Trade receivables Cash and cash equivalents 56 Loans and receivables £ Total £ 2,421,948 1,302,257 2,421,948 1,302,257 3,724,205 3,724,205 Financial Statements 21 Financial instruments continued Assets as per the consolidated balance sheet 2015 Trade receivables Cash and cash equivalents Assets as per the Company balance sheet 2016 Due from subsidiary companies Cash and cash equivalents Assets as per the Company balance sheet 2015 Due from subsidiary companies Cash and cash equivalents Liabilities as per the consolidated balance sheet 2016 Trade payables Obligations under finance leases Liabilities as per the consolidated balance sheet 2015 Trade payables Obligations under finance leases Other loans (designated on initial recognition) Liabilities as per the Company balance sheet 2016 Trade payables and amounts due to subsidiary companies Loans and receivables £ Total £ 2,237,427 1,972,137 2,237,427 1,972,137 4,209,564 4,209,564 Loans and receivables £ Total £ 4,278,619 597,557 4,278,619 597,557 4,876,176 4,876,176 Loans and receivables £ Total £ 4,425,635 931,928 4,425,635 931,928 5,357,563 5,357,563 Liabilities at fair value through profit and loss £ Amortised cost £ Total £ — — — 1,070,258 410,697 1,070,258 410,697 1,480,955 1,480,955 Liabilities at fair value through profit and loss £ — — 120,353 Amortised cost £ 1,106,328 432,865 — Total £ 1,106,328 432,865 120,353 120,353 1,539,193 1,659,546 Liabilities at fair value through profit and loss £ Amortised cost £ Total £ — 46,738 46,738 57 www.omegadiagnostics.com Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Notes to the Financial Statements continued for the year ended 31 March 2016 21 Financial instruments continued Liabilities as per the Company balance sheet 2015 Trade payables and amounts due to subsidiary companies Other loans (designated upon initial recognition) Liabilities at fair value through profit and loss £ — 120,353 120,353 Amortised cost £ 75,613 — 75,613 Total £ 75,613 120,353 195,966 In the prior year, within other loans designated at fair value through profit and loss was the vendor loan note of £1.1 million, which was issued in September 2007. It carried a coupon of base rate only and was repayable in three equal instalments of £360,000 in September 2012, 2013 and 2014 and a final capital payment of £20,000 in September 2015. The interest was rolled up and repayable with the final capital payment. The fair value was calculated as the future cash flows expected to result based on current estimates of interest rates. There has been no change in the year to the fair value of the loan due to changes in credit risk. The movement in the year of £120,353 (2015: £351,173) is due to the final instalment and rolled up interest being paid in September 2015. Financial risk management 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 operates in more than one currency jurisdiction and is therefore exposed to currency risk on the retranslation of the income statement and the balance sheet of its overseas subsidiaries from euros and rupees into its functional currency of pounds sterling. The Company funds its subsidiaries by a mixture of equity and intercompany loan financing and these balances are subject to exchange rate movements that can give rise to movements in equity. The Group also buys and sells goods and services in currencies other than the functional currency, principally in euros and US dollars. The Group has US dollar and euro-denominated bank accounts and, where possible, the Group will offset currency exposure where purchases and sales of goods and services can be made in these currencies. The Group’s non-sterling revenues, profits, assets, liabilities and cash flows can be affected by movements in exchange rates. It is currently Group policy not to engage in any speculative transaction of any kind but this will be monitored by the Board to determine whether it is appropriate to use additional currency management procedures to manage risk. At 31 March 2016 (and 31 March 2015) the Group had not entered into any hedge transactions. The following table demonstrates the sensitivity to a possible change in currency rates on the Group’s profit before tax and equity through the impact of sterling weakening against the US dollar, the euro and the Canadian dollar. 2016 Trade and other receivables Trade and other payables Cash and cash equivalents Net investment in overseas subsidiary 2015 Trade and other receivables Trade and other payables Cash and cash equivalents Net investment in overseas subsidiary An increase in currency rate of 5% would have a similar but opposite effect. Decrease in currency rate 5% 5% 5% 5% 5% 5% 5% 5% Effect on profit before tax £ 84,208 (25,803) 19,465 — 72,642 (47,128) 27,801 — Effect on equity £ — — — 379 — — — (214,282) 58 Financial Statements 21 Financial instruments continued Financial risk management continued 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. Creditworthiness checks are undertaken before entering into contracts with new customers, and credit limits are set as appropriate. The Group conducts most of its operations through distributors and is therefore able to maintain a fairly close relationship with its immediate customers. As such, the Group monitors payment profiles of customers on a regular basis and is able to spot deteriorations in payment times. An allowance for impairment is made that represents the potential loss in respect of individual receivables where there is an identifiable loss event which, based on previous experience, is evidence of a reduction in the recoverability of cash flows. The amounts presented in the balance sheet are net of allowance for doubtful receivables. An analysis of trade receivables from various regions is analysed in the following table: UK/Europe North America South/Central America Asia and Far East Africa and Middle East 2016 Trade receivables £ 1,170,609 267,995 199,784 407,940 375,620 2015 Trade receivables £ 1,075,727 4,896 323,873 451,321 381,610 2,421,948 2,237,427 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 and maintaining investor, creditor and market confidence. The Board reviews and approves an annual budget to help ensure it has adequate facilities to meet all its operational needs and to support future growth in the business. Liquidity risk The Group’s objective is to maintain sufficient headroom in cash generation and banking facilities to meet its foreseeable financing and working capital requirements. The Group maintains a surplus balance of cash and cash equivalents to ensure flexible liquidity to meet financial liabilities as they fall due. The table below summarises the maturity profile of the Group’s financial liabilities at 31 March 2016 based on the undiscounted cash flows of liabilities which include both future interest and principal amounts outstanding based on the earliest date on which the Group can be required to pay. The amounts of future interest are not included in the carrying value of financial liabilities on the balance sheet. Consolidated 2016 Trade payables Obligations under finance leases 2015 Trade payables Obligations under finance leases Vendor loan Less than 3 months £ 3 to 12 months £ 1 to 5 years £ Total £ 1,070,258 25,664 — 102,119 — 282,914 1,070,258 410,697 1,095,922 102,119 282,914 1,480,955 1,106,328 19,883 — — 97,536 120,353 — 315,446 — 1,106,328 432,865 120,353 1,126,211 217,889 315,446 1,659,546 59 www.omegadiagnostics.com Financial Statements Notes to the Financial Statements continued for the year ended 31 March 2016 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 21 Financial instruments continued Financial risk management continued Liquidity risk continued The table below summarises the maturity profile of the Company’s financial liabilities at 31 March 2016 based on the undiscounted cash flows of liabilities based on the earliest date on which the Company can be required to pay. Company 2016 Trade payables and amounts due to subsidiary companies 2015 Trade payables and amounts due to subsidiary companies Vendor loan Interest rate risk All of the Group’s borrowings are at variable rates of interest. Less than 3 months £ 46,738 46,738 75,613 — 75,613 3 to 12 months £ — — — 120,353 120,353 1 to 5 years £ — — — — — Total £ 46,738 46,738 75,613 120,353 195,966 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 2016 Cash and cash equivalents 2015 Cash and cash equivalents Vendor loan Effect on profit before tax and equity £ Increase in basis points 25 25 25 4,093 6,360 (500) 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 2016 Cash and cash equivalents 2015 Cash and cash equivalents Vendor loan Effect on profit before tax and equity £ Increase in basis points 25 25 25 1,912 3,649 (500) 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 2016 and 31 March 2015. 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 2 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 2016 and 31 March 2015 represents the Group’s maximum exposure to credit risk. 22 Capital commitments At 31 March 2016 the Group had capital commitments contracted, but not provided for, of £Nil (2015: £0.2 million). 60 Financial Statements Notice of Annual General Meeting www.omegadiagnostics.com Notice is hereby given that the Annual General Meeting of the Company will be held at Omega House, Hillfoots Business Village, Clackmannanshire FK12 5DQ on 10 August 2016 at 12 noon for the following purposes: 1. To receive and adopt the reports of the Directors and the auditors and the audited accounts for the year ended 31 March 2016. 2. To re-appoint 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 Kieron Harbinson as a Director of the Company. 4. To re-elect Mr Andrew Shepherd as a Director of the Company. 5. That, in accordance with section 551 of the Companies Act 2006, the Directors be generally and unconditionally authorised to allot shares in the Company or grant rights to subscribe for or convert any security into shares in the Company (“Rights”) up to an aggregate nominal amount of £1,449,942.24 ordinary shares of 4 pence each (“Ordinary Shares”), provided that this authority shall, unless, renewed, varied or revoked by the Company, expire on the conclusion of the next Annual General Meeting of the Company or, if earlier, on 31 October 2017 save that the Company may, before such expiry, make an offer or agreement which would or might require shares to be allotted or Rights to be granted and the Directors may allot shares or grant Rights in pursuance of any such offer or agreement notwithstanding that the authority conferred by this resolution has expired. This authority is in substitution for all previous authorities conferred on the Directors in accordance with section 551 of the Companies Act 2006, but without prejudice to any allotment already made or to be made pursuant to such authority. Resolution 6 is proposed as a special resolution. 6. That, conditional upon the passing of resolution 5 above, and in accordance with section 570 of the Companies Act, the Directors be generally empowered to allot equity securities (as defined in section 560 of the Companies Act 2006) pursuant to the authority conferred by resolution 5 as if section 561(1) of the Companies Act 2006 did not apply to any such allotment, provided that this power shall be limited to: 6.1 the allotment of equity securities in connection with an issue in favour of the holders of Ordinary Shares where the equity securities respectively attributable to the interests of all holders of Ordinary Shares are proportionate (as nearly as may be) to the respective number of Ordinary Shares held by them but subject to such exclusions or arrangements as the Directors may deem necessary or expedient to deal with fractional entitlements arising or any legal or practical problems under the laws of any overseas territory or the requirements of any regulatory body or stock exchange; and 6.2 the allotment of Ordinary Shares otherwise than pursuant to subparagraph 6.1 above up to an aggregate nominal amount of £217,491.32, and provided that this power shall, unless renewed, varied or revoked by the Company, expire on the conclusion of the next Annual General Meeting of the Company or, if earlier, 31 October 2017, 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 24 June 2016 Registered in England and Wales number 5017761 www.omegadiagnostics.com Omega Diagnostics Group PLC One London Wall London EC2Y 5AB United Kingdom Tel: +44 (0)1259 763030 Fax: +44 (0)1259 761853 61 Financial Statements Notes to the Notice of Annual General Meeting Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2016 Entitlement to attend and vote 1. Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, the Company specifies that only those members registered on the Company’s register of members at 12 noon on 8 August 2016 shall be entitled to attend and vote at the Meeting. Appointment of proxies 2. If you are a member of the Company at the time set out in Note 1 above, you are entitled to appoint a proxy to exercise all or any of your rights to attend, speak and vote at the Meeting and you should have received a proxy form with this Notice of Meeting. You can only appoint a proxy using the procedures set out in these notes and the notes to the proxy form. 3. 4. 5. A proxy does not need to be a member of the Company but must attend the Meeting to represent you. Details of how to appoint the Chairman of the Meeting or another person as your proxy using the proxy form are set out in the notes to the proxy form. If you wish your proxy to speak on your behalf at the Meeting you will need to appoint your own choice of proxy (not the Chairman) and give your instructions directly to them. You may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares. You may not appoint more than one proxy to exercise rights attached to any one share. To appoint more than one proxy, please contact the registrars of the Company, Share Registrars Limited, on 01252 821 390. A vote withheld is not a vote in law, which means that the vote will not be counted in the calculation of votes for or against the resolution. If no voting indication is given, your proxy will vote or abstain from voting at his or her discretion. Your proxy will vote (or abstain from voting) as he or she thinks fit in relation to any other matter which is put before the Meeting. 6. The notes to the proxy form explain how to (a) direct your proxy to vote on each resolution or withhold their vote; (b) appoint proxies; (c) change proxy instructions; and (d) terminate proxy appointments. Corporate representing 7. Corporate members are referred to the guidance issued by the Institute of Chartered Secretaries and Administrators on proxies and corporate representatives – www.icsa.org.uk – for further details of this procedure. Issued shares and total voting rights 8. As at the date of this Annual Report the Company’s issued voting share capital comprised 108,745,669 ordinary shares of 4 pence each. Each ordinary share carries the right to one vote at a general meeting of the Company and, therefore, the total number of voting rights in the Company is as at the date of this Annual Report. Communications with the Company 9. Except as provided above, members who have general queries about the Meeting should telephone Kieron Harbinson on +44(0)1259 763 030 (no other methods of communication will be accepted). You may not use any electronic address provided either in this notice of Annual General Meeting, or any related documents (including the proxy form), to communicate with the Company for any purposes other than those expressly stated. Voting through CREST CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the Annual General Meeting and any adjournment(s) thereof by using the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with CRESTCo Limited’s specifications and must contain the information required for such instructions, as described in the CREST Manual. The message, regardless of whether it relates to the appointment of a proxy or to an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s agent (7RA36) by the latest time(s) for receipt of proxy appointments specified above. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time, any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. CREST members and, where applicable, their CREST sponsors or voting service providers should note that CRESTCo Limited does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his or her CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of CREST by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The Company may treat as invalid a CREST Proxy instruction in the circumstances set out in Regulation 35(5) (a) of the Uncertificated Securities Regulations 2001. 62 Financial Statements Advisers www.omegadiagnostics.com Nominated adviser and broker finnCap Limited 60 New Broad Street London EC2M 1JJ Auditors Ernst & Young LLP G1 5 George Square Glasgow G2 1DY Solicitors Brodies LLP 15 Atholl Crescent Edinburgh EH3 8HA Registrar Share Registrars Limited The Courtyard 17 West Street Farnham Surrey GU9 7DR Public relations Walbrook PR Limited 4 Lombard Street London EC3V 9HD Country of incorporation England & Wales Omega Diagnostics Group PLC Registered number: 5017761 Printed by Ripping Image on FSC® certified paper. 100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and, on average, 99% of any waste associated with this production will be recycled. This document is printed on Heaven 42 and Edixion offset. Both papers are from FSC® certified forests. Design Portfolio is committed to planting trees for every corporate communications project, in association with Trees for Cities. 63 Omega Diagnostics Group PLC Omega House Hillfoots Business Village Alva FK12 5DQ Scotland United Kingdom www.omegadiagnostics.com Tel: +44 (0)1259 763030 Fax: +44 (0)1259 761853