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9
ANNUAL REPORT AND
FINANCIAL STATEMENTS
2019
OVERVIEW
02 Highlights
04
Introducing Science Group
STRATEGIC REPORT
06 Chairman’s Statement
12 Finance Director’s Report
14 Key Performance Indicators
14 Principal Opportunities and Risks
16 Corporate Responsibility
REPORT OF THE DIRECTORS
19 Report of the Directors
22 Corporate Governance Report
23 Board Committees
24 Report of the Remuneration Committee
26 Report of the Audit Committee
28 Report of the Nomination Committee
28 Directors’ Responsibilities
28 Approval
29
Independent Auditor’s Report
FINANCIAL STATEMENTS
37 Consolidated Income Statement
38
39
41
42
44
Consolidated Statement of
Comprehensive Income
Consolidated Statement of
Changes in Shareholders’ Equity
Company Statement of
Changes in Shareholders’ Equity
Consolidated and Company
Balance Sheet
Consolidated and Company
Statement of Cash Flows
46 Notes to the Financial Statements
01
Annual Report and Financial Statements 2019 OVERVIEW I HIGHLIGHTS
We have a track record
of delivering increased
shareholder returns.
Science Group is an international, science-led services
and product development organisation, listed on the AIM
market of the London Stock Exchange, with a freehold
property asset base. We aim to deliver shareholder returns
through the profitable development of our business based
on financial and operational discipline, augmented by
incremental and strategic acquisitions.
U K
Cambridge
(Headquarters)
London
Epsom
Knaresborough
E U R O P E
Paris, France
Hildesheim, Germany
Oviedo, Spain
N O R T H
A M E R I C A
Boston, USA
Washington DC, USA
Sacramento, USA
A S I A
Shenzhen, China
Hong Kong
02
OPERATIONAL HIGHLIGHTS
Acquisition
The acquisition of Frontier Smart Technologies was
completed in October 2019 and brings additional
scale and breadth to the Group. Frontier is the
market leader in DAB/DAB+ radio chips and
modules with engineering capabilities in the UK and
manufacturing operations in China.
Product Development
The Product Development business provides
science-led R&D services to medical and commercial
(consumer, food & beverage and industrial) sectors.
The Commercial business recorded a strong year of
growth and the Medical business, despite a tough
start to the year with a number of large projects
completing in 2018, recovered in the second half of
the year.
Advisory
The Advisory business provides science and
technology-focused consulting services to blue-chip
organisations in the consumer, industrial and food
& beverage sectors. The business delivered a good
performance in 2019 with strong growth in consumer
and food & beverage market sectors which benefited
from synergies with other parts of the Group.
Regulatory
Comprising the TSG businesses in Europe and
North America and the Leatherhead Food Research
regulatory services, the Regulatory business
specialises in providing science and regulatory
advice to chemicals, agritech and food & beverage
companies, with the latter sector delivering good
growth in 2019.
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03
OVERVIEW I INTRODUCING SCIENCE GROUP
Since 2010, Science Group has
generated significant value for
shareholders.
The Board of Directors has a diverse range of skills and
experience which are used in the objective management
of the Group in capital and resource allocation. The
Group has an ambition to accelerate growth through
acquisition and over the past 9 years, this strategy has
been executed without shareholder dilution through the
Group’s focus on cash generation from
operations.
1986
Formation of
Sagentia
(then Scientific
Generics);
Part of Cambridge
Cluster
IPO and listing
on the AIM
market of the
London Stock
Exchange
2001
2010
New Chairman
invests and
joins the board
Acquisition
of OTM
Consulting
2013
2015
Acquisition
of Oakland
Innovation
04
MEDICAL
FOOD &
BEVERAGE
CHEMICALS
CONSUMER
AGRITECH
INDUSTRIAL &
ENERGY
Consulting
Regulatory
Applied Science &
Product Development
Defined by Science
Inspired by technology
Delivering innovation
2015
2015
Acquisition of
Leatherhead
Food Research
(founded 1919)
2019
Acquisition
of Frontier
Smart
Technologies
Acquisition of
TSG Consulting
in Europe and USA
2017
Name change
to Science
Group plc
2015
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05
STRATEGIC REPORT
06
Chairman’s Statement
Science Group plc (the ‘Company’)
together with its subsidiaries (‘Science
Group’ or the ‘Group’) is an international,
science & technology services and
product development organisation,
supported by a strong balance sheet
including significant freehold property
assets. In 2019, the Group delivered
a consistent operating performance
from its organic business activities and
completed a major acquisition followed
by an accelerated restructuring and
integration programme. As a result,
the progress of Science Group has
continued despite the background of
macroeconomic and political uncertainty
during 2019.
The strategy of enhancing the organic
development of the Group through
acquisitions has created a financially
and operationally resilient organisation.
The acquisition of Frontier Smart
Technologies Group Limited (‘Frontier’)
was again funded primarily from
the Group’s existing cash resources,
minimising shareholder dilution. This
strategy has delivered a substantial
increase in scale, profit and the asset
base of the Group, with offices in the UK,
Europe, North America and Asia, serving
a range of vertical markets including
medical, consumer, food & beverage and
industrial sectors.
Annual Report and Financial Statements 2019 STRATEGIC REPORT
Chairman’s Statement (continued)
Financial Summary
Organic business performance in 2019 was positive. The Group’s statutory results
for the year are significantly influenced by the Frontier acquisition and the associated
intensive restructuring undertaken to position the Group to realise the benefit in 2020
and beyond. As explained within this report, the accounting treatment associated with
the acquisition is complex and, in order to provide transparency to shareholders, the
Group results are summarised in the table below.
Adjusted
Operating
Profit
2019
£000
Revenue
2019
£000
Adjusted
Operating
Profit
2018
£000
Revenue
2018
£000
Services Operating Business
(excluding Frontier and exited
operations)
Freehold properties
Corporate costs
48,710
3,871
8,221
1,503
47,195
3,920
7,564
1,573
–
(1,737)
–
(1,574)
Intra-Group elimination
(2,874)
–
(2,858)
–
Group excluding Frontier and
exited operations
Exited operations
Frontier
Group
49,707
7,987
48,257
7,563
–
7,540
57,247
–
(1,283)
413
–
6,704
48,670
168
–
7,731
For the year ended 31 December 2019, Group revenue was £57.2 million (2018:
£48.7 million) of which organic revenue was £49.7 million (2018: £48.3 million
excluding exited operations). Adjusted operating profit (‘AOP’) for the organic
business for the year ended 31 December 2019 was in line with the Board’s
expectations at the time of the October trading update, despite the negative impact
of foreign currency movements during the last few months of the year, a period of
considerable volatility for Sterling. The Group result comprised a profit contribution
of £8.0 million (2018: £7.6 million excluding exited operations) from organic business
activities and a loss of £1.3 million from the Frontier operations, as anticipated.
(Adjusted operating profit and other Alternative Performance Measures used in this
report are defined in the Finance Director’s Report. The Group exited operations in
Central Europe in H1 2018 and the continuing measure provides comparability.)
In line with the Group’s established model, acquisition restructuring and integration
have been expedited and associated costs recognised at the earliest opportunity.
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Annual Report and Financial Statements 2019
STRATEGIC REPORT
Chairman’s Statement (continued)
Costs related to the Frontier acquisition including professional
fees; share revaluation; property lease provisions; and the
integration/restructuring process totalled £4.1 million.
Amortisation of acquisition related intangibles and share based
payment charge totalled £3.5 million (2018: £2.8 million) and
as a result, in line with the Board’s expectations, the Group
reported an operating loss of £0.2 million for the year (2018:
profit of £5.3 million).
Balance Sheet
The Group maintains a strong balance sheet, even after the
Frontier acquisition, with significant cash resources, low debt
and two substantial freehold properties hosting the Group’s
main UK laboratories and offices (see below).
Reflecting the deployment of cash to acquire Frontier, at
31 December 2019, gross cash was £13.9 million (2018:
£21.5 million) and net debt was £2.3 million (2018: net funds
of £8.8 million). The Group’s bank debt at 31 December
2019 was £16.2 million (2018: £12.7 million). The Group’s
bank debt is tied to interest rate swaps to produce a net
fixed rate (effectively 3.6%) to 2026 and is secured on the
Group’s freehold property assets. Subject to net debt not
exceeding £10 million, the bank debt is not subject to operating
covenants.
During the year, the Company sold some treasury shares
in association with the Frontier acquisition. As a result, at
31 December 2019, shares in issue (excluding treasury shares
held of 0.4 million) were 41.7 million (2018: 40.0 million).
Apart from the treasury shares, the acquisition of Frontier
was undertaken using the Group’s existing resources. This is
consistent with the Board’s prior practice, which has delivered
substantial growth in revenue and profit over the past 9 years
without shareholder dilution. (Issued share capital, excluding
treasury shares, at 31 December 2010 was 41.7 million, the
same as at 31 December 2019.)
basis. As a result, while there are operational and liability
mitigation benefits from the Group’s freehold property, the
financial performance of the services operating business is not
enhanced by these assets.
Product Development
The Group provides product development consulting services
to the medical, consumer, food & beverage and industrial
markets helping clients develop innovative products and
technologies. Science Group services are differentiated by their
combination of deep scientific understanding, engineering
excellence and sector domain knowledge.
Revenues for the Product Development business increased
to £23.2 million (2018: £22.0 million). The Commercial
(consumer, food & beverage and industrial sectors) business
delivered very strong results compared to the prior year. The
Medical business, characterised by large projects with a
greater customer concentration, was impacted in H1 2019 as
a result of some large projects completing at the end of 2018,
but recovered well in the second half of the year. The largest
Product Development client accounted for £3.1 million of
revenue in 2019.
The acquisition of Frontier enhances the Product Development
business’ Internet of Things (‘IoT’) proposition, particularly
in the Commercial sectors. Prior to the Frontier acquisition,
IoT has been a growth area as companies seek to evolve their
business models in line with this digital market trend. However,
one of the less understood but critical aspects of deploying IoT
strategies is the requirement for ongoing support infrastructure
to enable, for example, the updating of firmware; system
control; data analysis; and maintenance monitoring. The Nuvola
infrastructure, originally established to support Frontier’s smart
radio (‘SmartRadio’) and smart audio models which now has an
installed base of several million field-deployed units, brings a
new capability to the Group’s strategy.
Dividend
In recent years, the Group has progressively increased the
dividend paid to shareholders ahead of the rate of inflation.
Following the cash deployed in the Frontier acquisition, the
Board has decided to recommend that this year the dividend
is held at 4.6 pence per share. Subject to shareholder approval
at the Annual General Meeting (‘AGM’), the dividend will be
payable on 12 June 2020 to shareholders on the register at the
close of business on 22 May 2020.
Advisory
The Group’s Advisory business provides clients with a
combination of sector understanding and science/technology
expertise. These consulting services help clients innovate,
typically looking at market developments and opportunities in
the 3-10 year horizon. The client base is mainly large, blue-chip
organisations, but project-size is typically smaller than product
development projects. The largest Advisory client accounted
for £1.2 million of revenue in 2019.
Services Operating Business Overview
For the year ended 31 December 2019, revenue from the
Group’s services operating business (which excludes Frontier
and property income) increased to £48.7 million (2018:
£47.2 million, excluding exited operations). Adjusted operating
profit generated from the services operating business was
£8.2 million (2018: £7.6 million), in line with the trading update
in October, despite the foreign exchange impact within the
fourth quarter related to Brexit uncertainty. This profitability
measure includes property rental costs charged to the
services operating business at market rates on an arms-length
The Advisory business had a good performance in 2019 with
revenue increasing to £8.2 million (2018: £7.6 million). The
Consumer and Food & Beverage sectors performed strongly,
benefitting from the Group’s wider capabilities in Product
Development and Regulatory services. The Industrial (including
Energy) sector performed satisfactorily.
08
Annual Report and Financial Statements 2019 STRATEGIC REPORT
Chairman’s Statement (continued)
Regulatory
The Regulatory businesses provide science-based regulatory
consulting services to clients in the food & beverage, agritech,
consumer and chemicals market sectors. The Group delivers
services to clients predominantly in Europe and North America,
but provides international coverage across wider geographical
territories, particularly in food & beverage where services cover
over 100 countries, a key differentiating factor in this global
market.
The revenues from the Group’s Regulatory businesses slightly
declined to £16.8 million (2018: £17.3 million from continuing
operations). Performance was strong in food & beverage,
reflecting the Group’s market leadership position and scalable
services model. In the US Regulatory business, the market
was impacted significantly in the first part of the year by the
federal government shutdown, recovering in the second half
with growth in the federal and state renewals business which
provides repeat revenue from the established client base. In
Europe, the prior year benefited from a regulatory deadline
relating to the REACH programme and the revenue in 2019
therefore declined slightly. The largest Regulatory client
accounted for £0.5 million of revenue in the year.
Frontier Acquisition
Science Group completed the acquisition of Frontier in
October. Due to the progressive increase of the Science Group
shareholding between May and October, the accounting
treatment of the 2019 results is complex. In brief, prior
to 11 July 2019, the shareholding was deemed to be an
investment. Thereafter, Frontier was treated as an associate
until 23 August 2019, at which point Science Group obtained
control and the results were consolidated (with the proportion
relating to the other Frontier shareholders being separately
attributed). On 11 October 2019, completion of the statutory
merger resulted in Science Group obtaining 100% ownership
of Frontier.
The accounting treatment is further complicated by the
variation in price paid per share during the course of the
acquisition. On 23 August, the Group’s weighted average
cost per Frontier share for shares acquired prior to that
date, through on-market purchases and the formal offer
(‘Offer’), was 30.6 pence, at which time Science Group owned
19.4 million shares in Frontier. The price per share for the
subsequent statutory merger was 25 pence and as a result a
paper accounting loss of 5.6 pence per share was incurred on
the Group’s holding, equivalent to £1.1 million, although the
Board’s action produced a cash saving to Science Group of
approximately £2.7 million compared to the original Offer price
of 35 pence per Frontier share. This unusual circumstance,
which was significantly beneficial to Science Group, was only
possible due to Frontier not being subject to the UK Code on
Takeovers and Mergers and the Frontier Board rejecting the
original Science Group Offer.
At an adjusted operating level, the underlying loss reported by
Frontier was £0.8 million. In addition, acquisition accounting
treatment of work-in-progress and finished goods in
accordance with IFRS 3, Business Combinations, results in
an adjustment of £0.5 million reported as an operating loss.
Professional fees; share revaluation; property lease provisions;
and the costs arising from integration/restructuring activities
totalled £4.1 million.
In terms of the balance sheet on 23 August, when consolidation
commenced, goodwill of £2.8 million ($3.5 million) and
acquisition related intangible assets of £8.8 million
($10.7 million) were recognised. Subsequently, due to the
fluctuation in exchange rates and amortisation of acquisition
related intangible assets, at 31 December 2019 these balances
were £2.6 million and £7.6 million respectively. Frontier
also has significant unrecognised tax losses, in the order of
£24 million.
Frontier Integration and Strategy
Since completion in October, a very intensive restructuring
and integration programme has been executed by the new
Frontier management team. Excellent progress has been made
including:
• The Romanian operations have been closed and the legal
entity is anticipated to be terminated in 2020;
• The Frontier London office has been closed and staff
relocated to the Science Group London office;
• The Cambridge (Sawston) office has been closed and staff
relocated to Science Group’s freehold facility in Harston,
Cambridge, with onerous lease costs being recognised in
2019;
• In Hong Kong the office space has been reduced by
approximately half with the associated onerous costs being
recognised in 2019;
• A substantial reduction in the cost base has resulted in
headcount reducing from 110 in October 2019 to 67 in
February 2020; and
• A reduction in the number of module variants, including end-
of-life programmes for unprofitable product lines.
The market for Frontier products is relatively stable with
upticks in demand associated with country transitions to digital
broadcasting. Frontier holds a majority share in its core digital
radio (DAB/DAB+) market and demand for Frontier products
is therefore fundamentally linked to the scale and dynamics of
the market. Frontier has historically been over-optimistic in its
forecasting and failed to manage distribution/retail channel
inventory, a particular issue in late 2018 which resulted in
incentives to customers towards the end of the year having a
material impact on demand in 2019. This not only resulted in
forecast downgrades in Frontier but such short-term incentives
to customers exacerbate price/margin pressure and revenue
volatility. The Frontier strategy in future will be to allow revenue
to move in line with market developments to produce a more
sustainable, and profitable, operating model.
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Annual Report and Financial Statements 2019
STRATEGIC REPORT
Chairman’s Statement (continued)
The substantial reduction in the cost base resulting from the
accelerated integration/restructuring programme, should
enable Frontier performance to recover in 2020. However, the
impact of the coronavirus (COVID-19) outbreak is uncertain,
a global challenge particularly affecting production facilities
in China where Frontier and Frontier customers manufacture
their products. The Frontier manufacturing facility was
temporarily closed but has now been partially reopened
following approval from the local authority. The situation
remains under close review.
Frontier revenue and material costs are transacted in US
dollars, as is common practice in consumer electronics
manufactured in China since most materials are priced in that
currency. As a consequence, the Frontier business is exposed
to exchange rate fluctuations between Sterling and US dollars.
Frontier Product Strategy
The Frontier business comprises:
DAB Radio: Frontier is the market leader in design and
manufacture of chips and modules which are used in DAB
radios. The skills involved in designing, developing and
manufacturing these products include embedded software
engineering, RF and digital hardware development and
high-volume/low cost manufacturing. This product category
contributes the majority of Frontier revenue.
The market of approximately 5 million chips/modules is
concentrated in geographies such as Germany and the UK
which have been major adopters of the DAB digital broadcast
technology. The underlying, broadly flat market volume is
enhanced when major geographies accelerate their national
digital strategies or implement digital switchover.
SmartRadio: Frontier also designs and manufactures modules
which contain internet radio technology in addition to DAB
chips. The resulting products feature in an emerging category
increasingly referred to as ‘SmartRadio’. These products enable
consumers to listen to broadcast radio through DAB and/
or a wide range of global internet radio stations in addition to
music streaming services such as Spotify. The category aims to
combine the simplicity of radio together with the scope of the
internet, without the privacy concerns sometimes associated
with the smart speaker category.
In terms of market volume, SmartRadio currently accounts
for around 15% of Frontier shipments. Frontier SmartRadios
are connected to the Group’s cloud platform (‘Nuvola’) which
enables certain internet functionality and delivers firmware
updates when required.
Smart Audio: In recent years, Frontier invested heavily
in developing modules that enable voice-activated smart
speakers and other audio devices. This product-line absorbed
very substantial funds resulting in the lack of profitability of
Frontier. While the product category contributes some valuable
technology and capability in voice activation of the major
ecosystems and remains part of the product portfolio, as a
stand-alone product category the importance has now been
de-emphasised. A provision against excess inventory was taken
in 2019.
IoT: As part of Frontier’s smart radio and smart audio strategy,
Frontier developed the cloud architecture, Nuvola, which
enables certain functionality and firmware updates of internet-
connected products in the field. This architecture has been
technically well-conceived and currently supports an installed
base of several million devices, of which around 1.5 million
were actively connecting to Nuvola in January 2020. This
architecture will continue to support Frontier products and,
as explained above, will potentially provide an enabler for the
Group’s wider Product Development and IoT strategies.
Freehold Properties
The last formal valuation of the Group’s freehold properties,
Harston Mill, near Cambridge, and Great Burgh, near Epsom,
was undertaken in March 2018. This report indicated that
the aggregate ‘vacant possession’ valuation was estimated at
£22.6 million and, based on market rents and property yields
at that time, the aggregate sale & leaseback valuation was
estimated at £33.9 million. The properties are held on the
balance sheet at an aggregate value of £21.4 million (2018:
£21.6 million) on the historical cost-based valuation model.
Following the 2018 strategic review, the freehold properties
are managed outside of the operating business activities and
the operations are charged rent and service charges on an
arms-length basis. For the year ended 31 December 2019, the
property business generated a total revenue of £3.9 million.
This comprised £1.0 million (2018: £1.1 million) from third party
tenants and £2.9 million (2018: £2.9 million) from intra-Group
rental charges. On a stand-alone basis, the Group’s freehold
property delivered a £1.5 million (2018: £1.6 million) adjusted
operating profit, although at Group level, the intra-Group
trading is eliminated on consolidation.
The vacant space in the mill building on the Harston Mill site
has been used to accommodate Frontier. During the year, one
larger tenant went into insolvency and currently there is 6,000
square feet of lettable space at Harston Mill. Additional tenant
turnover is anticipated in the year ahead and marketing of
potential free space has been initiated.
The Board previously concluded that the Harston Mill property
should be moved out of Sagentia into a separate company and
this was due to be actioned early in 2020, with a corresponding
tax cash outflow of approximately £2 million. The preparatory
work has been completed. However, following the Frontier
acquisition and the deployment of cash resources into
expanding the Group’s business operations, the Board has
decided to defer the Harston Mill transfer and to review later in
the year. There are no material operating consequences of this
deferral.
External Factors
There are several external factors which may influence the
Group in the year ahead.
10
Annual Report and Financial Statements 2019 Summary
The financial performance of the Group’s organic operations
in 2019 was in line with expectations. The Board anticipate
continued progress in the year ahead and the new year has
started satisfactorily.
Despite only completing the acquisition in October, the
restructuring and integration of Frontier has made very good
progress, resulting in a substantial reduction in the cost base
and a clear future strategy for this business. While the impact
of Covid-19 cannot be fully evaluated, the Board is confident
that the operational, financial and commercial transformation
that has been undertaken in the last few months will render the
business more resilient to external factors.
The Group retains a strong balance sheet with significant
cash resources; low net debt (without any operating covenants
at the current level); and substantial freehold property
assets. This foundation, together with the Group’s portfolio
of complementary business operations, diversified across
geography and industry sectors, provides stability and
opportunity in an unpredictable world.
Martyn Ratcliffe
Chairman
STRATEGIC REPORT
Chairman’s Statement (continued)
Brexit is the highest profile political change but it remains
unclear what the net effect on the Group’s services operations
will be, since some capabilities may be in greater demand
while R&D tax credit arrangements in EU countries may in
some cases make UK consultancy services less attractive. With
regard to the Frontier product business, supply is provided
directly from China/Hong Kong and it is not anticipated that
Brexit will have any material effect on this division. In addition
to Brexit, the US Presidential election could influence Science
Group’s services operations later in the year since a high
proportion of this revenue is derived from North America. The
Board monitors developments and awaits greater certainty
before reviewing the Group’s strategy, if appropriate.
The Covid-19 virus has to date only had a minor effect and this
has been in relation to the Frontier manufacturing in China.
However, while the timing of the outbreak around the Lunar
New Year was unfortunate, this time of year was planned to
be a quieter business period due to the holiday. As a result,
to date there has been only limited financial impact and the
Frontier manufacturing operations have now partially reopened
in accordance with local procedures. In summary, at present
it is considered that any material effect on Science Group is
likely to derive from the indirect consequences on the global
economy (R&D investment, business travel, etc). The Board are
closely monitoring the situation.
However, in regard to factors beyond the Board’s control, the
greatest financial impact is likely to derive from movements
in currency exchange rates with the Group benefitting from a
strong US dollar and weaker Sterling. Currency rates may be
directly or indirectly related to the above and/or other external
factors.
Corporate
The major corporate activity during 2019 was the Frontier
acquisition. Not only was this the largest acquisition in the
Group’s history, but it was also a complex bid for an AIM-listed,
Cayman-domiciled entity, which was actively resisted by the
Frontier Board. The transaction included market purchases; a
formal offer; an equity investment; and finally a cross-border
statutory merger, subject to English and Cayman law. The UK
Code on Takeovers and Mergers did not apply.
With Frontier having operations in Cambridge, London,
Romania, Hong Kong and China, the integration has been
intense particularly since the operational restructuring has
been effectively completed in just a few months. Finalising the
corporate administrative procedures and implementing the
new strategy is ongoing.
Corporate costs for the Group for the year increased to
£1.7 million (2018: £1.6 million).
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11
Annual Report and Financial Statements 2019
STRATEGIC REPORT
Finance Director’s Report
Overview of results
In the year ended 31 December 2019, the Group generated
revenue of £57.2 million (2018: £48.7 million) benefitting
from the inclusion of 4 months trading of Frontier following
the acquisition during 2019. Revenue from the services and
product operating businesses, that is revenue derived from
consultancy services, materials recharged on these projects
and product revenue, increased to £56.2 million (2018:
£47.6 million). Revenue generated by freehold properties,
comprising property and associated services income derived
from space let to third parties in the Harston Mill facility, was
£1.0 million (2018: £1.1 million).
value at the date of acquisition and the valuation of inventory
is adjusted to take into account the work done up until this
date. Therefore, work in progress and manufactured finished
goods held are not valued at cost and instead the fair value
is measured by taking into account the stage of development
in the production cycle of the item, with the fair value being
the estimated selling price less certain costs and a margin
thereon. This methodology, as required under IFRS 3, Business
Combinations, has resulted in an accounting adjustment to
the value of acquired inventory of £0.7 million and has reduced
the adjusted operating profit in 2019 by £0.5 million with the
balance reducing adjusted operating profit in 2020.
Adjusted operating profit for the Group of £6.7 million
(2018: £7.7 million) includes an adjusted operating loss of
£1.3 million for Frontier within which an acquisition accounting
loss of £0.5 million arose due to the revaluation of acquired
inventory. The Group statutory operating loss of £0.2 million
(2018: profit of £5.3 million) includes the costs resulting
from the restructuring of Frontier and the one-off costs and
accounting adjustments arising from the acquisition as set
out in the Chairman’s Statement. The statutory loss before tax
was £1.6 million (2018: profit before tax of £4.9 million) and
statutory loss after tax was £1.8 million (2018: profit after tax of
£4.3 million).
(Adjusted operating profit is an alternative profit measure
that is calculated as operating profit excluding amortisation
of acquisition related intangible assets, impairment of
investments, acquisition integration costs, share based
payment charges and other specified items that meet the
criteria to be adjusted. Refer to the notes to the financial
statements for further information on this and other alternative
performance measures.)
Frontier
The Frontier transaction started in early May 2019 when the
initial on-market purchases of shares were made. On 11 July
2019, the Group ownership reached 35.6% and the Group
commenced equity accounting for the investment. The Group
continued to acquire shares on the market and made an offer
for Frontier at 35 pence per share resulting in ownership of
47.5% on 19 July 2019. On 23 August 2019, through an issue
of 4 million shares by Frontier, Science Group increased
its ownership to 52.2% gaining control of Frontier and the
consolidation of results commenced. Additional shares were
acquired on the market taking the ownership to 72.3% on
6 September 2019 with the remaining Frontier shares being
acquired on 11 October 2019 by way of a statutory merger. The
statutory merger was effected by SG Bidco Limited (a 100%
owned subsidiary of Science Group plc) merging with Frontier
Smart Technologies Group Limited, the parent company of
the Frontier Group, through which Science Group obtained
full ownership of the Frontier business. Refer to Note 16 for
further information on the acquisition process and accounting
of Frontier.
Included within the Frontier adjusted operating loss for the
post acquisition period is a fair value adjustment related to the
acquisition accounting of inventory that increased the Frontier
loss by £0.5 million. All assets and liabilities are recorded at fair
Adjusting items
The acquisition and restructuring activities have resulted
in significant one-off costs including: professional fees and
integration costs of £2.5 million; a provision for onerous
costs relating to property leases (including an impairment
of the leased right of use asset) of £1.1 million; and a loss
on remeasurement of the equity investment in Frontier of
£0.5 million. The capitalised acquisition related intangible
assets in respect of Frontier has resulted in the associated
amortisation increasing to £2.3 million (2018: £2.0 million) and
the share based payment charge has increased to £1.2 million
(2018: £0.8 million) due to the full year effect of the share
options granted under the Enhanced Executive Incentive
scheme and the increase in PSP share options granted
resulting from the growth of the Group.
Foreign exchange
A significant proportion of the Group’s revenue is denominated
in US Dollars and Euros and changes in exchange rates
can have a significant influence on the Group’s financial
performance. In 2019, £28.7 million of the Group operating
business revenue was denominated in US Dollars (2018:
£16.6 million), including all of Frontier revenue, and £3.6 million
of the Group operating business revenue was denominated
in Euros (2018: £5.7 million). The Group continues to monitor
the volatility of exchange rates and to date has decided not to
utilise foreign exchange hedging instruments.
IFRS 16 Leases
The Group adopted IFRS 16 Leases from 1 January 2019
using the modified retrospective approach, under which the
cumulative effect of initial application is recognised in retained
earnings at 1 January 2019. This applies to property leases held
by the Group companies. The effect was to recognise a Right of
Use asset and a Lease liability of £2.8 million at 1 January 2019.
As a result, in the Consolidated Income Statement for the year
ended 31 December 2019, adjusted operating profit increased
by a net of £12,000 and interest cost increased by £95,000.
Taxation
The tax charge for the year was £0.2 million (2018:
£0.6 million). The underlying tax charge on the profits
generated by the organic operating business has been partially
offset against the tax income arising on losses generated by
12
Annual Report and Financial Statements 2019 STRATEGIC REPORT
Finance Director’s Report (continued)
Frontier from when it was 100% owned in the Group and a
Research and Development tax credit of £0.4 million (2018:
£0.4 million). A significant proportion of the one-off costs
resulting from the acquisition and restructuring activities are
not anticipated to be tax deductible.
At 31 December 2019, Science Group had £34.7 million
(2018: £10.8 million) of tax losses of which £0.2 million
(2018: £0.4 million) relate to trading losses which have been
recognised as a deferred tax asset and are anticipated to be
used to offset future trading profits. Tax losses of £24.0 million
(2018: £nil) relate to the acquired Frontier companies of which
£22.4 million (2018: £nil) are held by the trading company of
Frontier (Frontier Smart Technologies Limited) and would
be able to be offset against future profits generated by this
company but due to the uncertainty in the timing of utilisation
of these losses, they have not been recognised as a deferred
tax asset. The remaining tax losses of £10.5 million (2018:
£10.4 million) have not been recognised as a deferred tax asset
due to the low probability that these losses will be able to be
utilised in operating activities.
Statutory basic earnings per share (‘EPS’) was a loss of
4.5 pence (2018: profit of 10.7 pence) due to the Frontier
one-off costs relating to the acquisition and integration.
Cash flow
Cash flow from operating activities excluding Client
Registration Funds (‘CRF’) was £5.4 million (2018: £5.0 million).
Reported cash from operating activities in accordance with
IFRS was £5.4 million (2018: £5.6 million). The difference in
these two metrics relates to the fact that TSG, particularly in
the USA, processes regulatory registration payments on behalf
of clients. The alternative performance measures, adjusting
for CRF, more accurately reflect the Group’s cash position and
cash flow.
The cash outflow in acquiring the shares of Frontier was
£12.8 million which represented an average price per share of
27.3 pence. Frontier held cash at the end of August 2019 of
£2.8 million and had a revolving credit facility with Clydesdale
of £5.0 million which was repaid by Science Group following
the statutory merger. During the post-acquisition period, the
working capital of Frontier was normalised by paying overdue
balances owed to suppliers to address the extended payment
terms necessitated by Frontier’s financial position. Partially
offsetting this was the reduction in trade receivables and
inventory arising from Frontier’s seasonality which experiences
peak shipments in the summer months.
Financing and cash
The Group’s term loan with Lloyds Bank plc (‘Lloyds’), secured
on the Group’s freehold properties, is a 10 year fixed term
loan expiring in 2026. It was increased during the year to
£17.5 million on similar terms to those previously in place.
Phased interest rate swaps hedge the loan resulting in a
10 year fixed effective interest rate of 3.6%, comprising a
margin over 3 month LIBOR, the cost of the loan arrangement
fee and the cost of the swap instruments. The term loan has no
operating covenants as long as the Group net bank debt is less
than £10 million. If this threshold is crossed, two conditions
apply: (i) a financial covenant, measured half-yearly on a 12
month rolling basis, such that annual EBITDA must exceed
1.25 times annual debt servicing (capital and interest) and (ii)
a security covenant whereby the loan to value (‘LTV’) ratio of
the securitised properties must remain below 75%. If either of
these conditions are breached, a remedy period of 6 months
is provided, during which time the EBITDA or LTV condition
can be remedied or the net bank debt can be reduced to less
than £10 million. The Group has adopted hedge accounting for
the interest rate swap related to the bank loan under IFRS 9,
Financial Instruments, and the loss on change in fair value of
the interest rate swaps was £408,000 (2018: gain of £66,000)
which was recognised directly within equity.
The Group cash position (excluding CRF) at 31 December
2019 was £13.9 million (2018: £21.5 million) and net debt was
£2.3 million (2018: net funds of £8.8 million) following the cash
outflows for the consideration of Frontier, restructuring costs
and the realignment of the Frontier working capital position.
CRF of £1.5 million (2018: £1.5 million) were held at the year
end. Working capital management during the year continued
to be a focus with debtor days of 32 days at 31 December 2019
(2018: 37 days) while combined debtor and WIP days was
similar to prior year at negative 7 days (2018: negative 9 days).
(WIP is defined as the net of accrued income and payments
received on account). Following the acquisition of Frontier,
the Group holds inventory which, at 31 December 2019, was
£2.1 million (2018: £nil).
Share capital
At 31 December 2019, the Company had 41,700,440 ordinary
shares in issue (2018: 40,040,227) excluding 361,595 shares
in treasury (2018: 2,021,808). Of the ordinary shares in issue,
104,400 (2018: nil) shares are held by the EBT and hence the
voting rights in the Company are 41,596,040. In this report,
all references to measures relative to the number of shares in
issue exclude shares held in treasury unless explicitly stated to
the contrary.
Employee Benefit Trust
Prior to acquisition, Frontier Smart Technologies Employee
Benefit Trust (‘EBT’) held 2.0 million Frontier shares. On
completion of the statutory merger, the EBT received
£0.5 million in settlement of the shares of which £0.3 million
was paid to SG Bidco Limited to settle an outstanding loan.
104,400 shares in Science Group plc were acquired by the
EBT (by issuing shares held in treasury) which will be used to
satisfy employee share options issued to the Joint Managing
Directors of the Frontier business. The voting rights and right
to dividends in respect of the ordinary shares held by the EBT
are waived.
Rebecca Archer
Finance Director
13
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 STRATEGIC REPORT
Key Performance Indicators
The key performance indicators (‘KPIs’) are operating profit,
cash flow and the alternative performance measures as
disclosed in Note 1 in the Notes to the Financial Statements.
Profitability of the business is managed primarily via the review
of revenue and headcount. (Secondary measures of consultant
utilisation and daily fee rates are used internally but are not
disclosed due to their commercial sensitivity.) Working capital
is reviewed via measures of trade receivables, trade payables,
WIP and inventory. Performance against KPIs is reported in the
Financial Report.
Principal Opportunities and Risks
The Directors consider that the principal opportunities and
risks facing the Group are as set out below. The Board has
carried out a robust assessment of the emerging and principal
risks, including those that would threaten the sustainability of
its business model, its future performance, solvency or liquidity.
In addition the Board regularly reviews existing and emerging
risks across the Group on a monthly basis. The Board considers
this period to be appropriate for the business as it allows the
Board to remain informed of developments that may affect
the delivery of its strategy and to identify and implement any
mitigating actions. It also supports the Board’s review and
revision of forecasting, undertaken on a quarterly basis, to
minimise the impact of any emerging risks on the Group. The
Board has a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they fall
due over this period. A summary of the key measures taken to
mitigate those risks are also set out below.
Technology advances
The on-going development of new and existing technologies
provides opportunities for Science Group to provide market-
leading services to its clients. The Group’s personnel must
stay at the forefront of technical advances and understanding
of technical specialisms in order to exploit these opportunities
and sustain the Group’s growth.
The Group seeks to do this by the regular identification and
review by management of new technical areas for investment;
providing a budget for investment by managers in new ideas;
encouraging employees to keep up to date on technological
developments by both formal and informal training and self-
learning in relevant areas of technical expertise; and recruiting
employees with new technical skills where gaps in expertise
are identified.
Market for outsourced services
Science Group is dependent on the global market for
outsourced science-based services. This provides both
opportunities and risks, depending on the performance of and
confidence in the Group’s target geographies and markets. An
economic downturn or instability may cause clients to delay
or cancel projects and/or related services, or to use internal
resources to achieve their business goals. Conversely, a
reduction in internal resources by clients may result in greater
levels of outsourcing for business critical projects.
The Group seeks to capitalise on these opportunities
and mitigate these risks by diversifying exposure across
geographical markets; increasing the number of market
sectors in which the Group operates; diversifying the type
of customers with whom the Group operates (ranging from
well-funded start-up companies to large multi-national
corporates); increasing the range of service offerings that the
Group provides; and marketing activities to inform current
and prospective clients regarding the benefits of outsourced
research and development services and Science Group’s
proven ability to fulfil those objectives.
Market for radio products
The Frontier part of Science Group has a high market share of
the DAB radio market and is therefore subject to the market
demand and the competitive environment. These factors
are correspondingly affected by the economic climate and
alternative methods of receiving radio stations.
Frontier supplies branded products through intermediate
factories which are mainly based in China and Frontier’s
reputation may be damaged if quality were to decline.
These factories may also be impacted by local and global
developments, which in 2020 have included the Covid-19
outbreak. Import tariff changes may also impact the cost
of radio production and thereby the selling price to the end
consumer, which may affect demand and/or the margins of
the business. Furthermore, the business undertakes trade
with its main customers in US Dollars and volatility in foreign
exchange rates may result in significant changes to the cost of
the products and the margins made by Frontier.
The Group seeks to mitigate these risks by actively monitoring
market developments and adjusting material purchases
accordingly. The Group also has employees based in Shenzhen
and Hong Kong to manage relationships with customers and
manufacturing locations.
Dependence on key personnel
Science Group’s business relies on recruiting and retaining
highly qualified technical experts on whom the business
depends to deliver its science-based services. Failure to recruit
and retain key staff could threaten the business’ ability to
deliver projects to its clients or to win new work.
The Group’s expansion also places greater demands on the
Group’s management and infrastructure, across a wider range
of geographical locations and markets. Failure to recruit and
retain key management and functional staff could increase the
risks associated with operational and financial controls; sales
and marketing; information technology and other functional
support areas.
The risks associated with recruitment and retention of key
personnel can be compounded by upward pressure on salaries
and remuneration packages due to skill shortages or economic
inflation.
The Group seeks to mitigate this risk by encouraging staff
retention through both competitive remuneration packages
and a stimulating work environment. In addition to base salary,
remuneration can include profit share/annual bonus, pension,
health benefits, life assurance and share option schemes. The
14
Annual Report and Financial Statements 2019 STRATEGIC REPORT
Principal Opportunities and Risks (continued)
remuneration components are reviewed regularly. Efforts are
made to foster a vibrant, dynamic and supportive environment
for employees, which offers a diversity of technically
challenging work for large and small companies across a
range of industries and specialist market, science & technology
areas. The Group also provides career development paths and
training support.
Project over-run or failure to meet technical milestones
Projects may over-run and/or may fail to meet technical
milestones because the nature of the work which Science
Group undertakes is technically challenging. Project over-runs
can lead to loss of margin on projects and overall profitability
for the consultancy business. Poor performance may also result
in damage to Science Group’s reputation.
Reputational risk
Failure to deliver project deliverables to an agreed budget,
timetable and quality may result in reputational damage to
Science Group that may adversely affect future sales.
The Group seeks to mitigate this risk by having in place
effective Quality Assurance procedures; review meetings being
held with clients on a regular basis; formal questionnaires
being sent to clients at the close of projects to ascertain their
views and to suggest improvements and actions that the Group
may take; and various accreditations held by certain parts of
the Group including ISO 9001 and ISO 13485.
Brexit
The uncertainties and potential effects of Brexit during
and following the transition period provide both risks and
opportunities for Science Group.
There is uncertainty regarding the short, medium and
long-term impact Brexit will have on markets, financial
circumstances of customers and/or the future trading
relationships between the UK and other countries both in
Europe and in other parts of the world. The Group seeks to
mitigate this risk by actively managing customer relationships
including credit limits which, if appropriate, may require the
payment in advance of all or part of the estimated costs which
could have an impact on revenue.
The Group has a continental Europe presence which may be
able to be further leveraged to provide services from within
the EU. Furthermore, uncertainty around the legislative and
regulatory landscape following Brexit provides opportunities for
growth of the Group’s regulatory services.
Economic conditions or other factors affecting the financial
circumstances of customers
The profitability of the Group could be adversely affected
by the general economic conditions in the United Kingdom,
Continental Europe, United States, Asia and/or other key
markets by virtue of the impact of a deterioration in the
economic climate and/or financial failure of customers or
potential customers of the Group. It may also involve customers
defaulting on the payment of invoices issued by the Group or
delaying payment of invoices which may have a significant
impact on the income and the business of the Group.
The Group seeks to mitigate this risk by actively managing
customer relationships including credit limits which, if
appropriate, may require payment in advance; regular reviews
of debtors and overdue payments; and proactive credit control
procedures.
The Group seeks to mitigate this risk by contracting the
majority of projects on a time and materials basis; operating
a formal bid review process; incorporating risk premiums into
agreements if appropriate; conducting regular project reviews
to assess whether the revenue recognised on work in progress
is a fair representation of actual costs incurred and estimated
costs to completion; conducting regular, formal project board
review meetings for large projects; and meetings with clients to
review progress on projects.
Currency exchange rates
A significant proportion of the Group’s revenues are invoiced
in currencies other than Pounds Sterling, including but not
limited to the US Dollar and Euro, whilst the majority of the
Group’s employee-based costs are incurred in Pounds Sterling.
Materials related to Frontier products are typically priced in US
Dollars. As a result, variations in currency exchange rates may
have a material impact, both positive and negative, on Group
revenue and profit performance.
The Group seeks to mitigate this risk by transferring all foreign
currency holdings into Pounds Sterling on a regular basis. The
Group regularly considers the merits of currency hedging but
to date has determined that it would not be appropriate.
Investment in acquisitions
The Group has grown through the acquisition of companies
with compatible service and technology offerings. The Board
considers further acquisitions to be a core part of the Group’s
strategy and the Group is continually monitoring opportunities
for strategic acquisition opportunities. Acquisitions provide
potential for growth and diversification, whilst increased scale
provides efficiencies of back office and central services across
the Group.
However, acquisitions can increase the risk profile of the
Group; unknown liabilities may be identified post-acquisition;
the revenue of the acquired business may decline; key staff
may leave; and other unforeseeable problems may arise.
The Group seeks to mitigate such risks by establishing an
integration team at the time of the acquisition who are rapidly
deployed to instil the Group’s financial and operational controls
into the acquired company as fast as practicable. While this
team comprises experienced managers from within the Group,
in every acquisition, unforeseen challenges arise and an
evolving iterative integration process is required.
Additional considerations
In addition to the principal risks and uncertainties above, the
Group faces other risks that include but are not limited to:
• increased competition;
• failure to retain, or loss of, customer contracts;
15
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 STRATEGIC REPORT
Principal Opportunities and Risks (continued)
• customer concentration;
• technology leadership;
• product or other professional liability claims or other
warranty and indemnity claims in respect of contractual
obligations;
• infringement of third party intellectual property rights;
• failure of licensees to successfully exploit licensed
technology;
• counterparty risk;
• risk of adverse valuation of freehold properties;
• changes in legislation or regulations relating to trading,
taxation or accounting practice.
Viability statement
In accordance with the UK Corporate Governance Code July
2018, the Board has determined that a one-year period from
the date of signing these Financial Statements constitutes an
appropriate period over which to provide its viability statement.
The Board considers annually a one-year detailed financial
plan, forecasting sales and costs at a departmental level.
Given the dynamic environment and inherent uncertainties in
technology businesses, the Board believes that the one-year
period is appropriate. Performance against the annual plan is
reviewed on a monthly basis by the Board and forecasts are
updated quarterly.
The Board has considered sensitivity analyses reflecting
downside scenarios of some of the principal risks detailed
above including the following:
Principal risk: Market for outsourced services – a downside
may include the failure to sell services or the delay or
cancellation of projects as a result of a global economic
downturn affecting customers’ ability or desire to purchase
outsourced services.
Principal risk: Market for radio products – a downside may
include the suspension of manufacturing capability in China as
a result of the Covid-19 outbreak.
Principal risk: Dependence on key personnel – a downside
may include the loss of all key personnel.
In each scenario or combination of scenarios above, the Group
is able to rely on its cash reserves, reduce capital expenditure
and take other cash management measures to mitigate the
impacts and still have residual capacity to absorb further
unanticipated events.
The Board has also considered the effect of the bank loan
covenants for this assessment period and noted that there is no
expectation for the operating covenants to be applicable, as the
prerequisite for this (net debt level exceeding £10 million) is not
forecast to materialise in the assessment period.
Based on the results of these analyses, the Directors have
a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due
over the one-year period of their assessment.
Corporate Responsibility
Science Group takes its responsibilities as a corporate citizen
seriously in the territories in which the Group operates. The
Board’s primary goal is to create shareholder value but in a
responsible way which serves all stakeholders. Furthermore,
Science Group seeks to continually enhance and extend its
science and technology contribution to society through the
work the Group undertakes with its clients and in areas where
the Group decides to invest and explore directly.
Governance
The Board considers sound governance as a critical component
of Science Group’s success and the delivery of its strategy.
Science Group has an effective and engaged Board, with a
strong non-executive presence from diverse backgrounds, and
well-functioning governance committees. Through the Group’s
compensation policies and variable components of employee
remuneration, the Remuneration Committee of the Board
seeks to ensure that Science Group’s values are reinforced
in employee behaviour and that effective risk management is
promoted.
More information on Science Group’s corporate governance
can be found on page 22.
Section 172 statement
The Companies (Miscellaneous Reporting) Regulations 2018
require qualifying companies to publish a statement explaining
how the directors have had regard to the matters set out in
section 172(1)(a) to (f) of the Companies Act 2006 in performing
their duties under section 172.
In accordance with section 172, the Directors confirm that they
have acted in the way that they consider, in good faith, would
be most likely to promote the success of the Company for the
benefit of its shareholders as a whole. The paragraphs below
summarise how the Directors have had regard to the matters
set out in section 172(1)(a) to (f) of the Act.
The likely long term consequences of decisions - The
acquisition of Frontier was a significant addition to the Group
and, upon completion, involved an intensive restructuring and
integration programme. More information on the integration
can be found in the Chairman’s Statement of this report
but included a review of Frontier employees’ remuneration
packages and alignment with the wider Group, relocation of UK
employees to current Science Group locations and transitioning
to Group policies and processes where appropriate. These
actions reflected the Directors’ consideration of the medium
and long term consequences of the acquisition.
The interests of the Company’s employees - Science Group’s
employees are fundamental to the specialist services that the
Group provides. The Directors have regard to the interests of
employees through the Group’s remuneration strategy;
16
Annual Report and Financial Statements 2019 STRATEGIC REPORT
Corporate Responsibility (continued)
review of employee performance and associated training
and development needs; and promotion of an inclusive and
diverse culture within the Group. More information can be
found in Report of the Remuneration Committee on page 24
and the sections below titled Statement on engagement with
employees, Training and development, and Diversity and
inclusion.
Need to foster business relationships - The Directors
recognise the importance of fostering business relationships
with key stakeholders such as customers and suppliers.
Customer relationships are proactively maintained and
strengthened including through key account management and
the Group’s Quality Assurance procedures. Where appropriate
the Group maintains key and critical supplier lists which are
regularly reviewed and, for example, the Frontier business
regularly liaises with and visits critical third party suppliers in
its supply chain.
The need to act fairly between shareholders - The Directors
are committed to treating all shareholders equally. As part of
its decision making process, the Board considers the interests
of shareholders as a whole. All shareholders are provided with
equivalent information through RNS announcements, circulars
and the Science Group website. All shareholders are invited to
attend the Annual General Meeting and have the opportunity
to ask questions of the Directors. For more information see the
section entitled Relations with shareholders on page 22.
Statement on engagement with employees
Employees have been provided with information on matters
of concern to them through the Group’s intranet; revised
policies and updates from the human resources team; and
formal and informal meetings and other communications with
line managers and senior managers. Employees have been
consulted on specific issues likely to affect their interests
through individual meetings with the human resources team;
and discussion with line managers and senior managers.
The involvement of employees in the Group’s performance has
been encouraged through the award of share option grants
under the Group’s share option scheme, payments made
under the Group’s bonus and profit share schemes, and other
discretionary incentives.
The Directors have sought to ensure employees have
a common awareness of the financial and economic
factors affecting the Group’s performance by Group-wide
presentations following the issue of the Group’s Annual and
Interim Results.
For information on how the Directors have had regard to
employees’ interests, see the Section 172 statement on page 16.
Employee training and development
Science Group’s employees are the business’ primary asset
and the Board are committed to investing in their career
development and rewarding exceptional performance. The
Group makes a focused effort to offer bespoke training and
mentorship to allow each individual to thrive within their
environment and realise their personal potential. Formal
training and career development is offered to staff of all levels
through internal and external programmes that cover technical,
business and managerial advancement opportunity. Beyond
formal training, employees also hold informal lunchtime
sessions on a regular basis to enable knowledge and skills
transfer amongst teams.
Employee performance is aligned to the Group’s objectives
through an annual performance review process and ongoing
project management, line management and mentorship
feedback. Employees are kept up to date with information
about the Group’s activities through regular briefings and other
media.
The Group also invests in and rewards its workforce through
the operation of its bonus and profit share schemes for
qualifying employees; and its share option scheme which is
at the discretion of the Remuneration Committee and other
discretionary incentives.
The Board regularly monitors the Group’s culture and practices,
including the review of recruitment, retention and turnover
data, health & safety reports and reports from senior managers
within the Group.
Diversity and inclusion
Science Group’s employment policies are non-discriminatory
on the grounds of age, gender, nationality, ethnic or racial
origin, disability, religion or belief, pregnancy and maternity,
sexual orientation or marital or civil partnership status. Science
Group gives due consideration to all applications and provides
training and the opportunity for career development wherever
possible. The Board does not support discrimination of any
form, positive or negative, and all appointments are based on
merit.
17
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 STRATEGIC REPORT
Corporate Responsibility (continued)
The gender ratio for the number of persons employed by the Group at the end of the year are set out in the table below. The
change in the year has been primarily due to the acquisition of Frontier.
31 December 2019
31 December 2018
Male
Female
Male
Female
No
%
No
%
No
%
No
%
4
67%
2
33%
5
62%
3
38%
60
187
251
73%
53%
57%
22
167
191
27%
47%
43%
40
152
197
65%
49%
52%
22
159
184
35%
51%
48%
Plc Board of Directors & corporate
executive team
Senior management & staff
(>£75,000 per annum salary)
Other employees
Total employees
Notes:
• The 2018 information has been restated to align with the
categories used in 2019. The change in categorisation
reflects the growth of the Group and evolution of the
management structure.
• In 2018 the first category included the Directors, Company
Secretary and corporate executive team. In 2019 the first
category included the Directors and Company Secretary, and
there was no separate corporate executive team.
• Employees are only allocated to one category. For example,
where an individual is a member of the plc Board, that
person is not then included within the other classifications;
• Subsidiary Directors have not been separately identified in
the above table.
Statement on engagement with customers, suppliers and
others
Engagement with customers, suppliers and other stakeholders
in the business is an important factor in ensuring the
successful implementation of the Group’s strategy. For
information on how the Directors have had regard to the need
to foster these business relationships, see the sections entitled
Reputational risk on page 15 and Business relationships on
page 17.
Health and safety
Science Group endeavours to ensure that the working
environment is safe and conducive to healthy, safe and
motivated employees. The Group has a Health and Safety
at Work policy which is reviewed annually by the Board. The
Board Executive Director, responsible for health and safety,
is the Finance Director with day-to-day responsibility being
undertaken by the Company Secretary.
seeks, by continuous improvement, to develop health and
safety performance.
Research and development
Science Group provides outsourced science based services and
therefore has an inherent and continuing commitment to high
levels of research and development, primarily on behalf of its
clients but also, when appropriate, on its own behalf.
Environment
Science Group’s policy with regard to the environment is
to ensure that it understands and effectively manages the
actual and potential environmental impact of its activities. The
Directors feel that due to the nature of the Group’s operations,
it does not have a significant impact on the environment.
The Group strives to seek to minimise its carbon impact
and recognises that its activities should be carried out in an
environmentally friendly manner and therefore aims to reduce
waste and, where practicable, re-use and recycle consumables.
The Board acknowledges the growing public and governmental
support for the use of electric cars and is supportive of the
associated environmental benefits. Accordingly the Board
anticipates that electric charging points will be installed at its
freehold sites during 2020.
The Group’s operations are conducted such that compliance is
maintained with legal requirements relating to the environment
in areas where the Group conducts its business. During the
period covered by this report Science Group has not incurred
any fines or penalties or been investigated for any breach of
environmental regulations.
Approved by the Board of Directors on 2 March 2020 and
signed on its behalf by:
The Group is committed to the health and safety of its
employees, clients, sub-contractors and others who may be
affected by the Group’s work activities. The Group evaluates
the risks to health and safety in the business and manages this
through a Health and Safety Management System.
Martyn Ratcliffe
Chairman
The Group provides necessary information, instruction, training
and supervision to ensure that employees are able to discharge
their duties effectively. The Health and Safety Management
System used by the Group ensures compliance with applicable
legal and regulatory requirements and internal standards and
18
Annual Report and Financial Statements 2019 REPORT OF THE DIRECTORS
Report of the Directors
The Directors present their annual report on the business
of Science Group plc together with Consolidated Financial
Statements and Independent Auditor’s Report for the year
ended 31 December 2019.
Directors
The Directors and associated biographies are listed on page 21.
Rebecca Archer took maternity leave for the first half of the
year and returned to a full-time role in Q3 2019.
Accompanying the Report of the Directors is the Strategic
Report.
Review of the business and its future development
A review of the business and its future development is set
out in the Strategic Report, incorporating the Chairman’s
Statement and Financial Report.
Cautionary statement
The review of the business and its future development in the
Strategic Report has been prepared solely to provide additional
information to shareholders to assess the Group’s strategies
and the potential for these strategies to succeed. It should
not be relied on by any other party for any other purpose. The
review contains forward looking statements which are made
by the Directors in good faith based on information available
to them up to the time of the approval of these reports and
should be treated with caution due to inherent uncertainties
associated with such statements.
Results and dividends
The results of the Group are set out in detail on page 37.
Subject to shareholder approval at the next Annual General
Meeting, the Directors propose to pay a dividend of 4.6 pence
per share for the year ended 31 December 2019 (2018:
4.6 pence per share).
Capital structure
Details of the Company’s issued share capital, together with
details of the movements therein are set out in Note 23 to the
Financial Statements. The Company has one class of ordinary
shares which carry no right to fixed income.
Financial instruments and risk management
Disclosures regarding financial instruments are provided within
the Strategic Report and Note 3 to the Financial Statements.
David Courtley was re-appointed as a Director at the Annual
General Meeting for a tenth year to provide continuity and
stability to the Board. Mr Courtley will retire after the Board
Meeting in April 2020 and the Board will seek to appoint a new
Non-Executive Director.
Daniel Edwards was appointed by the Board during the year,
and as such will offer himself for re-election at the next Annual
General Meeting. Rebecca Archer will retire by rotation and
offer herself for re-election at the next Annual General Meeting.
Directors’ interests in shares and contracts
Directors’ interests in the shares of Science Group plc at
31 December 2019 and 31 December 2018, and any changes
subsequent to 31 December 2019, are disclosed in Note
9. None of the Directors had an interest in any contract of
significance to which Science Group was a party during the
financial year.
Annual General Meeting
The Annual General Meeting (‘AGM’) will be held on 19 May
2020 at 17 Waterloo Place, London, SW1Y 4AR. The notice of
the Annual General Meeting contains the full text of resolutions
to be proposed.
Purchase of own shares
At the AGM on 24 April 2019, shareholders approved a
resolution for the Company to buy back up to 10% of its own
shares. This resolution remains valid until the conclusion of
the next Annual General Meeting in 2020 or 30 June 2020 if
earlier. As at the date of this report, the Company has bought
back 51,913 shares pursuant to this authority. For further
information refer to Note 23.
Substantial shareholdings
As at 1 March 2020, Science Group had been notified of the following significant interests (greater than 3%) in its ordinary share
capital:
Shareholder
Martyn Ratcliffe
Canaccord Genuity Group Inc
Ruffer LLP
Otus Capital Management
Herald Investment Management Ltd
Charles Stanley & Co
Ordinary shares held
% of voting rights
13,412,906
6,835,879
5,476,074
3,238,514
1,669,950
1,313,115
32.3
16.4
13.2
7.8
4.0
3.2
19
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 REPORT OF THE DIRECTORS
Report of the Directors (continued)
Employees
The average number of persons, including Directors, employed
by the Group and their remuneration is set out in Note 8 to the
Financial Statements.
Donations
The Company operates a scheme whereby it will, on a
discretionary basis, match charitable donations raised by
employees up to a specified limit. Charitable donations related
to this programme were similar to the prior year. As a result,
total charitable contributions made in 2019 were £1,500 (2018:
£305). No political donations were made during the period
(2018: £nil).
Post balance sheet events
Post balance sheet events are disclosed in Note 31 to the
Financial Statements.
Auditor
KPMG LLP were re-appointed as auditor during the year.
The KPMG audit fees for the 2019 year end audit were
£176,000 (excluding Frontier). The fees for 2017 on a like for
like basis were £101,000. The Board considers this fee level
to be too high for a business of the Group’s size and that the
increase from 2017 is both material and disproportionate.
Consequently the Board will be tendering for new auditors and
KPMG has indicated that they will decline to participate. As a
result, KPMG has indicated its intention to resign as auditors of
the Group but will remain in post until the appointment of new
auditors following the tender process.
Disclosure of information to auditors
The Directors who held office at the date of approval of this
Directors’ report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company’s
auditor is unaware and each Director has taken all the steps
that they ought to have taken as a Director to make themselves
aware of any relevant audit information and to establish that
the Company’s auditor is aware of that information.
Directors
The Directors of the Company who served during the year were:
Director
Martyn Ratcliffe
Rebecca Archer
Daniel Edwards
David Courtley+
Michael Lacey-Solymar+
Role at
31 December 2018
Chairman
Finance Director
Group Managing Director
Non–Executive
Non–Executive
Date of
(re-) appointment
Board Committee
19/04/2018
18/05/2017
24/04/2019
24/04/2019
24/04/2019
A
A
N
N
N
R
R
Board Committee abbreviations are as follows: A = Audit Committee; R = Remuneration Committee; N = Nomination Committee
+ Independent Director
20
Annual Report and Financial Statements 2019 REPORT OF THE DIRECTORS
Report of the Directors (continued)
Directors’ Biographies
Below are the biographies of the Directors:
Martyn Ratcliffe – Chairman
Martyn Ratcliffe was appointed Chairman on 15 April 2010
following his investment in Sagentia Group, now Science
Group. He was Chairman of Microgen plc from 1998 to
2016 and Chairman of RM plc from 2011 to 2013. He was
previously Senior Vice President of Dell Computer Corporation,
responsible for EMEA. He has a degree in Physics from the
University of Bath and an MBA from City University, London.
Rebecca Archer – Finance Director*
Rebecca Archer was appointed to the Board on 27 January
2014. Mrs Archer is a Chartered Accountant and has a degree
in Physics from the University of Oxford. She qualified at
Deloitte where she spent six years including three years in New
Zealand and joined Science Group from RM plc where she was
Business Finance Partner for the Managed Services Business.
Daniel Edwards – Group Managing Director
Daniel Edwards was appointed to the Board on 24 April 2019.
Mr Edwards joined the Company in 2004 and has held a
number of roles within the Group including four years in the
USA before being appointed Managing Director in 2012. He
has an Engineering degree from the University of Cambridge
and an MBA from Harvard Business School. He started his
career at Rolls-Royce plc.
Michael Lacey-Solymar – Senior Independent Director
Michael was appointed a Non-Executive Director on 11 October
2012. Michael has over 25 years corporate finance experience
at UBS and Investec. He is currently chairman of Cambridge
Medical Technologies Limited and a partner at Opus Corporate
Finance LLP. He has a degree in Modern Languages from the
University of Oxford.
David Courtley – Non-Executive Director
David Courtley was appointed a Non-Executive Director on
15 April 2010. He is also Chief Executive of Mozaic Services
and Non-Executive Director of Parity plc. He was previously
Chief Executive of Phoenix IT Group plc, Chief Executive of
Fujitsu Services Europe and MD of EDS UK. He has a degree
in Mathematics from Imperial College, London. After 10 years
as a Non-Executive Director, Mr Courtley will be retiring from
the Board in April 2020. The Board express their gratitude and
appreciation for the significant contribution he has made.
Sarah Cole – Company Secretary
Sarah Cole joined the Company on 10 January 2011 and was
appointed Company Secretary on 22 March 2013. Ms Cole has
a degree in Jurisprudence from the University of Oxford and
qualified as a Solicitor in 2003.
* Retire by rotation at the next AGM
21
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 REPORT OF THE DIRECTORS
Corporate Governance Report
The Company is registered in England and Wales and listed
on the Alternative Investment Market of the London Stock
Exchange (‘AIM’).
Adoption of recognised corporate governance code
The Board has adopted the Financial Reporting Council’s
UK Corporate Governance Code July 2018. The Company’s
statement of compliance and associated disclosures are
available on the investor pages of the Company’s website.
Non-Executive Directors are appointed for a three year term
after which their appointment may be extended by mutual
agreement after due consideration by the Nomination
Committee of the Board. In accordance with the Company’s
Articles of Association, the longest serving Director (from their
last appointment) must retire at each Annual General Meeting
and each Director must retire in any three year period, so that
over a three year period all Directors will have retired from the
Board and been subject to shareholder re-election.
Board of Directors
Biographical details of the Directors are included on page 21.
At 31 December 2019, the Board comprised an Executive
Chairman (part-time), Group Managing Director, Finance
Director, and two independent Non-Executive Directors.
All Directors bring a wide range of skills and international
experience to the Board. The Non-Executive Directors hold
meetings without the Chairman, Group Managing Director and
Finance Director present if appropriate.
The Chairman is primarily responsible for the working of the
Board of Science Group plc and the Group corporate strategy.
High-level strategic decisions are discussed and taken by the
full Board. Investment decisions (above a de minimis level)
are taken by the full Board. Operational decisions are taken by
the Executive Board members, Divisional Managing Directors
and other Senior Managers within the framework approved
in the annual financial plan and within a framework of Board-
approved authorisation levels.
The Board met 24 times during 2019 (2018: 13). The significant
increase in meetings over 2018 was primarily due to the
Frontier acquisition. The Board regulations define a framework
of high-level authorities that maps the structure of delegation
below Board level, as well as specifying issues which remain
within the Board’s preserve. The Board typically meets ten
times a year to consider a formal schedule of matters including
the operating performance of the business and to review
Science Group’s financial plan and business model.
All Directors have access to the advice and services of the
Company Secretary and other independent professional
advisers as required. Non-Executive Directors have access to
key members of staff and are entitled to attend management
meetings in order to familiarise themselves with all aspects of
Science Group.
It is the responsibility of the Chairman and the Company
Secretary to ensure that Board members receive sufficient and
timely information regarding corporate and business issues to
enable them to discharge their duties.
Relations with shareholders
The Directors seek to establish and maintain a mutual
understanding of objectives between Science Group and its
major shareholders by meeting to discuss long-term issues
and receive feedback, communicating regularly throughout the
year and issuing trading or business updates as appropriate.
The Board also seeks to use the Annual General Meeting to
communicate with its shareholders.
Remuneration strategy
Science Group operates in a competitive market. If Science
Group is to compete successfully, it is essential that it attracts,
develops and retains high quality staff. Remuneration policy
has an important part to play in achieving this objective.
Science Group aims to offer its staff a remuneration package
which is both competitive in the relevant employment market
and which reflects individual performance and contribution. For
2019, in addition to base salary, benefits have included pension
contributions, healthcare and life assurance benefits, a Group
bonus/profit share scheme and, where appropriate, share
options.
22
Annual Report and Financial Statements 2019 REPORT OF THE DIRECTORS
Board Committees
The Board maintains three standing committees, being the
Audit, Remuneration and Nomination Committees. The
minutes of all sub-committees are circulated for review and
consideration by all relevant Directors, supplemented when
appropriate by oral reports from the Committee Chairmen at
Board meetings.
The Board conducts an annual internal evaluation of the Board
and its committees, the results of which are reviewed and
discussed by the Board. Due to the small size of the Board,
there is an annual evaluation of the Board and its committees
in accordance with the articles of association and informal
performance evaluations of directors and the Chairman by the
Board on a regular basis which is considered sufficient.
Audit Committee
The Audit Committee is chaired by Michael Lacey-Solymar
and currently comprises Michael Lacey-Solymar and David
Courtley. The Audit Committee met 4 times during 2019 (2018:
3). Further details on the Audit Committee are provided in the
Report of the Audit Committee.
Remuneration Committee
The Remuneration Committee is chaired by David Courtley
and currently comprises David Courtley and Michael Lacey-
Solymar. The Remuneration Committee met 6 times during
2019 (2018: 5). It may take advice from time to time from
external advisers, but did not do so in 2019. Further details on
the Remuneration Committee are provided in the Report of the
Remuneration Committee.
Nomination Committee
The Nomination Committee is chaired by Martyn Ratcliffe and
also currently comprises David Courtley and Michael Lacey-
Solymar. The Nomination Committee met 2 times during 2019
(2018: 1). It may take advice from time to time from external
advisers, but did not do so in 2019. The Committee meets
when necessary. The Committee’s primary function is to make
recommendations to the Board on all new appointments and
re-appointments and also to advise generally on issues relating
to Board composition and balance. The Board seeks input from
all Directors regarding nominations for Board positions. All
Board appointments have to be ratified at a General Meeting of
the Company.
Meetings of the Board and sub-committees during 2019 were as follows:
Number of meetings held in 2019
Martyn Ratcliffe
Rebecca Archer
Daniel Edwards
David Courtley
Michael Lacey-Solymar
* Attendance by invitation
Board Meetings
Audit
Committee
Remuneration
Committee
Nomination
Committee
24
24
13
18
22
23
4
4*
3*
2*
3
4
6
6*
1*
3*
6
6
2
2
–
–
2
2
23
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019
REPORT OF THE DIRECTORS
Report of the Remuneration Committee
Remuneration Committee
The Remuneration Committee, which is chaired by David
Courtley, currently comprises David Courtley and Michael
Lacey-Solymar.
The Remuneration Committee monitors the remuneration
policies of Science Group to ensure that they are consistent
with Science Group’s business objectives. Its terms of
reference include the recommendation and execution of
policy on Director and executive management remuneration
and for reporting decisions made to the Board. The
Committee determines the individual remuneration package
of the Chairman and Executive Directors, and also reviews
remuneration packages for all senior employees of Science
Group. This responsibility includes pension rights and any
other compensation payments including bonus/profit share
payments and share option awards.
The Remuneration Committee recognises that incentivisation
of staff is a key issue for Science Group, which depends
on the skill of its people for its success. The Remuneration
Committee seeks to incentivise employees by linking individual
remuneration to individual performance and contribution, and
to Science Group results. During the year, the Remuneration
Committee approved grants of share options and confirmed
Group profit related bonus and profit share schemes for the
Company for 2019.
The aim of the Board and the Remuneration Committee is to
maintain a policy that:
• establishes a remuneration structure that will attract, retain
and motivate executives, senior managers and other staff of
appropriate calibre;
• rewards executives and senior managers according to both
individual and Group performance;
• establishes an appropriate balance between fixed
and variable elements of total remuneration, with the
performance-related element forming a potentially
significant proportion of the total remuneration package;
• aligns the interests of executives and senior managers with
those of shareholders through the use of performance-
related rewards and share options in Science Group.
From time to time the Committee may obtain market data and
information as appropriate when making its comparisons and
decisions and is sensitive to the wider perspective, including
pay and employment conditions elsewhere in Science Group,
especially when undertaking salary/remuneration reviews.
The remuneration policies operated as intended during the
year.
Employee remuneration can include the following elements:
• basic salary – normally reviewed annually and set to reflect
market conditions, personal performance and benchmarks in
comparable companies;
• annual performance-related bonus/profit share – executives,
managers and eligible employees receive annual bonuses/
profit shares related to company performance. (The
Chairman does not participate in the Group performance-
related bonus scheme.) The bonus scheme includes a claw
back mechanism in certain circumstances;
• commission – some employees in sales roles participate
in commission schemes based on revenue received from
relevant sales. These employees are not eligible for the
Group bonus/profit share schemes.
• benefits – benefits include medical insurance, life assurance
and pension contributions. The Chairman does not receive
these benefits;
• share options – share option grants are reviewed regularly
and granted on a discretionary basis by the Remuneration
Committee.
Full details of each Director’s remuneration package and
their interests in shares and share options can be found in
Note 9 to the Financial Statements. There are no elements of
remuneration, other than basic earnings, which are treated as
being pensionable.
Share option plans
The Company adopted an approved and unapproved Share
Option scheme in 2008, the terms of which were reviewed
and amended in 2010 and 2013 and adopted by shareholders.
Further in 2013, the Company adopted an unapproved
Performance Share Plan (‘PSP’), the terms of which were
amended in 2014 and 2018 and adopted by shareholders.
Options granted under the former schemes were issued at
market price whilst options granted under the PSP scheme
are issued at the nominal share price. No options have been
granted under the former schemes since the adoption of the
PSP scheme. The Remuneration Committee approves any
options granted.
Directors are entitled to participate in Science Group’s share
option schemes. Independent Non-Executive Directors do not
participate in Science Group’s share option schemes. It is the
policy of Science Group to grant share options to Executive
Directors and key employees as a means of encouraging
ownership and providing incentives for performance. The only
share options granted to the Chairman, which occurred in
2010, were specifically approved by shareholders.
24
Annual Report and Financial Statements 2019 REPORT OF THE DIRECTORS
Report of the Remuneration Committee (continued)
The Frontier Smart Technologies Employee Benefit Trust
(‘EBT’) holds 104,400 shares in the Company which will
be used to satisfy employee share options issued to the
Joint Managing Directors of the Frontier business following
acquisition. For more information about the EBT see the
Finance Director’s Report.
Director contracts and remuneration
The Executive Directors have employment contracts that
contain notice periods of six months. Non-Executive Directors’
service contracts may be terminated on three months’ notice.
There are no additional financial provisions for termination.
The Chairman and Non-Executive Directors receive a fixed
salary. The Chairman does not participate in the Group bonus
scheme but, if appropriate, the Remuneration Committee may
award a discretionary bonus. Remuneration of the Executive
Directors (excluding the Chairman) follows a simple structure
of base salary, bonus and long term incentives using share
options, including under the Enhanced Executive Incentive
(‘EEI’) addendum to the PSP plan that was approved by
shareholders at the 2018 AGM.
The market price of the shares at 31 December 2019 was
249.0 pence (2018: 210.0 pence). The highest and lowest price
during the year was 185.5 pence and 249.0 pence respectively.
25
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 REPORT OF THE DIRECTORS
Report of the Audit Committee
Audit Committee
The Audit Committee is chaired by Michael Lacey-Solymar
and currently comprises Michael Lacey-Solymar and David
Courtley.
Acquisition accounting – all acquisitions are approved by
the Board to ensure the acquisition is in line with the Group
strategy and the potential risks are explained, quantified where
possible and understood.
The Audit Committee has written terms of reference and
provides a mechanism through which the Board can:
maintain the integrity of the financial statements of Science
Group (including financial reporting policies) and any formal
announcements relating to Science Group’s financial
performance; review Science Group’s internal financial controls
and Science Group’s internal control and risk management
systems; and make recommendations to the Board in relation
to the appointment of the external auditor, their remuneration
both for audit and non-audit work, the nature, scope and results
of the audit and the cost effectiveness and the independence
and objectivity of the auditors. A recommendation regarding
the auditors is put to shareholders for their approval in general
meetings.
Provision is made by the Audit Committee to meet the auditors
at least twice a year, including at least one meeting without any
executives present.
Financial reporting and significant financial matters
In carrying out its duties, the Audit Committee is required to
assess whether suitable accounting policies have been adopted
and to challenge the robustness of significant management
judgements reflected in the financial results. This is performed
through discussions at Audit Committee meetings where the
Finance Director explains any changes to accounting policies
and describes any significant management judgements made.
In addition, the Audit Committee reviews the year end report to
the Audit Committee from the external auditors which details
its work performed and findings from the annual audit.
During the year, the Audit Committee considered the following
key financial matters in relation to the Group’s financial
statements and disclosures, with input from the external
auditor:
Going concern - the going concern assertion has a significant
impact on the basis of preparation of the financial statements.
The Committee reviewed the business plan P&L presented by
management for the financial year ending 31 December 2020
and considered the key assumptions made by management.
The Committee challenged management on the assumptions
in the Plan and consequently considered them appropriate. The
Committee received the business plan cash flow which covered
the period to March 2021 and considered the associated
assumptions, which were concluded to be appropriate.
The Finance Director performed a sensitivity analysis to assess
the amount of headroom available in the event of a downside
event occurring. The analysis considered the likelihood of the
net debt of the Group increasing above £10 million from which
point covenants would apply. The conclusion was that, under
the downside scenario, the net debt would remain below £10
million and hence covenants would not apply and that the
Group would continue to have sufficient cash resources in order
to meet its liabilities as they fall due.
The Frontier acquisition occurred over several months and
completed with a statutory merger and as a result, was an
unusually complex acquisition for the Group. A number of
key judgements and assumptions were made relating to the
acquisition accounting and additional review processes were
performed in order to manage the risk of misstatement due to
the material nature of these judgements and assumptions.
The dates on which the Group obtained significant influence
and then control were critical in the accounting for the
step acquisition of Frontier. All factors relevant at the date
of these events were considered, including the ownership
percentage of the Frontier shares acquired by the Group, the
financing structure of Frontier and the ability for the Science
Group Board to be able to participate in the financial and
operating policy decisions of Frontier. Further, the purchase
price allocation was calculated based on externally available
market price information at these dates. The conclusions
were reviewed by the Audit Committee to ensure they were
appropriate.
The Finance Director obtained external advice on the
identification and measurement of the value of goodwill and
acquisition related intangible assets of Frontier. This was
based on cash flows extracted from the Group’s financial plan
which has been approved by the Board. The Finance Director
communicated the key assumptions within the acquisition
accounting model and the Audit Committee concurred with
management’s conclusion that the carrying value of these
assets was fully supported.
The Finance Director performed a review of the accounting
policies of the acquired companies and whether they are
compliant with Group accounting policies. Any differences
were recognised in the opening balance sheet to ensure
consistency. Further, additional consideration was given to
ensure completeness of the recognition of identified assets and
liabilities on the acquisition balance sheet.
Carrying value of goodwill and acquisition related intangible
assets – the value of the goodwill and acquisition related
intangible assets is supported by a value in use model prepared
by management. This is based on cash flows extracted from the
Group’s financial plan which has been approved by the Board.
The Finance Director communicated the key assumptions
within the value in use model and the Audit Committee
concurred with management’s conclusion that the carrying
value of these assets was fully supported.
Risk of fraud within revenue recognition - Revenue is the most
material balance in the Consolidated Income Statement and
accordingly, there is a rebuttable presumption that there is a
fraud risk surrounding revenue. There is presumed to be an
incentive to manipulate revenue in a manner that inflates the
group profit, particularly around the year end period.
26
Annual Report and Financial Statements 2019 REPORT OF THE DIRECTORS
Report of the Audit Committee (continued)
Project managers carefully monitor the revenue recognised
against projects and are accountable for the progress of
projects. The Finance Director reviews the revenue recognised
and accrued income balances on a monthly basis and
investigates any unusual amounts recognised against projects.
Collectively these processes would identify any unwarranted
revenue recognised. No instances of fraudulent revenue
recognition have been noted from these monitoring procedures
in the current year. The Audit Committee is satisfied with
management’s response to the risk this incentive represents.
Recoverability of investments in subsidiaries of Science
Group plc – the value of investments in subsidiaries is
supported by a value in use model prepared by management.
This was based on cash flows extracted from the Group’s
financial plan which has been approved by the Board. The
Finance Director communicated the key assumptions within
the value in use model and the Audit Committee concurred
with management’s conclusion that the carrying value of these
assets was fully supported.
Internal controls
In applying the principle that the Board should maintain a
sound system of internal control to safeguard shareholders’
investments and Science Group’s assets, the Directors
recognise that they have overall responsibility for ensuring
that Science Group maintains systems to provide them
with reasonable assurance regarding effective and efficient
operations, internal control and compliance with laws and
regulations and for reviewing the effectiveness of that system.
However, there are inherent limitations in any system of control
and accordingly even the most effective system can provide
only reasonable and not absolute assurance against material
mis-statement or loss. The system is designed to manage
rather than eliminate the risk of failure to achieve the business
objectives.
Science Group has established procedures necessary to
implement the guidance on internal control issued by the
FRC Guidance on Audit Committees 2014. This includes
identification, categorisation and prioritisation of critical risks
within the business and allocation of responsibility to its
executives and senior managers.
The key features of the internal control system are described
below:
Control environment – Science Group is committed to high
standards of business conduct and seeks to maintain these
standards across all of its operations. There is a whistleblowing
policy in place for the reporting and resolution of suspected
fraudulent activities. There is a continual review of payment
processes, authorisation levels for expenditure, and awareness
raising of the risks of fraudulent activities. Science Group has
an appropriate organisational structure for planning, executing,
controlling and monitoring business operations in order to
achieve its objectives.
Risk identification – Corporate and operational managers are
responsible for the identification and evaluation of key risks
applicable to their areas of business. These risks are assessed
on a continual basis and may be associated with a variety of
internal and external sources, including infringement of IP,
sales channels, investment risk, staff retention, disruption
in information systems, natural catastrophe and regulatory
requirements.
Information systems – Group businesses participate in
operational/strategy reviews and annual plans. The Board
actively monitors performance against plan. Forecasts and
operational results are consolidated and presented to the Board
on a regular basis. Through these mechanisms, performance
is continually monitored, risks identified in a timely manner,
their financial implications assessed, control procedures re-
evaluated and corrective actions agreed and implemented.
Main control procedures – Science Group has implemented
control procedures designed to ensure complete and accurate
accounting for financial transactions and to limit the exposure
to loss of assets and fraud. Measures taken include segregation
of duties, as far as reasonably practicable.
Monitoring and corrective action – There are procedures in
place for monitoring the system of internal financial controls.
This process, which operates in accordance with the FRC
Guidance, was maintained throughout the financial year, and
has remained in place up to the date of the approval of these
financial statements. The Board, via the Audit Committee, has
reviewed the systems and processes in place in meetings with
the Finance Director and Science Group’s auditors during 2019.
No internal audit function is operated outside of the systems
and processes in place, as the Board considers that Science
Group is currently too small for a separate function, although
this remains under regular review. The Board considers the
internal control system to be appropriate for the Group.
Auditors
During the year KPMG LLP were re-appointed as auditor for
a fourth year. Their initial appointment in 2015 followed a full
tender process undertaken with three audit firms. The Board
will be retendering for audit services during 2020. For more
information see the section entitled Auditor on page 20.
The Audit Committee considers the independence of the
auditors as part of considering their annual re-appointment.
During the year KPMG has provided services in relation to the
annual audit of the Group and also provided taxation advice in
relation to the freehold property and certain Brexit implications.
Audit Committee approval was provided for the provision of
non-audit services by KPMG in order to safeguard auditor
independence.
27
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the parent Company and
enable them to ensure that its financial statements comply
with the Companies Act 2006. They are responsible for such
internal control as they determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Group and to prevent and
detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report and a Directors’
Report that complies with that law and those regulations.
The Directors are responsible for the maintenance and
integrity of the corporate and financial information included
on the company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Approval
The Report of the Directors was approved by the Board on
2 March 2020 and signed on its behalf:
By order of the Board
Sarah Cole
Company Secretary
Harston Mill
Harston
Cambridge
CB22 7GG
REPORT OF THE DIRECTORS
Report of the Nomination Committee
The Nomination Committee is chaired by Martyn Ratcliffe and
also currently comprises David Courtley and Michael Lacey-
Solymar.
The Nomination Committee reviews the composition of
the Board and its effectiveness on an annual basis in order
to ensure that the Board comprises the requisite skills and
experience and reviews how the Board works together as a
unit. The Nomination Committee does not believe that it is
appropriate to set any specific targets with regards to diversity,
including gender. The Committee believes that the search for
Board candidates should be conducted, and appointments
made, on merit, against objective criteria but with due regard
for the benefits of diversity on the Board. During 2020, the
Committee will be seeking to appoint a new Non-Executive
Director since Mr Courtley will be retiring after ten years’
service to the Company.
Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report
and the Group and parent Company financial statements in
accordance with applicable law and regulations. The Directors
consider that the Annual Report and financial statements, taken
as a whole, are fair, balanced and understandable, and provide
the information necessary for shareholders to assess the
Group’s position, performance, business model and strategy.
Company law requires the directors to prepare Group and
parent Company financial statements for each financial year.
As required by the AIM Rules of the London Stock Exchange
they are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards as
adopted by the EU (IFRSs as adopted by the EU) and applicable
law and have elected to prepare the parent Company financial
statements on the same basis.
Under company law the directors must not approve the
financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Group and parent
Company and of their profit or loss for that period. In preparing
each of the Group and parent Company financial statements,
the directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable,
relevant and reliable;
• state whether they have been prepared in accordance with
IFRSs as adopted by the EU;
• assess the Group and parent Company’s ability to continue
as a going concern, disclosing, as applicable, matters related
to going concern; and
• use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent Company or to
cease operations, or have no realistic alternative but to do
so. The directors confirm that they consider it appropriate to
adopt the going concern basis of accounting in preparing the
Annual Report and financial statements.
28
Annual Report and Financial Statements 2019
INDEPENDENT AUDITOR’S REPORT
Independent Auditor’s Report to the Members of Science Group plc
1 Our opinion is unmodified
We have audited the financial statements of Science Group plc (“the Company”) for the year ended 31 December 2019 which
comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Statement of
Changes in Shareholders’ Equity, Company Statement of Changes in Shareholders’ Equity, Consolidated and Company Balance
Sheets and Consolidated and Company Statement of Cash Flows and the related notes, including the accounting policies in
Note 2.
In our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at
31 December 2019 and of the Group’s loss for the year then ended;
• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs as adopted by the EU);
• the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as
applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in
accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the
audit evidence we have obtained is a sufficient and appropriate basis for our opinion.
2 Key audit matters: including our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial
statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us,
including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing
the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
The risk
Our response
The impact of
uncertainties due to
the UK exiting the
European Union on our
audit
Refer to page 15
(principal risks)
We developed a standardised firm–wide approach
to the consideration of the uncertainties arising from
Brexit in planning and performing our audits. Our
procedures included:
Our Brexit knowledge: We considered the directors’
assessment of Brexit–related sources of risk for
the group’s business and financial resources
compared with our own understanding of the risks.
We considered the directors’ plans to take action to
mitigate the risks.
Sensitivity analysis: When addressing the key audit
matters affected and other areas that depend on
forecasts, we compared the directors’ analysis to our
assessment of the full range of reasonably possible
scenarios resulting from Brexit uncertainty and, where
forecast cash flows are required to be discounted,
considered adjustments to discount rates for the level
of remaining uncertainty.
Assessing transparency: As well as assessing
individual disclosures as part of our procedures on key
audit matters affected we considered all of the Brexit
related disclosures together, including those in the
strategic report, comparing the overall picture against
our understanding of the risks.
All audits assess and challenge the
reasonableness of estimates, in particular
as described in the step acquisition of
Frontier Smart Technologies Group Limited,
recognition and measurement of the
identifiable assets acquired and the liabilities
assumed, valuation of Group goodwill and
intangible assets and recoverability of parent
Company’s investments in subsidiaries
below, and related disclosures and the
appropriateness of the going concern basis
of preparation of the financial statements. All
of these depend on assessments of the future
economic environment and the Group’s future
prospects and performance.
In addition, we are required to consider the
other information presented in the Annual
Report including the principal risks disclosure
and the viability statement and to consider
the directors’ statement that the annual
report and financial statements taken as a
whole is fair, balanced and understandable
and provides the information necessary for
shareholders to assess the Group’s position
and performance, business model and
strategy.
Brexit is one of the most significant economic
events for the UK and its effects are subject
to unprecedented levels of uncertainty of
consequences, with the full range of possible
effects unknown.
29
Annual Report and Financial Statements 2019 INDEPENDENT AUDITOR’S REPORT
Independent Auditor’s Report to the Members of Science Group plc (continued)
The risk
Our response
Step acquisition
of Frontier Smart
Technologies Group
Limited
(Total identifiable
net assets acquired
£5,780k)
Refer page 15 (principal
risks), page 26 (Audit
Committee report),
page 49 (accounting
policy) and page 86
(financial disclosures).
Accounting treatment and subjective
estimate
As set out on page 86, the Group acquired
Frontier Smart Technologies Group Limited
“Frontier” in the year. The acquisition occurred
in stages (i.e. as a step acquisition) resulting
in significant judgement around the dates
at which the Group first obtained significant
influence and then subsequently control.
Furthermore, accounting for the transaction
involves estimating the fair value at
acquisition date of the assets and liabilities,
including the identification and valuation,
where appropriate, of acquired intangible
assets. Significant judgement is involved
in relation to the assumptions used in this
valuation process.
The effect of these matters is that, as part of
our risk assessment, we determined that the
measurement of identifiable assets acquired
and liabilities assumed has a high degree of
estimation uncertainty, with a potential range
of reasonable outcomes greater than our
materiality for the financial statements as a
whole, and possibly many times that amount.
Our procedures included;
Accounting analysis: Critically evaluating and
challenging management’s determination of the
acquisition date and accounting for the holding in
Frontier acquired entity prior to obtaining control, with
the assistance of accounting specialists.
Assessing valuer’s credentials: Assessing the
competence, capability and independence of the
expert engaged by the Group in identifying and
valuing the acquired intangible assets.
Our sector experience: Use of our own Corporate
Finance Specialists to assist us in assessing the
intangible asset valuations, in particular challenging
the valuation method, inputs and key assumptions
applied such as discount rate.
Our sector experience: With the assistance of our
accounting specialists, critically evaluating and
testing the Directors’ determination of fair value of
the remaining assets acquired and liabilities assumed
including share based payment awards, inventory
and contingent liabilities. This was done through
our review of the work of component auditors on the
acquisition date assets and liabilities, and obtaining
corroborative audit evidence through inspection of
supporting information.
Assessing transparency: Assessing whether the
Group’s disclosures regarding the acquisition
adequately disclose the judgements and estimates
involved in arriving at the fair values and considering
whether the disclosure requirements of IFRS 3
Business Combinations are satisfied.
30
Annual Report and Financial Statements 2019 INDEPENDENT AUDITOR’S REPORT
Independent Auditor’s Report to the Members of Science Group plc (continued)
The risk
Our response
Service revenue
recognition
Service revenue :
£ 48,710k (2018 :
£47,608k)
Refer page 15 (principal
risks), page 26 (Audit
Committee report),
page 52 (accounting
policy) and page 61
(financial disclosures).
Existence and accuracy of service revenue
The Group undertakes a large volume of
consultancy projects with the majority billed
on a time and materials basis, however some
will be undertaken as fixed price contracts.
Most projects of the Group are short term
which commence and complete in the year,
however at each period end there will be a
number of ongoing projects with associated
contract assets or liabilities depending on the
billing profile of the contract.
Revenue is the most material balance in the
financial statements and is considered to be
a main driver of results, and as such had the
greatest effect on our allocation of resources
in planning and completing the audit.
Furthermore, professional standards require
us to make a rebuttable presumption that
the fraud risk from revenue recognition is a
significant risk, this has not been rebutted in
relation to service revenue.
Our procedures included;
Control operation: Testing the design,
implementation and operating effectiveness of
controls related to revenue recognition.
Test of detail: Using computer assisted audit
techniques to match invoices to cash received during
the year on a transactional level for three of the five
reporting components with service revenue. We tested
a sample of reconciling items between the invoice
listing and revenue recognised for the year back to
supporting evidence.
Expectation vs outcome: For the remaining two
components with service revenue, creating an
expectation of revenue for the year based on cash
receipts and comparing to actual revenue recorded.
We agreed a sample of cash receipts to third party
data and tested a sample of reconciling items back to
supporting evidence.
Test of detail: For a sample of projects for which
accrued income is recognised at the year end agreeing
revenue recognised to corroborative evidence such
as correspondence with end–clients on the status of
projects and to hours worked per timesheets where
applicable.
Test of detail: For a sample of project revenue
recorded in the last 2 weeks of December 2019
assessing whether the revenue has been recognised in
the correct period by agreeing the work undertaken to
timesheets which showed the date on which the hours
were charged by employees to such projects. We also
inspected correspondence with clients regarding the
status of projects.
Test of detail: Obtaining service revenue journals
posted in the last two weeks of December and
analysing these to identify any entries which were
unexpected based upon the specific characteristics
of the journal, considering in particular whether the
opposite side of the entry was as expected, based on
our business understanding. We tested these back to
supporting evidence to assess whether revenue was
recognised appropriately.
31
Annual Report and Financial Statements 2019 INDEPENDENT AUDITOR’S REPORT
Independent Auditor’s Report to the Members of Science Group plc (continued)
The risk
Our response
Valuation of Group
goodwill and intangible
assets
Goodwill: £13,808k,
(2018: £11,239k)
Acquisition related
intangible assets:
£13,222k (2018:
£7,495k)
Refer page 15 (principal
risks), page 26 (Audit
Committee report),
page 49 (accounting
policy) and page 71
(financial disclosures).
Forecast based valuation
The estimation of the recoverable amount
of each cash–generating unit is subjective
due to the inherent uncertainty involved in
forecasting and discounting future cash flows.
The effect of these matters is that, as part of
our risk assessment, we determined that the
value in use of goodwill has a high degree of
estimation uncertainty, with a potential range
of reasonable outcomes greater than our
materiality for the financial statements as a
whole, and possibly many times that amount.
Recoverability of
Parent company’s
investments in
subsidiaries
Investments:
£47,389k, (2018:
£37,046k)
Refer page 49
(accounting policy)
and page 75 (financial
disclosures).
Low risk, high value
The carrying amount of the parent Company’s
investments in subsidiaries represents 78%
(2018: 74%) of the company’s total assets as
at 31 December 2019. Their recoverability is
not at a high risk of significant misstatement
or subject to significant judgement. However,
due to their materiality in the context of the
parent company financial statements, this
is considered to be the area that had the
greatest effect on our overall parent Company
audit.
Our procedures included;
Assessing principles: Assessing the determination
of Cash Generating Units (‘CGUs’) , including CGUs
relating to the Frontier acquisition, and considering
whether the basis of such determination is in line with
the requirements of IAS 36 Impairment of Assets.
Historical comparisons: Assessing the accuracy
of management’s forecasting by considering the
historical accuracy of previous forecasts.
Our sector experience: Evaluating whether
assumptions used, in particular those relating
to revenue growth rates and EBITDA margins,
reflect our knowledge of the business and industry,
including known or probable changes in the business
environment.
Benchmarking assumptions: Challenging the key
inputs used in the Group’s calculation of the discount
rates by comparing them to externally derived
data, including available sources for comparable
companies.
Sensitivity analysis: Performing sensitivity analysis
on the key assumptions and inputs such as discount
rates and growth rates used in the value–in–use
computations.
Assessing transparency: Assessing whether the
Group’s disclosures about the sensitivity of the
outcome of the impairment assessment to changes
in key assumptions reflected the risks inherent in the
valuation of goodwill.
Our procedures included;
Test of detail: Comparing the carrying amount of the
entire population of investments with the relevant
subsidiaries’ draft balance sheet to identify whether
their net assets, being an approximation of their
minimum recoverable amount, were in excess of
their carrying amount and assessing whether those
subsidiaries have historically been profit–making.
Subsidiary audits: Considering the results of our
audit over subsidiaries’ profits and net assets.
Test of detail: Comparing the market capitalisation of
the Group to the total carrying amount of investments
in subsidiaries to identify whether there was an
indication of impairment.
Our sector experience: For the investments where
the carrying amount exceeded the net asset value,
comparing the carrying amount of the investment
with the expected value of the business based on a
discounted cash flow model.
32
Annual Report and Financial Statements 2019 INDEPENDENT AUDITOR’S REPORT
Independent Auditor’s Report to the Members of Science Group plc (continued)
3 Our application of materiality and an overview of the scope of our audit
Materiality for the Group financial statements as a whole was set at £211,000 (2018 £183,000), determined with reference to a
benchmark of profit before tax normalised to exclude one-off costs and adjustments such as costs related to the acquisition, share
of loss of equity accounted investee and reversal of provision of legal claim, of which it represents 6.5% (2018: 5%).
Materiality for the parent Company financial statements as a whole was set at £105,000 (2018: £145,000), which was determined
with reference to a benchmark of company total assets, but has been capped at 50% of Group materiality.
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £10,500 (2018:
£9,000), in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the Group’s 25 components, we subjected 8 components to full scope audits for Group purposes.
The components within the scope of our work accounted for the following percentages of the Group’s results
2019
2018
Number of
components Group revenue
Profits and
losses that
make up Group
loss
before tax
Group total
assets
8
9
93%
92%
96%
89%
92%
98%
The remaining 7% of total Group revenue, 4% of profits and losses that make up Group loss before tax and 8% of total Group
assets is represented by 17 of reporting components, none of which individually represented more than 4% of any of total Group
revenue, profits and losses that make up Group loss before tax or total Group assets. For these residual components, we performed
analysis at an aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement
within these.
The Group team instructed the component auditor as to the significant areas to be covered, including the relevant risks detailed
above and the information to be reported back. The Group team approved the component materialities, which ranged from
£16,000 to £116,000, having regard to the mix of size and risk profile of the Group across the components. The work on 1 of the
8 components above was performed by another component auditor and the rest, including the audit of the parent Company, was
performed by the Group team. The Group team performed procedures on the items excluded from normalised Group profit before
tax.
The Group team visited and held a number of telephone conference meetings with the 1 component auditor to assess the audit
risks and strategy. At these meetings and visits, the findings reported to the Group team were discussed in more detail, and any
further work required by the Group team was then performed by the component auditor.
4 We have nothing to report on going concern
The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or
the Group or to cease their operations, and as they have concluded that the Company’s and the Group’s financial position means
that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over
their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going
concern period”).
Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty
related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or
conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the
time they were made, the absence of reference to a material uncertainty in this auditor’s report is not a guarantee that the Group or
the Company will continue in operation.
In our evaluation of the Directors’ conclusions, we considered the inherent risks to the Group’s and Company’s business model and
analysed how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over the
going concern period. The risk that we considered most likely to adversely affect the Group’s and Company’s available financial
resources over this period was the impact of coronavirus to Chinese operations.
As these were risks that could potentially cast significant doubt on the Group’s and the Company’s ability to continue as a going
concern, we considered sensitivities over the level of available financial resources indicated by the Group’s financial forecasts
taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and
collectively and evaluated the achievability of the actions the Directors consider they would take to improve the position should
the risks materialise. We also considered less predictable but realistic second order impacts, such as the erosion of customer or
supplier confidence and the impact of Brexit on the Group’s UK workforce, which could result in a rapid reduction of available
financial resources.
33
Annual Report and Financial Statements 2019 INDEPENDENT AUDITOR’S REPORT
Independent Auditor’s Report to the Members of Science Group plc (continued)
Based on this work, we are required to report to you if we have anything material to add or draw attention to in relation to the
directors’ statement in Note 2 to the financial statements on the use of the going concern basis of accounting with no material
uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least twelve
months from the date of approval of the financial statements.
We have nothing to report in these respects, and we did not identify going concern as a key audit matter.
5 We have nothing to report on the other information in the Annual Report
The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our
opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or,
except as explicitly stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work,
the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely
on that work we have not identified material misstatements in the other information.
Strategic report and directors’ report
Based solely on our work on the other information:
• we have not identified material misstatements in the strategic report and the directors’ report;
• in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
• in our opinion those reports have been prepared in accordance with the Companies Act 2006.
Disclosures of emerging and principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to
in relation to:
• the directors’ confirmation within Viability Statement, as set out on page 16, that they have carried out a robust assessment of
the emerging and principal risks facing the Group, including those that would threaten its business model, future performance,
solvency and liquidity;
• the Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated; and
• the directors’ explanation in the Viability Statement of how they have assessed the prospects of the Group, over what period
they have done so and why they considered that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements
audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent
with judgments that were reasonable at the time they were made, the absence of anything to report on these statements is not a
guarantee as to the Group’s and Company’s longer-term viability.
Corporate governance disclosures
We are required to report to you if:
• we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and
the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced
and understandable and provides the information necessary for shareholders to assess the Group’s position and performance,
business model and strategy; or
• the section of the annual report describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
6 We have nothing to report on the other matters on which we are required to report by exception
Under the Companies Act 2006, we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been
received from branches not visited by us; or
• the parent Company financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
We have nothing to report in these respects.
34
Annual Report and Financial Statements 2019 INDEPENDENT AUDITOR’S REPORT
Independent Auditor’s Report to the Members of Science Group plc (continued)
7 Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 28, the directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing
the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern;
and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to
cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high
level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
8 The purpose of our audit work and to whom we owe our responsibilities
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to
state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for
the opinions we have formed.
Jeremy Hall (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15, Canada Square,
London,
E14 5GL
2 March 2020
35
Annual Report and Financial Statements 2019 Financial
Statements
and Notes to the
Financial Statements
FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT
FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2019
Revenue
Operating expenses before adjusting items
Adjusted operating profit
Acquisition and integration costs
Loss on remeasurement of equity-accounted investee
Amortisation of acquisition related intangible assets
Share based payment charge
Release of provision on settlement of legal claim
Release of contingent consideration
Impairment of other investments
Operating (loss)/profit
Finance income
Finance costs
Share of loss of equity-accounted investee, net of tax
(Loss)/profit before income tax
Income tax charge (including R&D tax credit of £406,000)
(2018: £432,000))
(Loss)/profit for the year
Earnings per share
Earnings per share from continuing operations (basic)
Earnings per share from continuing operations (diluted)
Adjusted earnings per share from continuing operations (basic)
Adjusted earnings per share from continuing operations (diluted)
Note
5
6
4
26
26
14
8
21
22
16
7
7
26
10
12
12
12
12
2019
£000
57,247
(50,543)
6,704
(3,571)
(491)
(2,345)
(1,167)
687
–
–
(183)
22
(852)
(592)
(1,605)
(226)
Group
2018
£000
48,670
(40,939)
7,731
(76)
–
(2,004)
(812)
–
519
(50)
5,308
10
(451)
–
4,867
(580)
(1,831)
4,287
(4.5) p
(4.4) p
11.6p
11.3p
10.7p
10.5p
14.7p
14.4p
The accompanying Notes form an integral part of this Consolidated Income Statement.
37
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2019
(Loss)/profit for the year attributable to:
Equity holders of the parent
Non-controlling interests
(Loss)/profit for the year
Other comprehensive income
Items that will or may be reclassified to profit or loss:
Exchange differences on translating foreign operations
Fair value (loss)/gain on interest rate swap
Deferred tax on interest rate swap
Other comprehensive (expense)/income for the year
Total comprehensive income for the period attributable to:
Equity holders of the parent
Non-controlling interests
Total comprehensive (expense)/income for the year
Group
2019
£000
(1,669)
(162)
(1,831)
(939)
(408)
77
(1,270)
(2,939)
(162)
(3,101)
2018
£000
4,287
–
4,287
(50)
66
(13)
3
4,290
–
4,290
The accompanying Notes form an integral part of this Consolidated Statement of Comprehensive Income.
38
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUIT Y
For the year ended 31 December 2019
Group
Issued
Share
Treasury
Merger
Translation
Share
Retained
Total –
Non-
capital
premium
stock
reserve
reserve
based
earnings
Share-
controlling
Attributable to owners of the Company
£000
£000
£000
£000
£000
payment
reserve
£000
holders’
interests
£000
funds
£000
£000
£000
Total
equity
Balance at 1
January 2018
Contributions and
distributions
Purchase of own
shares
Issue of shares out
of treasury stock
Dividends paid
Share based
payment charge
(Note 23)
Deferred
tax on share
based payment
transactions
Transactions with
owners
Profit for the year
Other
comprehensive
income:
Fair value gain on
interest rate swap
Exchange
differences on
translating foreign
operations
Deferred tax on
interest rate swap
Total
comprehensive
income for the
year
Balance at 31
December 2018
421
8,230
(3,569)
10,343
310
2,663
19,341
37,739
–
37,739
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(190)
995
–
–
–
805
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(50)
–
(50)
–
–
–
–
(190)
(880)
115
(1,760)
(1,760)
812
–
812
–
(48)
(48)
812
(2,688)
(1,071)
–
4,287
4,287
–
–
–
–
66
66
–
(50)
(13)
(13)
4,340
4,290
421
8,230
(2,764)
10,343
260
3,475
20,993
40,958
–
–
–
–
–
–
–
–
–
–
–
–
(190)
115
(1,760)
812
(48)
(1,071)
4,287
66
(50)
(13)
4,290
40,958
The accompanying Notes form an integral part of this Consolidated Statement of Changes in Shareholders’ Equity.
39
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019
FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUIT Y
For the year ended 31 December 2019
Attributable to owners of the Company
Group
Issued
Share
Treasury
Merger
Translation
Share
Retained
Total –
Non-
capital
premium
stock
reserve
reserve
based
earnings
Share-
controlling
Total
equity
£000
£000
£000
£000
£000
payment
reserve
£000
holders’
interests
£000
funds
£000
£000
£000
Balance at 1
January 2019
Contributions and
distributions
Purchase of own
shares
Issue of shares out
of treasury stock
Dividends paid
Share based
payment charge
(Note 23)
Deferred
tax on share
based payment
transactions
Total contributions
and distributions
Changes in
ownership
interests
Acquisition of
subsidiary with NCI
Acquisition of NCI
without change in
control
Total changes
in ownership
interests
Total transactions
with owners
Loss for the year
Other
comprehensive
income:
Fair value loss on
interest rate swap
Exchange
differences on
translating foreign
operations
Deferred tax on
interest rate swap
Total
comprehensive
income for the year
Balance at 31
421
8,230
(2,764)
10,343
260
3,475
20,993
40,958
–
40,958
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(203)
2,307
–
–
–
2,104
–
–
–
2,104
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(939)
–
(939)
–
–
–
–
(203)
109
2,416
(1,840)
(1,840)
1,167
–
1,167
–
(25)
(25)
1,167
(1,756)
1,515
–
–
–
–
–
–
(203)
2,416
(1,840)
1,167
(25)
1,515
–
–
–
–
–
2,763
2,763
(3,265)
(3,265)
(2,601)
(5,866)
(3,265)
(3,265)
162
(3,103)
1,167
(5,021)
(1,750)
162
(1,588)
(1,669)
(1,669)
(162)
(1,831)
–
–
–
–
(408)
(408)
–
77
(939)
77
–
–
–
(408)
(939)
77
(2,000)
(2,939)
(162)
(3,101)
December 2019
421
8,230
(660)
10,343
(679)
4,642
13,972
36,269
–
36,269
The accompanying Notes form an integral part of this Consolidated Statement of Changes in Shareholders’ Equity.
40
Annual Report and Financial Statements 2019
FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUIT Y
FINANCIAL STATEMENTS COMPANY STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUIT Y
For the year ended 31 December 2019
Company
Issued
capital
Share
premium
Treasury
stock
Merger
reserve
£000
£000
£000
£000
Share
based
payment
reserve
£000
Retained
earnings
£000
Total
Share-
holders’
funds
£000
Balance at 1 January 2018
421
8,230
(3,569)
10,343
2,663
22,374
40,462
Contributions and distributions
Purchase of own shares
Issue of shares out of treasury stock
Dividends paid
Share based payment charge (Note 23)
Deferred tax on share based payment transactions
Transactions with owners
Profit and total comprehensive income for the
year
Balance at 31 December 2018
Balance at 1 January 2019
Contributions and distributions
Purchase of own shares
Issue of shares out of treasury stock
Dividends paid
Share based payment charge (Note 23)
Deferred tax on share based payment transactions
Transactions with owners
Profit and total comprehensive income for the
year
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(190)
995
–
–
–
805
–
–
–
–
–
–
–
–
–
–
–
812
–
–
(190)
(880)
115
(1,760)
(1,760)
–
13
812
13
812
(2,627)
(1,010)
–
7,425
7,425
421
421
8,230
(2,764)
10,343
8,230
(2,764)
10,343
3,475
3,475
27,172
46,877
27,172
46,877
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(203)
2,307
–
–
–
2,104
–
–
–
–
–
–
–
–
–
–
–
1,167
–
–
109
(203)
2,416
(1,840)
(1,840)
–
(2)
1,167
(2)
1,167
(1,733)
1,538
–
6,587
6,587
Balance at 31 December 2019
421
8,230
(660)
10,343
4,642
32,026
55,002
The accompanying Notes form an integral part of this Company Statement of Changes in Shareholders’ Equity.
41
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019
FINANCIAL STATEMENTS CONSOLIDATED AND COMPANY BALANCE SHEET
As at 31 December 2019
Assets
Non-current assets
Acquisition related intangible assets
Goodwill
Property, plant and equipment
Investments
Derivative financial assets
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Current tax asset
Cash and cash equivalents – Client
registration funds
Cash and cash equivalents – Group
cash
Total assets
Liabilities
Current liabilities
Trade and other payables
Current tax liabilities
Provisions
Borrowings
Lease liabilities
Company
Group
Note
2019
£000
2018
£000
2019
£000
2018
£000
14
14
15
16
3
11
17
18
19
19
20
21
24
25
–
–
165
47,389
–
25
–
–
–
37,046
–
27
13,222
13,808
25,870
–
–
47
7,495
11,239
23,353
–
293
16
47,579
37,073
52,947
42,396
–
10,483
–
–
2,744
13,227
60,806
–
5,741
–
–
7,465
13,206
50,279
2,060
10,239
482
1,517
13,912
28,210
81,157
5,804
3,402
20,581
–
–
–
–
–
–
–
–
5,804
3,402
226
172
1,200
1,212
23,391
–
9,717
245
1,487
21,520
32,969
75,365
17,376
374
1,038
1,000
–
19,788
42
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS CONSOLIDATED AND COMPANY BALANCE SHEET
FINANCIAL STATEMENTS CONSOLIDATED AND COMPANY BALANCE SHEET (CONTINUED)
As at 31 December 2019
Non-current liabilities
Provisions
Borrowings
Lease liabilities
Financial instruments
Deferred tax liabilities
Total liabilities
Net assets
Shareholders’ equity
Share capital
Share premium
Treasury stock
Merger reserve
Translation reserve
Share based payment reserve
Retained earnings
Total equity
21
24
25
3
11
23
Company
Group
Note
2019
£000
2018
£000
2019
£000
–
–
–
–
–
–
–
–
–
–
–
–
5,804
3,402
480
15,013
2,111
115
3,778
21,497
44,888
2018
£000
296
11,689
–
–
2,634
14,619
34,407
55,002
46,877
36,269
40,958
421
8,230
(660)
10,343
–
4,642
32,026
55,002
421
8,230
(2,764)
10,343
–
3,475
27,172
46,877
421
8,230
(660)
10,343
(679)
4,642
13,972
36,269
421
8,230
(2,764)
10,343
260
3,475
20,993
40,958
The financial statements were approved by the Board of Directors and signed on its behalf by:
Martyn Ratcliffe
Rebecca Archer
Chairman
Finance Director
On 2 March 2020
The accompanying Notes form an integral part of this Consolidated and Company Balance Sheet.
The company’s registered number is 06536543.
43
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS CONSOLIDATED AND COMPANY STATEMENT OF CASH FLOWS
For the year ended 31 December 2019
Profit/(loss) before income tax
Adjustments for:
Share of loss of equity-accounted investee, net of tax
Loss on remeasurement of equity-accounted investee
Amortisation of acquisition related intangible assets
Depreciation of property, plant and equipment
Impairment of right of use asset
Depreciation of right of use asset
Net interest cost
Release of contingent consideration
Share based payment charge
Impairment of cost of investment
Decrease in inventories
Decrease/(increase) in receivables
(Decrease)/increase in payables representing client
registration funds
Increase/(decrease) in payables excluding balances
representing client registration funds
Changes in provisions
Cash generated from operations
Interest paid
UK corporation tax paid
Foreign corporation tax paid
Company
Group
Note
2019
£000
6,587
2018
£000
7,473
2019
£000
(1,605)
26
26
14
15
25
25
7
22
8
16
–
–
–
33
–
–
52
–
43
–
–
–
–
–
–
–
–
65
(519)
37
–
–
(4,439)
(3,897)
592
491
2,345
776
796
1,033
830
–
1,167
–
1,863
3,432
2018
£000
4,867
–
–
2,004
760
–
–
441
(519)
812
50
–
(354)
–
–
(30)
600
2,099
3,284
(3,846)
(1,535)
–
4,375
(52)
–
–
–
6,443
(65)
–
–
(933)
6,911
(781)
(554)
(196)
257
7,383
(555)
(1,025)
(159)
5,644
10
(444)
–
(434)
Cash flows from operating activities
4,323
6,378
5,380
Interest received
Purchase of property, plant and equipment
Purchase of subsidiary undertakings, net of cash
received
26
Cash flows used in investing activities
–
(198)
(9,219)
(9,417)
–
–
–
–
22
(555)
(4,118)
(4,651)
44
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS CONSOLIDATED AND COMPANY STATEMENT OF CASH FLOWS
FINANCIAL STATEMENTS CONSOLIDATED AND COMPANY STATEMENT OF CASH FLOWS (CONTINUED)
For the year ended 31 December 2019
Issue of shares out of treasury
Repurchase of own shares
Dividends paid
Acquisition of NCI
Proceeds of bank loan received
Repayment of term loan
Repayment of revolving credit facility
Payment of lease liabilities
Cash flows generated by/(used in) financing
activities
Note
13
26
24
24
24
25
Company
Group
2019
£000
2,416
(203)
(1,840)
2018
£000
115
(190)
2019
£000
2,416
(203)
(1,760)
(1,840)
–
–
–
–
–
–
–
–
–
–
(5,869)
4,750
(1,200)
(5,000)
(998)
2018
£000
115
(190)
(1,760)
–
–
(1,250)
–
–
373
(1,835)
(7,944)
(3,085)
(Decrease)/increase in cash and cash equivalents in the year
(4,721)
4,543
(7,215)
2,125
Cash and cash equivalents at the beginning of the
year
Exchange (loss)/gains on cash
Cash and cash equivalents at the end of the year
19
7,465
–
2,744
2,922
23,007
20,780
–
(363)
102
7,465
15,429
23,007
Cash and cash equivalents is analysed as follows:
Cash and cash equivalents – Client registration funds (Note 19)
Cash and cash equivalents – Group cash
Group
2019
£000
1,517
13,912
15,429
2018
£000
1,487
21,520
23,007
The accompanying Notes form an integral part of this Consolidated and Company Statement of Cash Flows.
45
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
1. General information
Science Group plc (the ‘Company’) together with its
subsidiaries (‘Science Group’ or the ‘Group’) is an international,
science & technology-led services and product development
organisation, supported by a strong balance sheet including
significant freehold property assets.
The Group and Company accounts of Science Group plc were
prepared under IFRS as adopted by the European Union and
have been audited by KPMG LLP. Accounts are available
from the Company’s registered office; Harston Mill, Harston,
Cambridge, CB22 7GG.
The Company is incorporated and domiciled in England and
Wales under the Companies Act 2006 and has its primary
listing on the AIM Market of the London Stock Exchange
(SAG.L). The value of Science Group plc shares, as quoted on
the London Stock Exchange at 31 December 2019, was 249.0
pence per share (31 December 2018: 210.0 pence per share).
These Consolidated Financial Statements have been approved
for issue by the Board of Directors on 2 March 2020.
Alternative performance measures
The Group uses alternative (non-Generally Accepted
Accounting Practice (‘non-GAAP’)) performance measures
of ‘adjusted operating profit’, ‘adjusted earnings per share’
and ‘net funds’ which are not defined within the International
Financial Reporting Standards (IFRS). These are explained as
follows:
(a) Adjusted operating profit
The Group calculates this measure by making adjustments to
exclude certain items from operating profit namely: impairment
of goodwill and investments, amortisation of acquisition related
intangible assets, acquisition integration costs, share based
payment charges and other specified items that meet the
criteria to be adjusted.
Cash and cash equivalents – Group cash
Borrowings
Net (debt)/funds
The criteria for the adjusted items in the calculation of adjusted
operating profit is operating income or expenses that are
material and either arise from an irregular and significant event
or the income/cost is recognised in a pattern that is unrelated
to the resulting operational performance. Materiality is defined
as an amount which, to a user, would influence the decision
making. Acquisition integration costs include all costs incurred
directly related to the restructuring, relocation and integration
of acquired businesses. Adjustments for share based payment
charges occur because: once the cost has been calculated,
the Directors cannot influence the share based payment
charge incurred in subsequent years; it is understood that
many investors/analysts exclude the cost from their valuation
analysis of the business; and the value of the share option to
the employee differs considerably in value and timing from the
actual cash cost to the Group.
The calculation of this measure is shown on the Consolidated
Income Statement.
(b) Adjusted earnings per share (‘EPS’)
The Group calculates this measure by dividing adjusted profit
after tax by the weighted average number of shares in issue
and the calculation of this measure is disclosed in Note 12. The
tax rate applied to calculate the tax charge in this measure is
the tax at the blended corporation tax rate across the various
jurisdictions rate for the year which is 19.4 % (2018: 19.4%)
which results in a comparable tax charge year on year.
(c) Net funds
The Group calculates this measure as the net of Cash and cash
equivalents – Group cash and Borrowings. Client registration
funds are excluded from this calculation because these monies
are pass through funds held on behalf of the client solely
for the purpose of payment of registration fees to regulatory
bodies and for which no revenue is recognised. This cash is
not available for use in day to day operations. This measure is
calculated as follows:
Note
19
24
Group
2019
£000
13,912
2018
£000
21,520
(16,213)
(12,689)
(2,301)
8,831
The Directors believe that disclosing these alternative
performance measures enhances shareholders’ ability to
evaluate and analyse the underlying financial performance
of the Group. Specifically, the adjusted operating profit
measure is used internally in order to assess the underlying
operational performance of the Group, aid financial, operational
and commercial decisions and in determining employee
compensation. The adjusted EPS measure allows the
shareholder to understand the underlying value generated
by the Group on a per share basis. Net funds represents
the Group’s cash available for day to day operations and
investments. As such, the Board considers these measures
enhance shareholders’ understanding of the Group results and
should be considered alongside the IFRS measures.
46
Annual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation
of these consolidated financial statements are set out below.
These policies have been consistently applied to all of the years
presented, unless otherwise stated.
2.1 Basis of preparation
The consolidated and Company financial statements of Science
Group have been prepared under the historical cost convention,
as modified by the revaluation of certain financial instruments
at fair value. The financial statements are in accordance with
IFRS as adopted by the EU.
Of the new standards and interpretations effective for the
year ended 31 December 2019, there was no impact on the
presentation of the financial statements of Science Group other
than from IFRS 16. This is the first set of financial statements
in which IFRS 16 has been applied. The related changes to
accounting policies are described in Note 2.2. The accounting
policies have been applied consistently throughout the Group
for the purposes of preparation of these consolidated financial
statements.
No income statement is presented for the Company as
provided by Section 408 of the Companies Act 2006. The
Company’s profit for the financial period after tax, determined
in accordance with the Act, was £6,587,000 (2018: £7,425,000).
Going concern – the Directors have considered the current
cash balance of £13.9m (excluding client registration funds)
and assessed forecast future cash flows for the next 12 months.
There are no events or conditions which cast significant doubt
on the ability of the Group to continue as a going concern. The
term loan has no operating covenants while the Group net bank
debt is less than £10 million. On the basis of the forecast future
cash flows, the Directors do not expect the Group net bank debt
to exceed £10 million at any time during the forecast period.
The Directors are satisfied that the Group has adequate cash
and financing resources to continue in operational existence
for the foreseeable future, being a period of at least a year
following the approval of the accounts and therefore continue
to adopt the going concern basis of accounting in preparing the
annual financial statements.
2.2 Changes in accounting policies
The Group has adopted IFRS16 Leases from 1 January 2019.
A number of other new standards are effective from 1 January
2019 but they are not considered to have a material effect on
the Group’s financial statements.
IFRS 16 introduced a single on-balance sheet accounting model
for lessees. As a result, the Group as a lessee, has recognised
right-of-use assets representing its rights to use the underlying
assets and lease liabilities representing its obligation to make
lease payments. Lessor accounting remains similar to previous
accounting policies.
The Group has applied IFRS 16 using the modified
retrospective approach, under which the cumulative effect of
initial application is recognised in retained earnings at 1 January
2019. Accordingly, the comparative information presented for
2018 has not been restated – i.e. it is presented, as previously
reported, under IAS 17 and related interpretations. The new
accounting policy is set out in Note 2.21 Leases.
i. Transition
Previously, the Group classified property leases as operating
leases under IAS 17. The leases run for periods between 2 and
10 years, based on the non-cancellable period.
At transition, for leases classified as operating leases under
IAS 17, lease liabilities were measured at the present value
of the remaining lease payments, discounted at the Group’s
incremental borrowing rate as at 1 January 2019. Right-of-use
assets are measured at an amount equal to the lease liability,
adjusted by the amount of any prepaid or accrued lease
payments.
The Group has chosen the practical expedient not to reassess
whether contracts at the date of initial application did, or did
not, contain a lease.
The Group has elected not to recognise right-of-use assets and
lease liabilities for leases of low-value assets and short-term
leases, including IT equipment.
The Group used the following practical expedients when
applying IFRS 16 to leases previously classified as operating
leases under IAS 17.
–
–
Applied a single discount rate to the property leases on
the basis that they are leases with reasonably similar
characteristics.
Applied the exemption not to recognise right-of-use assets
and liabilities for leases for which the lease term ends
within 12 months of date of initial application.
–
Excluded initial direct costs from measuring the right-of-
use asset at the date of initial application.
ii. As a lessor
The Group lets out space to third party tenants on property
leases, of which, the majority are subject to mutual notice
periods of up to 6 months. These leases are classified as
operating leases.
The accounting policies applicable to the Group as a lessor
are not different from those under IAS 17. The Group is not
required to make any adjustments on transition to IFRS 16 for
leases in which it acts as a lessor.
47
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
2. Summary of significant accounting policies (continued)
2.2 Changes in accounting policies (continued)
iii. Impact on financial statements on transition*
On transition to IFRS 16, the Group recognised additional right-of-use assets and additional lease liabilities. The impact on
transition is shown below.
Group
Right-of-use asset presented in property, plant and equipment
Lease liabilities
1 January
2019
£000
2,771
2,771
* For the impact of IFRS 16 on profit or loss for the period, see Note 25.
When measuring lease liabilities for leases that were classified as operating leases, the Group discounted lease payments using its
incremental borrowing rate at 1 January 2019 of 4.0%.
Group
Operating lease commitments at 31 December 2018 as disclosed under IAS 17 in the Group’s consolidated
financial statements
Recognition exemption for leases of low-value assets
Recognition exemption for leases with less than 12 months lease term at transition
Lease liabilities recognised at 1 January 2019, before discounting
Discounted using the incremental borrowing rate at 1 January 2019
£000
3,169
(138)
(120)
2,911
2,771
2.3 Standards issued but not yet effective
The standards and interpretations in issue but not effective
for accounting periods commencing until 1 January 2020 that
may impact on Science Group going forward are listed below.
Science Group has not adopted these early.
The group intends to adopt these standards in the first
accounting period after the effective date. The Directors
do not anticipate that the adoption of the Standards and
Interpretations listed below will have a material effect on
the consolidated financial statements in the period of initial
application.
Number
IFRS 17
Title
Insurance contracts
IFRS10 and IAS28 (amendments)
Sale or Contribution of Assets between an Investor and its Associate
or Joint Venture
Amendments to IFRS3
Definition of a business
Amendments to IAS1 and IAS8
Definition of material
Conceptual Framework
Amendments to references to the conceptual framework in IFRS
standards
Effective
1–Jan–21
Yet to be set
1–Jan–20
1–Jan–20
1–Jan–20
The preparation of financial statements in conformity with
IFRS requires the use of certain critical accounting estimates.
It also requires management to exercise its judgement in the
process of applying Science Group’s accounting policies. The
areas involving a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the
consolidated financial statements are disclosed in Note 30
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. The financial position of the
Group, its cash flows, liquidity position and borrowing facilities
are also described in the Strategic Report. In addition, Note
3 to the Financial Statements and the Report of the Directors
include the Group’s objectives, policies and processes for
managing its capital; its financial risk management objectives;
details of its financial instruments and hedging activities; and
its exposure to credit risk and liquidity risk.
2.4 Basis of consolidation
The basis of consolidation is set out below:
Subsidiaries – subsidiaries are entities controlled by Science
Group. The Group controls an entity when it is exposed to, or
has rights to, variable returns from its involvement with the
entity and has the ability to affect those returns through its
power over the entity. The financial statements of subsidiaries
are included in the consolidated financial statements from
the date on which control commences until the date on which
control ceases.
48
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
2. Summary of significant accounting policies (continued)
2.4 Basis of consolidation (continued)
Investment in subsidiaries – in the Company accounts,
investments in subsidiaries are stated at cost less any provision
for impairment where appropriate.
2.6 Intangible assets
All intangible assets, except goodwill, are stated at cost less
accumulated amortisation and any accumulated impairment
losses.
Business combinations – the acquisition of subsidiaries
is accounted for using the acquisition method. The cost
of the acquisition is measured at the aggregate of the fair
values, at the date of exchange, of assets given and liabilities
incurred or assumed in exchange for control. The acquired
Company’s identifiable assets, liabilities and contingent
liabilities that meet the conditions for recognition under IFRS
3 Business Combinations are recognised at their fair value at
the acquisition date. Acquisition expenses are expensed as
incurred.
Non-controlling interests – NCI are measured initially at their
proportionate share of the acquiree’s identifiable net assets at
the date of acquisition. Changes in the Group’s interest in a
subsidiary that do not result in a loss of control are accounted
for as equity transactions.
Interests in equity-accounted investees – Associates are
those entities in which the Group has significant influence, but
not control or joint control, over the financial and operating
policies. Interests in associates are accounted for using the
equity method. They are initially recognised at cost, which
includes transaction costs. Subsequent to initial recognition,
the consolidated financial statements include the Group’s share
of the profit or loss and OCI of equity accounted investees, until
the date on which significant influence ceases.
Other investments – investments made in entities over which
Science Group is deemed to have no significant influence
are stated at cost less any provision for impairment where
appropriate. Significant influence is the power to participate in
the financial and operating policy decisions of the investee but
is not control or joint control over those policies.
2.5 Segment reporting
Under IFRS 8, the accounting policy for identifying segments is
based on the internal management reporting information that
is regularly reviewed by the chief operating decision makers
(CODMs).
Following the Corporate Review in 2018, from 1 January
2019 the Group financial reporting was changed to show the
performance of the operating business separately from the
value generated by the Group’s significant freehold property
assets and the Corporate costs. As a result, the Group results
are presented across 4 reporting segments: Services Operating
Business, Product Operating Business, Freehold Properties and
Corporate. This provides greater transparency and facilitates
shareholder analysis of the component parts of the Group and
the prior period financial information has been restated to be in
line with this new basis.
Goodwill – goodwill represents the amount by which the fair
value of the cost of a business combination exceeds the fair
value of net assets acquired. Goodwill is not amortised and is
stated at cost less any accumulated impairment losses.
The recoverable amount of goodwill is tested for impairment
annually or when events or changes in circumstance indicate
that it might be impaired. Impairment charges are deducted
from the carrying value and recognised immediately in profit
or loss. For the purpose of impairment testing, goodwill is
allocated to each of the Group’s cash generating units expected
to benefit from the synergies of the combination. If the
recoverable amount of the cash generating unit is less than the
carrying amount of the unit, the impairment loss is allocated
first to reduce the carrying amount of any goodwill allocated
to the unit and then to the other assets of the unit pro-rata on
the basis of the carrying amount of each asset in the unit. An
impairment loss recognised for goodwill is not reversed in a
subsequent period.
Acquisition related intangible assets – net assets acquired as
part of a business combination includes an assessment of the
fair value of separately identifiable acquisition related intangible
assets, in addition to other assets, liabilities and contingent
liabilities purchased. These are amortised over their useful
lives which are individually assessed. The estimated useful
economic life for acquired technology, customer contracts
and relationships is between 6 and 12 years. The assets are
assessed on an annual basis for impairment and amortised over
its remaining economic useful life.
2.7 Research and development expenditure
Expenditure on research activities is recognised in profit or loss
as incurred.
Development expenditure is capitalised only if the expenditure
can be measured reliably, the product or process is technically
and commercially feasible, future economic benefits are
probable and the Group intends to and has sufficient
resources to complete development and to use or sell the
asset. Otherwise, it is recognised in profit or loss as incurred.
Subsequent to initial recognition, development expenditure
is measured at cost less accumulated amortisation and any
accumulated impairment losses.
49
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
2. Summary of significant accounting policies (continued)
2.8 Property, plant and equipment
Land and buildings as shown in the Notes to the Financial
Statements comprise offices and laboratories at Harston Mill,
Harston, Cambridge, UK and at Great Burgh, Epsom, UK. Land
and buildings are shown at historical cost less accumulated
depreciation. Historical cost includes expenditure that is
directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount
or recognised as a separate asset, as appropriate, only when it
is probable that the future economic benefit associated with
the item will flow to Science Group and the cost of the item can
be measured reliably. All other repairs and maintenance are
charged to the income statement during the financial period in
which they are incurred.
Land is not depreciated. Depreciation on all other property,
plant and equipment is calculated using the straight-line
method to allocate their cost less their residual values over their
estimated useful lives, as follows:
Buildings
Furniture and fittings
Equipment
25 years
3-5 years
3 years
The assets’ residual values and useful lives are reviewed, and
adjusted if appropriate, at each balance sheet date. An asset’s
carrying amount is written down immediately to its recoverable
amount, when an indicator of impairment is identified.
difference between the asset’s carrying amount and the present
value of estimated future cash flows, discounted at the effective
interest rate. The amount of the provision is recognised in the
income statement.
2.12 Trade and other payables
Trade and other payables are initially recognised at fair value
and subsequently measured at amortised cost using the
effective interest method.
2.13 Provisions
A provision is recognised if, as a result of a past event, the
Group has a present legal or constructive obligation that can
be estimated reliably, and it is probable that an outflow of
economic benefits will be required to settle the obligation.
Provisions are determined by discounting the expected future
cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and the risks specific
to the liability. The unwinding of the discount is recognised as a
finance cost.
2.14 Borrowings
Borrowings are recognised initially at fair value, net of
transaction costs incurred. Borrowings are subsequently stated
at amortised cost; any difference between the proceeds (net of
transaction costs) and the redemption value is recognised in
the income statement over the period of the borrowings using
the effective interest method.
Gains and losses on disposals are determined by comparing
proceeds with carrying amount. These are included in the
income statement.
Borrowings are classified as current liabilities unless the Group
has an unconditional right to defer settlement of the liability for
at least 12 months after the balance sheet date.
2.9 Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand
and on demand deposits, together with short term, liquid
investments that are readily convertible to a known amount of
cash and that are subject to a minimal risk of changes in value.
Cash that is held on behalf of the client that is solely for the
purpose of payment of product registration fees to regulatory
bodies is separately identified.
2.10 Inventories
Inventories are stated at the lower of cost and net realisable
value. Costs includes all cost incurred in bringing each product
to its present location and condition, which comprises the cost
of direct materials and third-party charges. Net realisable value
is the estimated selling price in the ordinary course of business
less any applicable selling expenses.
2.11 Trade and other receivables
Trade and other receivables are recognised initially at fair
value and subsequently measured at amortised cost using the
effective interest method, less provision for impairment.
A provision for impairment of trade receivables is established
when there is objective evidence that Science Group will not
be able to collect all the amounts due according to the original
terms of receivables. The amount of the provision is the
2.15 Financial instruments
(a) Classification – from 1 January 2018, the Group classifies its
financial assets in the following measurement categories:
(i)
those to be measured subsequently at fair value (either
through other comprehensive income, or through profit or
loss), and
(ii) those to be measured at amortised cost.
The classification depends on the Group’s business model for
managing the financial assets and the contractual terms of the
cash flows.
For assets measured at fair value, gains and losses will either
be recorded in profit or loss or other comprehensive income.
For investments in debt instruments, this will depend on
the business model in which the investment is held. For
investments in equity instruments that are not held for trading,
this will depend on whether the group has made an irrevocable
election at the time of initial recognition to account for the
equity investment at fair value through other comprehensive
income.
50
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
2. Summary of significant accounting policies (continued)
2.15 Financial instruments (continued)
(b) Measurement – at initial recognition, the Group measures
a financial asset at its fair value plus, in the case of a financial
asset not at fair value through profit or loss, transaction costs
that are directly attributable to the acquisition of the financial
asset. Transaction costs of financial assets carried at fair value
through profit or loss are expensed in profit or loss.
Debt instruments
Subsequent measurement of debt instruments depends on the
Group’s business model for managing the asset and the cash
flow characteristics of the asset. There are three measurement
categories into which the Group classifies its debt instruments:
(i)
Amortised cost: Assets that are held for collection of
contractual cash flows where those cash flows represent
solely payments of principal and interest are measured at
amortised cost. A gain or loss on a debt investment that is
subsequently measured at amortised cost and is not part of
a hedging relationship is recognised in profit or loss when
the asset is derecognised or impaired.
(ii) Fair value through other comprehensive income (FVOCI):
Assets that are held for collection of contractual cash flows
and for selling the financial assets, where the assets’ cash
flows represent solely payments of principal and interest,
are measured at FVOCI. Movements in the carrying
amount are taken through OCI, except for the recognition
of impairment gains or losses and interest revenue which
are recognised in profit or loss. When the financial asset
is derecognised, the cumulative gain or loss previously
recognised in OCI is reclassified from equity to profit or
loss and recognised in other gains/(losses). Interest income
from these financial assets is included in finance income
using the effective interest rate method.
(iii) Fair value through profit or loss: Assets that do not meet
the criteria for amortised cost or FVOCI are measured
at fair value through profit or loss. A gain or loss on a
debt investment that is subsequently measured at fair
value through profit or loss and is not part of a hedging
relationship is recognised in profit or loss and presented net
in the statement of profit or loss within other gains/(losses)
in the period in which it arises.
Equity instruments
The Group subsequently measures all equity investments
at fair value. Where the Group’s management has elected
to present fair value gains and losses on equity investments
in other comprehensive income, there is no subsequent
reclassification of fair value gains and losses to profit or loss
following the derecognition of the investment. Dividends from
such investments continue to be recognised in profit or loss as
other income when the Group’s right to receive payments is
established.
Changes in the fair value of financial assets at fair value
through profit or loss are recognised in other gain/(losses) in
the statement of profit or loss as applicable. Impairment losses
(and reversal of impairment losses) on equity investments
measured at FVOCI are not reported separately from other
changes in fair value
(c) Impairment – the Group assesses on a forward-looking
basis the expected credit losses associated with its debt
instruments carried at amortised cost and FVOCI. The
impairment methodology applied depends on whether
there has been a significant increase in credit risk. For trade
receivables, the Group applies the simplified approach
permitted by IFRS 9, which requires expected lifetime losses to
be recognised from initial recognition of the receivables.
The Group recognises loss allowances for expected credit
losses (ECLs) on financial assets measured at amortised cost,
debt investments measured at FVOCI and contract assets (as
defined in IFRS 15).
The Company measures loss allowances at an amount equal
to lifetime ECL, except for other debt securities and bank
balances for which credit risk (i.e. the risk of default occurring
over the expected life of the financial instrument) has not
increased significantly since initial recognition, which are
measured as 12-month ECL.
Loss allowances for trade receivables and contract assets are
always measured at an amount equal to lifetime ECL.
When determining whether the credit risk of a financial asset
has increased significantly since initial recognition and when
estimating ECL, the Company considers reasonable and
supportable information that is relevant and available without
undue cost or effort. This includes both quantitative and
qualitative information and analysis, based on the Company’s
historical experience and informed credit assessment and
including forward-looking information.
Measurement of ECLs
ECLs are a probability-weighted estimate of credit losses.
Credit losses are measured as the present value of all cash
shortfalls (i.e. the difference between the cash flows due to the
entity in accordance with the contract and the cash flows that
the company expects to receive). ECLs are discounted at the
effective interest rate of the financial asset.
Credit-impaired financial assets
At each reporting date, the Company assesses whether
financial assets carried at amortised cost and debt securities at
FVOCI are credit impaired. A financial asset is ‘credit-impaired’
when one or more events that have a detrimental impact on
the estimated future cash flows of the financial asset have
occurred.
Write-offs
The gross carrying amount of a financial asset is written off
(either partially or in full) to the extent that there is no realistic
prospect of recovery.
51
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
2. Summary of significant accounting policies (continued)
2.16 Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of new shares or options are
shown in equity as a deduction, net of tax, from the proceeds.
Where the Company purchases the Company’s equity share
capital into treasury (treasury shares), the consideration paid,
including any directly attributable incremental costs (net of
income taxes) is deducted from equity attributable to the
Company’s equity holders until the shares are cancelled,
reissued or disposed of. Where such shares are subsequently
sold or reissued, any consideration received, net of any directly
attributable incremental transaction costs, and the related
income tax effects are included in equity attributable to the
Company’s equity holders. Where such shares are subsequently
cancelled, the movement is recognised directly in equity with
no gain or loss recognised in profit or loss.
2.17 Revenue recognition
The Services Operating Business segment provides
consultancy services to clients across the medical, food &
beverage and industrial markets. The Product Operating
Business segment sells digital radios to the consumer
electronics market.
i) Services revenue
Revenue from providing services is recognised in the
accounting period in which the services are rendered. The
majority of projects are priced on a time and materials basis
and the revenue for these projects is recognised based on the
actual labour hours spent at the contractual fee rates.
Performance obligations are linked to the reports supplied to
the client, where work is billed in an agreed fee rate context, so
that clients are able to specifically review work performed.
For the few fixed-price project contracts, revenue is recognised
based on the proportion of deliverables provided to the client
with an adjustment if the project is forecast to overrun.
Revenue is measured and recognised using the contractual
fee rates of the project. Estimates of revenues or extent of
progress toward completion are revised if circumstances
change. Any resulting increases or decreases in estimated
revenues are reflected in profit or loss in the period in which the
circumstances that give rise to the revision become known by
management.
In the case of both time and materials and fixed-price contracts,
the customer pays for the value of services provided based on
an invoicing and payment schedule. If the services rendered by
the Group at the reporting date exceed the payments received
to date, a contract asset is recognised (within trade receivables
if the sales invoice has been raised or amounts recoverable on
contracts if the services rendered have not been invoiced). If the
payments exceed the services rendered, a contract liability is
recognised.
In the majority of cases, customers are invoiced on a monthly
basis however this varies when appropriate to take into account
credit limits, payment terms and operational efficiencies.
Consideration is payable when invoiced based on contractual
payment terms.
The Group earns revenue from design services on either a fixed
cost or time and materials basis. These projects tend to be
short term in nature and the revenue is recognised to match the
effort expended.
ii) Subscription income
Subscription income for membership services provided over
an annual contractual period is recognised in the income
statement on a straight-line basis over the period of the
contract.
iii) Product revenue
Revenue, excluding sales tax and relevant sales incentives,
in respect of the sale of goods is recognised at the point that
goods are despatched to customers.
The Group recognises contract liabilities for consideration
received in respect of unsatisfied performance obligations
and reports these amounts as other liabilities in the statement
of financial position. Similarly, if the Group satisfies a
performance obligation before it receives the consideration,
the Group recognises either a contract asset or receivable in its
statement of financial position.
Any sales incentives are recognised as the corresponding
sale occurs as a charge against revenue to reflect the overall
transaction price of the revenue recorded.
iv) Property rental income
The Freehold properties segment includes all third-party
revenue generated from a property owned by the Group and
this is recognised in the related period on a straight-line basis
over the lease term. Lease contractual notice periods are
typically shorter than 12 months.
2.18 Foreign currency
(a) Functional and presentation currency – items included in
the financial statements of each of Science Group’s entities
are measured using the currency of the primary economic
environment in which the entity operates (‘the functional
currency’). The Consolidated Financial Statements are
presented in Pound Sterling, which is the Company’s functional
and presentation currency.
(b) Transactions and balances – foreign currency transactions
are translated into the functional currency using the exchange
rates prevailing at the dates of the transactions. Foreign
exchange gains and losses resulting from the settlement
of such transactions and from the translation at year end
exchange rates of monetary assets and liabilities denominated
in foreign currencies are recognised in the income statement.
52
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
2. Summary of significant accounting policies (continued)
2.18 Foreign currency (continued)
(b) Transactions and balances – in respect of translation
differences on non-monetary items, items held at cost are
translated at the exchange rate at the date of transaction.
(c) Group companies – the results and financial position of
all Science Group entities (none of which has the currency of
a hyperinflationary economy) that have a functional currency
different from the presentation currency are translated into the
presentation currency as follows:
(i)
assets and liabilities for each balance sheet presented are
translated at the closing rate at the date of that balance
sheet;
(ii) income and expenses for each income statement are
translated at average exchange rates (unless this average
is not a reasonable approximation of the cumulative effect
of the rates prevailing on the transaction dates, in which
case income and expenses are translated at the dates of the
transactions);
(iii) all resulting exchange differences are recognised as a
separate component of equity; and
(iv) on disposal of a foreign subsidiary the accumulated
translation differences recognised in equity are reclassified
to profit and loss and recognised as part of the gain or loss
on disposal.
2.19 Employee benefits
(a) Pension obligations – Group companies operate various
pension schemes. The schemes in TSG Iberia, TSG Germany
and TSG France are based on government schemes and funded
through social security payments. The other schemes are
generally funded through payments to insurance companies
based on a percentage of salary earned, currently ranging
between 5% and 8%. These are defined contribution plans.
A defined contribution plan is a pension plan under which
the Group pays fixed contributions into publicly or privately
administered pension insurance plans. The Group has no legal
or constructive obligations to pay further contributions if the
fund does not hold sufficient assets to pay all employees the
benefits relating to employee service in the current and prior
periods.
The contributions are recognised as an employee benefit
expense when they are due. Prepaid contributions are
recognised as an asset to the extent that a cash refund or a
reduction in future payments is available.
Sagentia Inc. and TSG Inc. provide 401(k) pension benefits to
employees. The Group has no further payment obligations once
the contributions have been paid.
(b) Share based compensation – Science Group operates an
equity-settled, share based compensation plan. The fair value
of the employee services received in exchange for the grant of
the options is recognised as an expense. The total amount to
be expensed over the vesting period is determined by reference
to the fair value of the options granted, as calculated by using
an appropriate valuation method. The Black-Scholes model
excludes the impact of any non-market vesting conditions (for
example profitability and sales growth targets). The Monte
Carlo and Binomial Option Pricing models build in any market
performance conditions. Non-market vesting conditions are
included in assumptions about the number of options that are
expected to become exercisable. At each balance sheet date,
the entity revises its estimates of the number of options that are
expected to become exercisable. It recognises the impact of the
revision of original estimates, if any, in the income statement,
and a corresponding adjustment to equity over the remaining
vesting period.
The proceeds received net of any directly attributable
transaction costs are credited to share capital (nominal value)
and share premium when the options are exercised.
The share based compensation charge in the Company
accounts is based only on those option holders employed
directly by the Company.
(c) Termination benefits – termination benefits are payable
when employment is terminated before the normal retirement
date, or whenever an employee accepts voluntary redundancy
in exchange for these benefits. Science Group recognises
termination benefits when it is demonstrably committed to
either: terminating the employment of current employees
according to a detailed formal plan without possibility of
withdrawal; or providing termination benefits as a result of
an offer made to encourage voluntary redundancy. Benefits
falling due more than 12 months after balance sheet date are
discounted to present value.
(d) Profit-sharing and bonus plans – Science Group recognises
a liability and an expense for bonuses and/or profit-sharing,
based on the incentive plans approved by the Remuneration
Committee. Science Group recognises a liability where
contractually obliged or where there is a past practice that has
created a constructive obligation.
(e) Sales commission – Science Group operates a sales
commission scheme for relevant sales staff. A liability and
expense is recognised based on sales made by employees
who are eligible for the scheme, and is calculated using the
commission scheme rules. Sales commission is typically paid
quarterly.
2.20 Taxation
The tax expense for the period comprises current and
deferred tax. Tax is recognised in the income statement,
except to the extent that it relates to items recognised in other
comprehensive income, or directly in equity. In this case, the tax
is also recognised in other comprehensive income or directly in
equity, respectively.
Income tax is provided at amounts expected to be paid (or
recovered) using the tax rates and laws of the relevant countries
that have been enacted or substantively enacted by the balance
sheet date.
53
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
2. Summary of significant accounting policies (continued)
2.20 Taxation (continued)
Deferred income tax is provided, using the liability method, on
temporary differences arising between the tax bases of assets
and liabilities and their carrying amounts in the consolidated
financial statements. However, if the deferred income tax arises
from goodwill, the initial recognition of an asset or liability in
a transaction other than a business combination that at the
time of the transaction affects neither accounting nor taxable
profit nor loss, it is not accounted for. Deferred income tax is
determined using tax rates (and laws) that have been enacted
or substantively enacted by the balance sheet date and are
expected to apply when the related deferred income tax asset is
realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it
is probable that future taxable profit will be available against
which the temporary differences can be utilised.
Deferred income tax is provided on temporary differences
arising on investments in subsidiaries, except where the timing
of the reversal of the temporary difference is controlled by
Science Group and it is probable that the temporary difference
will not reverse in the foreseeable future.
2.21 Leases
The Group has applied IFRS 16 using the modified
retrospective approach and therefore the comparative
information has not been restated and continues to be reported
under IAS 17 and IFRIC 4. The details of accounting policies
under IAS 17 and IFRIC 4 are disclosed separately.
Policy applicable from 1 January 2019
At inception of a contract, the Group assesses whether a
contract is, or contains, a lease. A contract is, or contains,
a lease if the contract conveys the right to control the use
of an identified asset for a period of time in exchange for
consideration. To assess whether a contract conveys the right
to control the use of an identified asset, the Group uses the
definition of a lease in IFRS 16.
This policy is applied to contracts entered into, on or after
1 January 2019.
i. As a lessee
At commencement or on modification of a contract that
contains a lease component, the Group allocates the
consideration in the contract to each lease component on
the basis of its relative stand-alone prices. However, for the
leases of property the Group has elected not to separate non-
lease components and account for the lease and non-lease
components as a single lease component.
The Group recognises a right-of-use asset and a lease liability
at the lease commencement date. The right-of-use asset is
initially measured at cost, which comprises the initial amount
of the lease liability adjusted for any lease payments made at
or before the commencement date, plus any initial direct costs
incurred and an estimate of costs to dismantle and remove the
underlying asset or to restore the underlying asset or the site on
which it is located, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the
straight-line method from the commencement date to the end
of the lease term, unless the lease transfers ownership of the
underlying asset to the Group by the end of the lease term or
the cost of the right-of-use asset reflects that the Group will
exercise a purchase option. In that case the right-of-use asset
will be depreciated over the useful life of the underlying asset,
which is determined on the same basis as those of property and
equipment. In addition, the right-of-use asset is periodically
reduced by impairment losses, if any, and adjusted for certain
remeasurements of the lease liability.
The lease liability is initially measured at the present value of
the lease payments that are not paid at the commencement
date, discounted using the interest rate implicit in the lease
or, if that rate cannot be readily determined, the Group’s
incremental borrowing rate. Generally, the Group uses its
incremental borrowing rate as the discount rate.
The Group determines its incremental borrowing rate by
obtaining interest rates from various external financing sources
and makes certain adjustments to reflect the terms of the lease
and type of the asset leased.
Lease payments included in the measurement of the lease
liability comprise the following:
–
fixed payments, including in-substance fixed payments;
–
–
–
variable lease payments that depend on an index or a
rate, initially measured using the index or rate as at the
commencement date;
amounts expected to be payable under a residual value
guarantee; and
the exercise price under a purchase option that the Group is
reasonably certain to exercise,
lease payments in an optional renewal period if the Group
is reasonably certain to exercise an extension option, and
penalties for early termination of a lease unless the Group is
reasonably certain not to terminate early.
The lease liability is measured at amortised cost using the
effective interest method. It is remeasured when there is a
change in future lease payments arising from a change in an
index or rate, if there is a change in the Group’s estimate of
the amount expected to be payable under a residual value
guarantee, if the Group changes its assessment of whether it
will exercise a purchase, extension or termination option or if
there is a revised in-substance fixed lease payment.
54
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
2. Summary of significant accounting policies (continued)
2.21 Leases (continued)
i. As a lessee (continued)
When the lease liability is remeasured in this way, a
corresponding adjustment is made to the carrying amount
of the right-of-use asset or is recorded in profit or loss if the
carrying amount of the right-of-use asset has been reduced to
zero.
The Group presents right-of-use assets that do not meet
the definition of investment property in ‘property, plant and
equipment’ and lease liabilities in ‘loans and borrowings’ in the
statement of financial position.
Short-term leases and leases of low-value assets
The Group has elected not to recognise right-of-use assets and
lease liabilities for leases of low-value assets and short-term
leases, including IT equipment. The Group recognises the lease
payments associated with these leases as an expense on a
straight-line basis over the lease term.
ii. As a lessor
At inception or on modification of a contract that contains a
lease component, the Group allocates the consideration in the
contract to each lease component on the basis of their relative
standalone prices.
When the Group acts as a lessor, it determines at lease
inception whether each lease is a finance lease or an operating
lease. To classify each lease, the Group makes an overall
assessment of whether the lease transfers substantially all of
the risks and rewards incidental to ownership of the underlying
asset. If this is the case, then the lease is a finance lease; if not,
then it is an operating lease. As part of this assessment, the
Group considers certain indicators such as whether the lease is
for the major part of the economic life of the asset.
When the Group is an intermediate lessor, it accounts for its
interests in the head lease and the sub-lease separately. It
assesses the lease classification of a sub-lease with reference
to the right-of-use asset arising from the head lease, not with
reference to the underlying asset. If a head lease is a short-
term lease to which the Group applies the exemption described
above, then it classifies the sub-lease as an operating lease.
The Group applies the derecognition and impairment
requirements in IFRS 9 to the net investment in the lease (see
Note 45(R)(i)). The Group further regularly reviews estimated
unguaranteed residual values used in calculating the gross
investment in the lease.
The Group recognises lease payments received under operating
leases as income on a straight-line basis over the lease term as
part of ‘other revenue’.
Generally, the accounting policies applicable to the Group
as a lessor in the comparative period were not different from
IFRS 16 except for the classification of the sub-lease entered
into during current reporting period that resulted in a finance
lease classification.
Policy applicable before 1 January 2019
In accordance with IAS 17, the economic ownership of a
leased asset is transferred to the lessee if the lessee bears
substantially all the risks and rewards related to the ownership
of the leased asset. The related asset is recognised at the time
of inception of the lease at the fair value of the leased asset
or, if lower, the present value of the minimum lease payments
plus incidental payments, if any, to be borne by the lessee.
A corresponding amount is recognised as a finance leasing
liability. Leases of land and buildings are split into land and
buildings elements according to the relative fair values of the
leasehold interests at the date the asset is initially recognised.
The interest element of leasing payments represents a constant
proportion of the capital balance outstanding and is charged to
the income statement over the period of the lease.
All other leases are treated as operating leases and are charged
on a straight-line basis over the lease term, even if payments
are not made on such a basis. Income from property leases is
recognised in the related period on a straight-line basis over
the lease term. The majority of property leases are subject to
mutual notice periods of up to 6 months.
2.22 Dividends paid
Dividends are recognised as a liability in the period in which the
shareholders’ right to receive payment has been established.
If an arrangement contains lease and non-lease components,
then the Group applies IFRS 15 to allocate the consideration in
the contract.
2.23 Dividend income
Dividend income is recognised when the Company’s right to
receive payment is established.
55
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
3. Financial risk management
3.1 Financial risk factors
Science Group’s activities expose it to a variety of financial risks: market risk (including currency risk and fair value interest risk),
credit risk, liquidity risk and cash flow interest rate risk. Science Group’s overall financial risk management programme focuses on
the unpredictability of financial markets and seeks to minimise potential adverse effects on Science Group’s financial performance.
Science Group uses derivative financial instruments to hedge certain risk exposures.
(a) Foreign currency sensitivity
Science Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily
with respect to the US Dollar and Euro. Foreign exchange risk arises from commercial transactions, recognised assets and
liabilities.
To manage the Group’s foreign exchange risk arising from commercial transactions, recognised assets and liabilities, entities in
Science Group may use forward contracts and other instruments. Foreign exchange risk arises when commercial transactions
and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. The Group finance
function is responsible for managing the net position in each foreign currency primarily by selling monies held in currency into
GBP on a regular basis. At present, forward exchange contracts are not used.
Science Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.
Foreign currency denominated financial assets and liabilities, translated into GBP at the closing rate, are as follows:
2019
£000
Financial assets
Financial liabilities
Exposure
2018
£000
Financial assets
Financial liabilities
Exposure
US$
Euro
Other
Total
13,515
(5,115)
8,400
1,176
(165)
1,011
674
(41)
633
15,365
(5,321)
10,044
US$
Euro
Other
Total
7,184
(2,283)
4,901
1,289
(379)
910
38
(17)
21
8,511
(2,679)
5,832
All foreign currency denominated financial assets and liabilities are classified as current.
The following table illustrates the sensitivity of the net movement on reserves and equity in regards to Science Group’s financial
assets and financial liabilities and the US Dollar/GBP exchange rate and Euro/GBP exchange rate. It assumes a +/- 10% change
of the GBP/US Dollar exchange rate as at 31 December 2019 (2018: 10.0%). A +/- 10% change is considered for the GBP/Euro
exchange rate (2018: 10.0%).
If the GBP had strengthened against the US Dollar and Euro by 10% (2018: 10.0%) respectively then this would have had the
following impact:
2019
£000
Income statement
Equity
2018
£000
Income statement
Equity
US$
Euro
Other
Total
(331)
(570)
(94)
(47)
–
(32)
(425)
(649)
US$
Euro
Other
Total
(194)
93
(84)
(169)
–
(27)
(278)
(103)
For a 10.0% weakening of GBP against the relevant currency, there would be a comparable but opposite impact on the income
statement and equity.
56
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
3. Financial risk management (continued)
3.1 Financial risk factors (continued)
(a) Foreign currency sensitivity (continued)
The Company held no financial assets or liabilities in foreign currencies at the start or end of the year.
The actual currency rate movement against the US Dollar and Euro at year end compared to the previous year end was +4.0%
(2018: -5.8%) and +6.1% (2018: -1.0%) respectively. Exposures to foreign exchange rates vary during the year depending on the
volume and value of overseas transactions.
(b) Interest rate sensitivity
Science Group manages its longer-term cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest
rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Generally, Science Group raises
long term borrowings at floating rates and swaps them into fixed rates that are lower than those available if Science Group
borrowed at fixed rates directly. Under the interest rate swaps, Science Group agrees with other parties to exchange, at specified
intervals (typically quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference
to the agreed notional principal amounts.
Science Group’s bank borrowings and its interest rate profile are as follows:
Group
Pound Sterling – bank loan
Weighted average interest rate
Pound Sterling – fixed rate bank loan
Pound Sterling – floating rate bank loan
2019
£000
16,300
2018
£000
12,750
3.64%
3.47%
LIBOR+2.6%
LIBOR+2.6%
For benchmark rates of interest, Science Group refers to LIBOR. The bank loan is secured via a fixed charge over certain assets
of Science Group and is repayable as disclosed in Note 24. Terms and conditions of the interest rate swap are as disclosed in
Note 24.
In February 2019, the Group increased the bank loan to £17.5 million. The equivalent fixed rate on the extended sum is 4.0%.
(c) Credit risk analysis
Science Group has policies in place to ensure that sales are made to clients with an appropriate credit history. Derivative
counterparties and cash transactions are limited to high-credit-quality financial institutions although counterparty risk is not
negligible. Science Group has policies that limit the amount of credit exposure to any financial institution.
Science Group’s exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date,
as summarised below:
Cash and cash equivalents – Group cash
Cash and cash equivalents – Client registration funds
Trade and other receivables
Company
Group
2019
£000
2,744
–
10,107
12,851
2018
£000
7,465
–
5,726
13,191
2019
£000
13,912
1,517
8,950
24,379
2018
£000
21,520
1,487
8,864
31,871
Science Group monitors defaults of customers and other counterparties, identified either individually or by group and incorporates
this information into its credit risk controls. Where available at reasonable cost, external credit ratings and/or reports on customers
and other counterparties are obtained and used. Science Group’s policy is to deal only with creditworthy counterparties or to
require settlement in advance, although there can be no certainty that counterparty creditworthiness will be maintained. Cash
balances are held with more than one creditworthy institution.
Management reviews the credit status of the financial institutions with whom it holds its deposits.
Science Group’s management considers that all the above financial assets that are not impaired for each of the reporting dates
under review are of good credit quality, including those that are past due.
57
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
3. Financial risk management (continued)
3.1 Financial risk factors (continued)
(c) Credit risk analysis (continued)
An analysis of the age of trade and other receivables that are overdue but not impaired and an analysis of trade and other
receivables that are considered to be impaired are disclosed in Note 18.
None of Science Group’s financial assets are secured by collateral or other credit enhancements.
(d) Liquidity risk analysis
Science Group manages its liquidity needs by monitoring scheduled debt servicing payments for long term financial liabilities
as well as cash-outflows due in day-to-day business. Liquidity needs are monitored on a weekly and monthly basis. Long-term
liquidity needs for a quarterly and semi-annual period are reviewed monthly.
Science Group maintains cash to meet its liquidity requirements in interest bearing current accounts.
As at 31 December 2019, Science Group’s financial liabilities have contractual maturities which are summarised below:
2019
Current
Non-current
Bank borrowings
Interest on bank borrowings
Trade payables
Accruals
< 6
months
£000
600
292
2,548
6,688
10,128
6 to 12
months
£000
600
284
–
–
1 to 5
years
£000
4,800
1,871
–
–
> 5
years
£000
10,300
602
–
–
884
6,671
10,902
This compares to the maturity of Science Group’s financial liabilities in the previous reporting period as follows:
2018
Current
Non-current
Bank borrowings
Interest on bank borrowings
Trade payables
Accruals
< 6
months
£000
500
217
1,110
4,336
6,163
6 to 12
months
£000
500
212
–
–
712
1 to 5
years
£000
4,000
1,373
–
–
> 5
years
£000
7,750
621
–
–
5,373
8,371
58
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
3. Financial risk management (continued)
3.1 Financial risk factors (continued)
(e) Summary of financial assets and liabilities by category
The carrying amounts of Science Group’s financial assets and liabilities as recognised at the balance sheet date of the reporting
periods under review may also be categorised as follows:
Company
Group
Loans and receivables:
– Trade receivables
– Other receivables
– Cash and cash equivalents – Client registration funds
– Cash and cash equivalents – Group cash
Financial liabilities at amortised cost:
– Non-current borrowings
– Current borrowings
– Trade payables
– Accruals
Derivatives used for hedging:
– Financial instruments (liability)/asset
2019
£000
–
10,107
–
2,744
12,851
–
–
24
262
286
–
2018
£000
–
5,726
–
7,465
13,191
–
–
50
105
155
–
2019
£000
7,265
1,685
1,517
13,912
24,379
15,013
1,200
2,548
6,688
25,449
2018
£000
7,836
1,028
1,487
21,520
31,871
11,689
1,000
1,110
4,336
18,135
(115)
293
The fair value of Science Group’s financial assets and liabilities is the same as the carrying value.
3.2 Fair value estimation
Financial assets and liabilities measured at fair value in the balance sheet are grouped into three levels based on the significance
used in measuring the fair value of the financial assets and liabilities. The fair value hierarchy has the following levels:
• level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities
• level 2 – inputs other than quoted market prices included within level 1 that are observable for an asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices)
• level 3 – input for the asset or liability that are not based on observable market data (unobservable inputs)
The level within which the financial asset or liability is determined is based on the lowest level of significant input to the fair value
measurement.
The Group has measured the interest rate swap at fair value, and it has been measured under level 2.
The Group’s finance team performs valuations of financial items for financial reporting purposes in consultation with third
party valuation specialists for complex valuations. The valuation technique used for instruments categorised in levels 2 and 3 is
described below:
Interest rate swap: the fair value is estimated by discounting the future contracted cash flows, using readily available market data.
59
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
3. Financial risk management (continued)
3.3 Capital management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to
provide returns for shareholders and benefits for other stakeholders and to maintain an optimal structure to reduce the cost of
capital and to provide funds for merger and acquisition activity.
The Group primarily views its capital as being its shareholders’ funds, net funds (being gross cash less borrowings) and the
freehold properties at Harston Mill and Great Burgh.
Total shareholders’ funds
Net (debt)/funds (Note 1)
Freehold property at Harston Mill
Freehold property at Great Burgh
Group
2019
£000
36,269
(2,301)
13,125
8,259
2018
£000
40,958
8,831
13,210
8,342
Shareholders’ funds
In 2019 Sagentia Limited paid a dividend distribution of £7.0 million, OTM Limited paid a dividend distribution of £0.4 million
and Oakland Innovation Limited paid a dividend distribution of £1.5 million to Science Group plc. In 2018 Sagentia Limited paid a
dividend distribution of £6.0 million and Oakland Innovation Limited paid a dividend distribution of £1.2 million to Science Group
plc.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return
capital to shareholders or issue new shares. The Board will recommend the payment of a dividend of 4.6 pence per share at the
forthcoming AGM (2018: 4.6 pence per share). The Board anticipates recommending a single dividend being paid each year.
Net funds
The net funds of the Group have decreased by £11.1 million in 2019 (2018: increased by £2.8 million) as set out in the Consolidated
Statement of Cash Flows.
Details of the Group’s borrowings are set out in Note 24 which summarises the terms of the loan and interest swap arrangement.
Freehold property
Details of freehold property and related rental income are set out in Note 15.
4. Segment information
Following the Corporate Review in 2018, from 1 January 2019 the Group financial reporting was changed to show the performance
of the operating business separately from the value generated by the Group’s significant freehold property assets and the
Corporate costs. The Operating Business (excluding Frontier) is managed via the service lines of Applied Science and Product
Development, Technology advisory and Regulatory. Financial information is provided to the chief operating decision makers
(‘CODMs’) in line with this structure: the service lines in Operating Businesses; the Product Operating Business (Frontier); the
Freehold Properties and Corporate costs.
The service lines of Applied Science and Product Development, Technology advisory and Regulatory have been aggregated
resulting in one Services Operating Business segment because the service lines have similar economic characteristics such as
similar long-term average gross margins, trends in sales growth and operating cash flows and are also similar in respect of their
nature, delivery and types of customers that the services are provided to. This aggregation does not the impact the user’s ability to
understand the entity’s performance, its prospects for future cash flows or the user’s decisions about the entity as a whole as it is a
fair representation of the performance of each service line.
As a result, the Group results are presented across 4 reporting segments: Services Operating Business, Product Operating
Business, Freehold Properties and Corporate. This provides greater transparency and facilitates shareholder analysis of the
component parts of the Group and the prior period financial information has been restated to be in line with this new basis.
60
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
4. Segment information (continued)
Services Operating Business revenue includes all consultancy fees and other revenue includes recharged materials, expenses and
licence revenue generated directly from the Services Operating Business activities. Product Operating Business revenue includes
sales of chips and modules which are incorporated into digital radios. The Freehold Properties segment includes the results for
the two freehold properties owned by the Group. Income is derived from third party tenants from the Harston Mill site and from
the Services and Product Operating Businesses which have been charged fees equivalent to market-based rents for their utilised
property space and associated costs. Corporate costs include PLC/Group costs.
The segmental analysis is reviewed to operating profit. Other resources are shared across the Group.
The Group closed the Central/Eastern Europe offices during 2018 and the results generated by these offices are separately
reported under exited operations in 2018 on a pro forma basis.
Services Operating Business
Services revenue
Other
Revenue
Adjusted operating profit
Gain on settlement of legal claim
2019
Total
£000
46,885
1,825
48,710
8,221
687
2018
Continuing
£000
46,085
1,110
47,195
7,564
–
Amortisation of acquisition related intangible assets
(2,006)
(2,004)
Acquisition integration costs
Release of contingent consideration
Impairment of other investments
Share based payment charge
Operating profit
Product Operating Business
Product revenue
Revenue
–
–
–
(1,008)
5,894
(76)
519
(50)
(695)
5,258
Adjusted operating loss
Amortisation of acquisition related intangible assets
Professional fees and charges in relation to the acquisition
Acquisition integration costs
Provisions relating to onerous leases and impairment of right of use assets
Loss on remeasurement of equity-accounted investee
Share based payment charge
Operating loss
2018
Exited
£000
413
–
413
168
–
–
–
–
–
–
168
2019
£000
7,540
7,540
(1,283)
(339)
(1,672)
(794)
(1,105)
(491)
(12)
(5,696)
2018
Total
£000
46,498
1,110
47,608
7,732
–
(2,004)
(76)
519
(50)
(695)
5,426
2018
£000
–
–
–
–
–
–
–
–
–
–
61
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
4. Segment information (continued)
Freehold Properties
Inter-company property income
Third party property income
Revenue
Adjusted operating profit
Share based payment charge
Operating profit
Corporate
Adjusted operating loss
Share based payment charge
Operating loss
Group
Services revenue
Products revenue
Third party property income
Other
Revenue
2019
Organic
£000
46,885
–
997
1,825
49,707
2019
£000
2,874
997
3,871
1,503
(14)
1,489
2019
£000
(1,737)
(133)
(1,870)
2019
Acquired
£000
2019
Total
£000
2018
Continuing
£000
2018
Exited
£000
2018
£000
2,858
1,062
3,920
1,573
(12)
1,561
2018
£000
(1,574)
(105)
(1,679)
2018
Total
£000
–
46,885
46,085
413
46,498
7,540
–
–
7,540
997
1,825
–
1,062
1,110
–
–
–
–
1,062
1,110
7,540
57,247
48,257
413
48,670
Adjusted operating profit/(loss)
Gain on settlement of legal claim
Amortisation of acquisition related
intangible assets
Professional fees and charges in
relation to the acquisition
Acquisition integration costs
Provisions relating to onerous leases
and impairment of right of use assets
Release of contingent consideration
Impairment of other investments
Loss on remeasurement of equity-
accounted investee
Share based payment charge
Operating profit/(loss)
Finance charges (net)
Share of loss of equity-accounted
investment, net of tax
Profit/(loss) before income tax
Income tax (charge)/credit
Profit/(loss) for the period
7,987
687
(1,283)
–
6,704
687
7,563
–
(2,006)
(339)
(2,345)
(2,004)
–
–
–
–
–
–
(1,155)
5,513
(665)
(1,672)
(794)
(1,672)
(794)
(1,105)
(1,105)
–
–
(491)
(12)
(5,696)
(165)
–
–
(491)
(1,167)
(183)
(830)
–
(76)
–
519
(50)
–
(812)
5,140
(441)
–
(592)
(592)
–
4,848
(505)
4,343
(6,453)
(1,605)
4,699
279
(6,174)
(226)
(1,831)
(580)
4,119
168
–
–
–
–
–
–
–
–
–
168
–
–
168
–
168
7,731
–
(2,004)
–
(76)
–
519
(50)
–
(812)
5,308
(441)
–
4,867
(580)
4,287
62
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
4. Segment information (continued)
In the Freehold Properties segment, income includes £2.9 million (2018: £2.9 million) generated from intra group recharges. The
corresponding cost is included within the Services Operating Business segment and is eliminated on consolidation.
Geographical segments
Revenue and non-current assets (excluding deferred tax assets) by geographical area are as follows:
United Kingdom
Other European countries
North America
Other
Total
2019
Revenue
£000
12,263
12,345
23,642
8,997
57,247
Non-current
assets
£000
52,459
54
56
331
52,900
2018
Revenue
£000
8,948
18,197
19,080
2,445
48,670
Non-current
assets
£000
42,262
33
85
–
42,380
For the purpose of the analysis of revenue, geographical markets are defined as the country or area in which the client is based.
Non-current assets are allocated based on their physical location.
During 2019, no single customer accounted for more than 10% of the Group’s revenue (2018: £nil).
Operating profit for the Services Operating Business included a depreciation charge of £1.1 million (2018: £0.3 million), the Product
Operating Business included a depreciation charge of £0.2 million (2018: £nil) and the Freehold Properties included a depreciation
charge of £0.5 million (2018 £0.5 million).
5. Revenue
5.1 Revenue Streams
The Group’s operations and main revenue streams are those described in Note 4. The Group’s revenue is derived from contracts
with customers.
5.2 Disaggregation of revenue
In the following table, revenue is disaggregated by geographical market and by the currency in which the contract is denominated
Property revenue is generated in the UK and denominated in GBP.
For the purpose of the analysis of revenue, geographical markets are defined as the country or area in which the client is based.
Primary geographic markets
United Kingdom
Other European Countries
North America
Other
Currency
US Dollar
Euro
Sterling
Other
2019
£000
12,263
12,345
23,642
8,997
57,247
2019
£000
28,684
3,578
24,822
163
57,247
2018
£000
8,948
18,197
19,080
2,445
48,670
2018
£000
16,599
5,674
26,249
148
48,670
63
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
5. Revenue (continued)
5.3 Contract balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers.
Receivables that are included in ‘Trade and other receivables’
Contract assets that are included in ‘Trade and other receivables’
2019
£000
7,265
1,541
2018
£000
7,836
1,017
Contract liabilities which are included in ‘Trade and other payables’
(10,341)
(10,752)
The contract assets primarily relate to the Group’s rights to consideration for work performed but not billed at the reporting date
on Services Operating Business revenue streams. The contract assets are transferred to receivables when the rights to receive
cash become unconditional. This usually occurs when the Group issues an invoice to the customer.
The contract liabilities primarily relate to the advance consideration received from customers. £1,517,000 (2018: £1,487,000)
relates to pass through fees which represent advance payments for registration fees to be paid to regulatory bodies. The remainder
represents revenue to be recognised over time as the work is performed.
Significant changes in the contract assets and the contract liabilities balances during the period are as follows:
Revenue recognised that was included in the contract liability at the beginning of the period
Increase due to invoices raised to clients, excluding amounts recognised as revenue in the
period
Transfers from contract assets recognised at the beginning of the period to receivables
Increases as a result of changes in the measure of progress
Contract
Assets
£000
–
–
(1,017)
1,541
524
Contract
Liabilities
£000
10,752
(10,341)
–
–
411
The Group applies the practical expedient in paragraph 121 of IFRS 15 and does not disclose information about remaining
performance obligations that have original expected durations of one year or less.
6. Operating expenses
Expenses by nature
Year ended 31 December
Employee remuneration and benefit expenses
Operating third party expenses
Occupancy costs
Equipment and consumables
Cost of inventories
Selling and marketing expenses
Depreciation of property, plant and equipment
Depreciation of right-of-use asset
Impairment of right-of-use asset
Release of contingent consideration
Foreign currency losses/(gains)
Amortisation of intangible assets
Other
Less expenses below adjusted operating profit
64
Note
8
15
15,25
15,25
Group
2019
£000
32,275
2,619
3,404
2,619
3,931
2,639
776
1,033
796
–
488
2,345
1,325
54,250
(3,707)
50,543
2018
£000
28,320
2,367
3,811
1,744
–
2,360
760
–
–
(519)
(87)
2,004
2,602
43,362
(2,423)
40,939
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
6. Operating expenses (continued)
Included above
Research and development *
Operating lease rentals
Auditor’s remuneration
Auditor’s remuneration to KPMG LLP:
Fees payable to the Company’s auditors for the audit of the financial statements
Audit of the financial statements of the Group and Company subsidiaries pursuant to
legislation split between:
Audit fees – run rate
Audit fees - one off relating to the acquisition of Frontier, disclosed within integration costs
Auditors remuneration to Grant Thornton LLP:
Audit fees – run rate
Audit fees - one off relating to the acquisition of Frontier, disclosed within integration costs
Remuneration to KPMG LLP:
Fees payable to the Company’s auditor for other non-audit services:
Tax advisory services
*R&D costs are represented by staff and material costs incurred in relation to R&D projects
Group
2019
£000
8,729
83
2018
£000
7,757
1,090
15
161
64
76
28
32
14
151
–
–
–
11
7. Finance income and finance costs
Finance costs include all interest-related income and expenses through profit or loss. The following have been included in the
income statement for the reporting periods presented:
Year ended 31 December
Finance income
Bank interest receivable and similar income
Finance costs
Bank borrowings
Fees on settlement of revolving credit facility
Impairment of loan arrangement fees on settlement of revolving credit facility
Amortisation of loan arrangement fees
Lease liabilities
Group
2019
£000
22
22
(605)
(68)
(31)
(13)
(135)
(852)
2018
£000
10
10
(438)
–
–
(13)
–
(451)
The Group initially applied IFRS 16 as at 1 January 2019, using a modified retrospective approach. Under this approach,
comparative information is not restated and the cumulative effect of initially applying IFRS 16 is recognised in retained earnings at
the date of initial application. See Note 2.2
65
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
8. Employee benefit expenses
Employment costs are shown below:
Year ended 31 December
Wages and salaries (including bonuses and healthcare costs)
Social security costs
Redundancy costs
Pension costs
Share based payments (Note 23)
Group
2019
£000
25,379
3,706
566
1,457
1,167
2018
£000
23,041
3,231
–
1,236
812
32,275
28,320
The average monthly number of persons employed (including Executive and Non-Executive Directors and fixed term contractors)
by Science Group was as follows:
Year ended 31 December
Technology consultants
Marketing, support, administration and other staff
9. Directors’ remuneration, interests and transactions
Group
2019
Number
2018
Number
305
104
409
Directors’ emoluments and benefits include:
Year ended 31 December 2019
Name of Director
Courtley
Archer
Lacey-Solymar
Ratcliffe
Edwards
Aggregate emoluments
Year ended 31 December 2018
Name of Director
Courtley
Archer
Lacey-Solymar
Ratcliffe
Aggregate emoluments
Salary/ fee
Bonus
£000
£000
Pension
contribution
£000
Taxable
Benefits
£000
40
148
40
385
141
754
–
42
–
–
56
98
–
12
–
–
10
22
–
–
–
–
–
–
Salary/ fee
Bonus
£000
£000
Pension
contribution
£000
Taxable
Benefits
£000
40
170
40
385
635
–
43
–
–
43
–
12
–
–
12
–
–
–
–
–
289
92
381
Total
£000
40
202
40
385
207
874
Total
£000
40
225
40
385
690
Directors’ emoluments and benefits are stated for the Directors of Science Group plc only. Mr Edwards was appointed as Director
on 28 April 2019 and his emoluments are included in the table above from this date. In addition to the above, a share based
payment charge of £101,000 was recognised in the income statement relating to share options held by Directors (2018: £37,000).
The share based payment charge includes a charge relating to Mr Edwards from 28 April 2019.
66
Annual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
9. Directors’ remuneration, interests and transactions (continued)
The amounts shown were recognised as an expense during the year and relate to the Directors of the Company. Bonuses, pension
and medical benefits are not paid to Non-Executive Directors. Mr Ratcliffe does not participate in the Group bonus scheme or
receive pension or medical benefits.
Total social security costs related to Directors during the year was £112,371 (2018: £89,176).
Directors’ interests in the shares of Science Group at 31 December 2019 and 31 December 2018, and any changes subsequent to
31 December 2019, are as follows:
Mr Edward’s shares have been disclosed from the date he was appointed Director.
Science Group plc
Ordinary shares of £0.01
Options
Shares
Year ended 31 December
2019
2018
2019
2018
2019
2018
Archer
Ratcliffe
Courtley
Edwards
Average exercise
price (pence)
1.0
–
–
1.0
Number
1.0
150,000
Number
175,000
Number
65,000
Number
60,000
–
–
–
–
1.0
450,000
–
–
–
13,412,906
13,412,906
375,000
375,000
74,000
–
600,000
175,000
13,926,906
13,847,906
See Note 23 for further details on option plans.
10. Income tax
The tax charge comprises:
Year ended 31 December
Current taxation
Current taxation – adjustment in respect of prior years
Deferred taxation
Deferred taxation – adjustment in respect of prior years
R&D tax credit
The adjustment in prior years is due to estimation differences related to the tax charge.
Note
11
2019
£000
(1,280)
311
579
(242)
406
(226)
2018
£000
(1,377)
196
218
(49)
432
(580)
67
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
10. Income tax (continued)
The corporation tax on Science Group’s profit before tax differs from the theoretical amount that would arise using the blended
corporation tax rate across the various jurisdictions applicable to profits of the consolidated companies of 19.4% (2018: 19.4%) as
follows:
(Loss)/profit before tax
Tax calculated at domestic tax rates applicable to profits/(losses) in the respective countries
Expenses not deductible for tax purposes
Adjustment in respect of prior years – current tax
Adjustment in respect of prior years – deferred tax
Movement in deferred tax due to change in tax rate
Share scheme movements
Current year losses for which no deferred tax asset was recognised
Mandatory earnings and profits one-time tax
Prior year losses used in the current year which were not previously recognised
R&D tax credit
Tax (charge)
2019
£000
(1,605)
311
(1,022)
311
(242)
27
100
(180)
–
63
406
(226)
2018
£000
4,867
(946)
(179)
196
(49)
(239)
293
(73)
(78)
63
432
(580)
In 2017, the United States Federal Government released the Tax Cuts and Jobs Act. The impact of this bill resulted in the
recognition of a corporation tax liability of £120,000 as at 31 December 2017 based on the estimated undistributed profits of all
foreign subsidiaries of Technology Sciences Group Inc. During the prior year, the final liability in respect of these earnings and
profits one-time tax was calculated and an additional charge of £78,000 was recognised in the year ended 31 December 2018.
The Group claims Research and Development tax credits under both the R&D expenditure credit scheme and the Small or
Medium-sized Scheme. In the current year, the Group recognised a tax credit of £0.4 million (2018: £0.4 million). The Group
performed a reasonable estimate of all amounts involved to determine the R&D tax credits to be recognised in the period to which
it relates.
68
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
11. Deferred tax
The movement in deferred tax assets and liabilities during the year by each type of temporary difference is as follows:
Accelerated
capital
allowances
Tax losses
Share based
payment
£000
£000
104
(39)
(49)
–
16
47
–
–
–
47
(54)
(16)
At 1 January 2018
Charged to the income statement
Charge to the income statement
(prior year adjustment)
Charged to equity
At 31 December 2018
Charged to the income statement
Deferred taxation relating to
acquisitions
Charge to the income statement
(prior year adjustment)
Charged to Equity
Effect of movements in exchange rates
£000
(1,734)
(138)
–
–
(1,872)
33
–
–
–
At 31 December 2019
(1,893)
Deferred tax assets
Deferred tax liabilities
Net deferred tax liability
477
(28)
–
(48)
401
130
–
–
(25)
–
506
Acquisition
related
intangible
assets
£000
(2,001)
456
–
–
(1,545)
469
Other
temporary
differences
£000
428
(33)
–
(13)
382
(100)
Total
£000
(2,726)
218
(49)
(61)
(2,618)
579
(1,498)
(130)
(1,628)
–
–
121
(2,453)
(172)
(242)
77
5
62
52
126
(3,731)
Group
2019
£000
47
(3,778)
(3,731)
2018
£000
16
(2,634)
(2,618)
Deferred tax assets are recognised for tax loss carry-forwards to the extent that the realisation of the related tax benefit through
the future taxable profits is probable. Deferred tax liabilities are recognised against accelerated capital allowances. The Group has
available tax losses of approximately £34.7 million (2018: £10.8 million) and of these losses, £34.5 million are not recognised as
a deferred tax asset and they do not expire. The available tax losses at 31 December 2019 include estimated tax losses of £24.0
million relating to Frontier. These tax losses are subject to approval by the UK tax authorities and none have been recognised as a
deferred tax asset.
Company
At 1 January 2018
Charged to the income statement
Charged to equity
At 31 December 2018
Charged to equity
At 31 December 2019
Share based
payment
£000
Total
£000
62
(48)
13
27
(2)
25
62
(48)
13
27
(2)
25
The Company has available tax losses of approximately £2.3 million (2018: £2.3 million) and these losses do not expire.
Factors affecting future tax charges
A reduction in the UK corporation tax rate 20% to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were
substantively enacted on 26 October 2015, and an additional reduction to 17% (effective 1 April 2020) was substantively enacted
on 6 September 2016. This will reduce the company’s future current tax charge accordingly. The US federal rate had a reduction
from 35% to 21%, effective from 1 January 2018. Deferred tax assets / (liabilities) were calculated at the substantively enacted
corporation tax rates in the respective jurisdictions.
69
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
12. Earnings per share
The calculation of earnings per share is based on the following result and weighted average number of shares:
Profit after
tax
£000
2019
Weighted
average
number of
shares
Pence per
share
Profit after
tax
£000
2018
Weighted
average
number of
shares
Pence per
share
Basic earnings per ordinary share
(1,831) 40,767,070
(4.5)
4,287
39,889,693
10.7
Effect of dilutive potential ordinary
shares: share options
–
1,257,907
Diluted earnings per ordinary share
(1,831) 42,024,977
0.1
(4.4)
–
1,021,609
4,287
40,911,302
(0.2)
10.5
Only the share options granted, as disclosed in Note 23, are dilutive.
The calculation of adjusted earnings per share is as follows:
Adjusted*
profit after
tax
£000
2019
Weighted
average
number of
shares
Pence per
share
Adjusted*
profit after
tax
£000
2018
Weighted
average
number of
shares
Pence per
share
4,735
40,767,070
11.6
5,876
39,889,693
14.7
–
1,257,907
(0.3)
–
1,021,609
(0.3)
4,735
42,024,977
11.3
5,876
40,911,302
14.4
Adjusted basic earnings per ordinary
share
Effect of dilutive potential ordinary
shares: share options
Adjusted diluted earnings per ordinary
share
*Calculation of adjusted profit after tax:
Group
Adjusted operating profit
Finance income
Finance costs
Adjusted profit before tax
2019
£000
6,704
22
(852)
5,874
(1,139)
4,735
2018
£000
7,731
10
(451)
7,290
(1,414)
5,876
Tax charge at the blended corporation tax rate across the various jurisdictions 19.4%
(2018: 19.4%)
Adjusted profit after tax
The tax charge is calculated using the blended corporation tax rate across the various jurisdictions in which the Group companies
are incorporated.
13. Dividends
The proposed final dividend for 2018 of 4.6 pence per share was approved by shareholders and the Board on 24 April 2019. An
amount of £1.8 million was recognised as a distribution to equity holders in the year ended 31 December 2019.
The Board has proposed a final dividend for 2019 of 4.6 pence per share. The dividend is subject to approval by shareholders at the
next Annual General Meeting and the expected cost of £1.9 million has not been included as a liability as at 31 December 2019.
70
Annual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
14. Intangible assets
Group
Cost
Technology
£000
Customer
relationships
£000
Goodwill
Total
£000
£000
At 1 January 2018 and 31 December 2018
–
12,620
Acquisitions through business combination (Note 26)
Effect of movement in exchange rates
At 31 December 2019
Accumulated amortisation
At 1 January 2018
Amortisation charged in year
At 31 December 2018
Amortisation charged in year
Effect of movement in exchange rates
At 31 December 2019
Accumulated impairment
At 1 January, 31 December 2018 and 31 December 2019
Carrying amount
At 31 December 2018
At 31 December 2019
7,630
(635)
6,995
–
–
–
(307)
15
(292)
–
–
6,703
1,184
(137)
13,464
2,845
26,084
11,659
(276)
(1,048)
13,667
16,033
36,695
(3,114)
(2,004)
(5,118)
(2,038)
15
(7,141)
–
–
–
–
–
–
(3,114)
(2,004)
(5,118)
(2,345)
30
(7,433)
(7)
(2,225)
(2,232)
7,495
6,519
11,239
13,808
18,734
27,030
Goodwill and acquisition related intangible assets recognised arose from acquisitions during 2013, 2015, 2017 and 2019. The
discount rates used for goodwill impairment reviews and the carrying amount of goodwill is allocated as follows:
Group
2019
2018
Advisory
Leatherhead Research
TSG – Americas
TSG – Europe
Frontier Smart Technologies Group
Pre-tax
discount rate
11.2%
11.2%
11.0%
11.0%
13.6%
Pre-tax
discount rate
11.2%
11.2%
11.0%
11.0%
–
£000
3,383
650
2,621
4,546
2,608
13,808
£000
3,383
650
2,660
4,546
–
11,239
Impairment review of goodwill
The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The
recoverable amounts of the CGUs are determined from value in use. The key assumptions for the value in use calculations are
those regarding the discount rates and growth rates of revenue and costs.
The Group prepares the cash flow forecasts derived from the most recent financial plan approved by the Board and extrapolates
cash flows for the following three years based on forecast rates of growth or decline in revenue by the CGU. The revenue and costs
for the CGU that is incorporated in the cash flow forecasts is derived from the most recent financial plan approved by the Board.
The Group monitors its post-tax Weighted Average Cost of Capital and those of its competitors using market data. In considering
the discount rates applying to CGUs, the Directors have considered the relative sizes, risks and the inter-dependencies of its
CGUs. The impairment reviews use a discount rate adjusted for pre-tax cash flows and are included in the table above.
71
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
14. Intangible assets (continued)
Impairment testing for the Advisory CGU
A review of the forecast future cash flows of Advisory, based on value in use estimated using discounted cash flows, indicated
there was no impairment.
The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the key
assumptions represent management’s assessment of future trends in the relevant markets and have been based on historical data
from internal sources.
Advisory CGU
Rate of growth in revenue (average of next 5 years)
Rate of increase in operating costs (average of next 5 years)
Terminal value growth rate
2019
5.2%
5.2%
2018
4.0%
4.1%
2.25%
2.25%
The growth rates used are based on internal forecasts which reflect management’s best estimate of the future forecasts. The
terminal growth rate was determined based on management’s estimate of the long-term compound annual EBIT growth rate,
based on market data.
A sensitivity analysis using reasonably possible changes in key assumptions has been performed. None of these changes result
in the value of goodwill allocated to Advisory being in excess of its recoverable amount and therefore no sensitivity analysis is
presented.
Impairment testing for the Leatherhead Research CGU
A review of the forecast future cash flows of Leatherhead Research CGU, based on value in use estimated using discounted cash
flows, indicated there was no impairment.
The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the key
assumptions represent management’s assessment of future trends in the relevant markets and have been based on historical data
from internal sources.
Leatherhead Research CGU
Rate of growth in revenue (average of next 5 years)
Increase in costs (due to inflation) (average of next 5 years)
Terminal value growth rate
2019
3.7%
4.1%
2018
2.7%
2.8%
2.25%
2.25%
The growth rates used are based on internal forecasts which reflect management’s best estimate of the future forecasts. The
terminal growth rate was determined based on management’s estimate of the long-term compound annual EBIT growth rate,
based on market data.
A sensitivity analysis using reasonably possible changes in key assumptions has been performed. None of these changes result
in the value of goodwill allocated to Leatherhead Research CGU being in excess of its recoverable amount and therefore no
sensitivity analysis is presented.
Impairment testing for the TSG Americas CGU
A review of the forecast future cash flows of TSG Americas, based on value in use estimated using discounted cash flows,
indicated there was no impairment.
The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the key
assumptions represent management’s assessment of future trends in the relevant markets and have been based on historical data
from internal sources.
TSG Americas CGU
Rate of growth in revenue (average of next 5 years)
Rate of increase in operating costs (average of next 5 years)
Terminal value growth rate
2019
5.5%
4.9%
2018
6.2%
6.2%
2.25%
2.25%
72
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
14. Intangible assets (continued)
Impairment testing for the TSG Americas CGU (continued)
The growth rates used are based on internal forecasts which reflect management’s best estimate of the future forecasts. The
terminal growth rate was determined based on management’s estimate of the long-term compound annual EBIT growth rate,
based on market data.
A sensitivity analysis using reasonably possible changes in key assumptions has been performed. None of these changes result in
the value of goodwill allocated to TSG Americas being in excess of its recoverable amount and therefore no sensitivity analysis is
presented.
Impairment testing for the TSG Europe CGU
A review of the forecast future cash flows of TSG Europe, based on value in use estimated using discounted cash flows, indicated
there was no impairment.
The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the key
assumptions represent management’s assessment of future trends in the relevant markets and have been based on historical data
from internal sources.
TSG Europe CGU
Rate of growth in revenue (average of next 5 years)
Rate of increase in operating costs (average of next 5 years)
Terminal value growth rate
2019
5.5%
5.2%
2018
5.0%
4.9%
2.25%
2.25%
The growth rates used are based on internal forecasts which reflect management’s best estimate of the future forecasts. The
terminal growth rate was determined based on management’s estimate of the long-term compound annual EBIT growth rate,
based on market data.
A sensitivity analysis using reasonably possible changes in key assumptions has been performed. None of these changes result
in the value of goodwill allocated to TSG Europe being in excess of its recoverable amount and therefore no sensitivity analysis is
presented.
Impairment testing for the Frontier Smart Technologies Group CGU
A review of the forecast future cash flows of Frontier Smart Technologies Group (‘Frontier’), based on value in use estimated using
discounted cash flows, indicated there was no impairment.
The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the key
assumptions represent management’s assessment of future trends in the relevant markets and have been based on historical data
from internal sources.
Frontier Smart Technologies Group CGU
Rate of growth in revenue (average of next 5 years)
Rate of increase in operating costs (average of next 5 years)
Terminal value growth rate
2019
3.2%
2.9%
2.25%
2018
–
–
–
The growth rates used are based on internal forecasts which reflect management’s best estimate of the future forecasts. The
terminal growth rate was determined based on management’s estimate of the long-term compound annual EBIT growth rate,
based on market data.
A sensitivity analysis using reasonably possible changes in key assumptions has been performed. None of these changes result
in the value of goodwill allocated to Frontier being in excess of its recoverable amount and therefore no sensitivity analysis is
presented.
73
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
15. Property, plant and equipment
Group
Cost
At 1 January 2018
Exchange differences on cost
Reclassification
Additions
At 1 January 2019
Recognition of right-of-use asset on initial application
of IFRS 16
Adjusted balance at 1 January 2019
Exchange differences on cost
Acquired in business combination (Note 26)
Additions
At 31 December 2019
Accumulated depreciation
At 1 January 2018
Reclassification
Depreciation charge
Exchange differences on depreciation
At 1 January 2019
Depreciation charge
Impairment loss
Exchange differences on depreciation
At 31 December 2019
Carrying amount
At 31 December 2018
At 31 December 2019
Freehold
land and
buildings
£000
Land &
buildings
right-of- use
£000
25,200
–
–
–
25,200
–
25,200
–
–
–
25,200
3,481
–
167
–
3,648
168
–
–
–
–
–
–
–
2,771
2,771
(199)
1,337
368
4,277
–
–
–
–
––
1,033
796
(46)
Furniture
and
fittings
£000
3,162
2
(14)
90
3,240
–
3,240
(17)
125
350
Equipment
Total
£000
1,447
4
14
230
1,695
£000
29,809
6
–
320
30,135
–
2,771
1,695
32,906
(13)
134
205
(229)
1,596
923
3,698
2,021
35,196
1,585
(4)
336
(4)
1,913
362
–
(6)
956
4
257
4
1,221
246
–
(9)
6,022
–
760
–
6,782
1,809
796
(61)
3,816
1,783
2,269
1,458
9,326
21,552
21,384
–
2,494
1,327
1,429
474
563
23,353
25,870
The Epsom property is held at cost less accumulated depreciation. Included within land and buildings for the Group is freehold
land to the value of £500,000 (2018: £500,000) which has not been depreciated. During the year ended 31 December 2016, the
property was brought into use from which point depreciation commenced. This property was acquired solely for the use of Science
Group. This property was last formally valued at £8.1 million during March 2018 by BNP Paribas Real Estate, subject to the
assumption of full vacant possession.
The Harston property is held at cost less accumulated depreciation. Included within land and buildings for the Group is freehold
land to the value of £1,360,000 (2018: £1,360,000) which has not been depreciated. Cumulative interest capitalised up to 31
December 2003 was £340,000. No further interest has been capitalised. The Harston property was last formally valued during
March 2018 by BNP Paribas Real Estate. Under the assumptions used, including tenant covenant strength and market rents, the
indicative valuation range for the building was between £16.7 million based on occupational tenancies where the head lease is
merged into the freehold interest, and £22.5 million under a sale and leaseback scenario.
The Epsom and Harston buildings are depreciated using the straight-line method to allocate their cost less their residual values
over their estimated useful lives of 25 years. The residual values of the properties are based on estimates of the amounts the Group
would receive currently for the properties if they were already of an age and in the condition expected at the end of their useful
lives. The residual values are reviewed annually to ensure that they do not exceed the estimated market values of the properties.
74
Annual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
15. Property, plant and equipment (continued)
The Harston property generated third party rental and services income of £980,000 (2018: £1,046,000). Of this income, £595,000
(2018: £659,000) was rental income and £385,000 (2018: £387,000) was services income. Services income includes, but is not
limited to, utilities, cleaning and general maintenance.
The total space on the Harston site available for business use is 97,000 sq. ft. Of this space, the average total space let to third
parties during 2019 was 29,100 sq. ft. (2018: 29,400 sq. ft.). The leases to tenants are typically for a 36-month term and normally
have a termination notice period of 3 to 6 months. An average of 45,700 sq. ft. (2018: 45,700 sq. ft.) was used by the Group during
the year for its business activities including office space and laboratory space and 20,000 sq. ft. are common areas. The remaining
space of 2,200 sq. ft. (2018: 1,900 sq. ft.) was vacant during the year.
Given the continuing rental values and occupancy rates the Directors do not believe that the combined carrying value of the
Harston and Epsom properties of £21,384,000 (2018: £21,552,000) is significantly different to its fair value.
The term loan with Lloyds Bank plc is secured on the Harston and Epsom properties which have a net book value at 31 December
2019 of £21.4 million (2018: 21.6 million) (see Note 24).
Science Group plc had fixed assets with a net book value of £165,000 at 31 December 2019 (£nil at 31 December 2018).
16. Investments
a) Investments in subsidiaries
Science Group held investments in the following subsidiaries at 31 December 2019.
Subsidiaries of Science Group plc
Registered
office
Country of
incorporation
Principal activity Shares held
%
Consulting operations
Sagentia Limited*
Sagentia Technology Advisory Limited*
OTM Consulting Ltd*
Quadro Epsom Limited*
Manage5Nines Limited
Sagentia Inc.
OTM Consulting Inc.
Oakland Innovation Ltd*
Leatherhead Research Limited*
Technology Sciences Group Limited**
Technology Sciences Group Consulting Limited
Technology Sciences Group Canada (TSG) Inc.
TSGE Forum Limited
TSGE Iberia SL
TSGE d.o.o
TSGE Deutschland GmbH
Technology Sciences Group Inc.*
Technology Science Group France *
SG Bidco Ltd *
Frontier Smart Technologies Limited
Frontier Microsystems Ltd (UK)
(1)
(1)
(1)
(1)
(1)
(2)
(3)
(1)
(1)
(1)
(1)
(7)
(1)
(5)
(8)
(6)
(2)
(4)
(1)
(1)
(1)
England
Consultancy
Ordinary
England Holding company
Ordinary
England
England
Consultancy
Ordinary
Property
Ordinary
England
IT Consultancy
Ordinary
USA
USA
England
England
England
England
Canada
England
Consultancy
Ordinary
Consultancy
Ordinary
Consultancy
Ordinary
Consultancy
Ordinary
Consultancy
Ordinary
Consultancy
Ordinary
Consultancy
Ordinary
Consultancy
Ordinary
Spain
Consultancy
Ordinary
Slovenia
Germany
USA
France
Consultancy
Ordinary
Consultancy
Ordinary
Consultancy
Ordinary
Consultancy
Ordinary
England Holding Company
Ordinary
England
England
Production
Ordinary
Production
Ordinary
Frontier Silicon (HK) Ltd (Hong Kong)
(9)
Hong Kong
Production
Ordinary
Frontier Silicon Srl (Romania)
Frontier Silicon Limited
(10)
(1)
Romania
England
Production
Ordinary
Production
Ordinary
100
100
100
100
100
100
100
100
100
61
100
100
100
100
100
100
100
100
100
100
100
100
100
100
75
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
16. Investments (continued)
* Direct subsidiaries of Science Group plc as at 31 December 2019
** Science Group plc owns 61% of Technology Sciences Group Ltd, with Technology Sciences Group Inc. holding the remaining
39%. Science Group plc owns 100% of Technology Sciences Group Inc. hence the Group effectively owns 100% of Technology
Sciences Group Limited.
(1) Harston Mill, Royston Road, Harston, Cambridge, England, CB22 7GG
(2) 919 North Market Street, Suite 950, Wilmington, Delaware, 19801
(3) 815 Brazos St. STE 500 Austin, Texas, 78701
(4) 1-2 place des saisons, La Défense Tour First, 92400 Courbevoie, Paris
(5) Avenida De Galicia, 22-1, Isquierda, Dr Oviedo, 33005, Spain
(6) Richthofenstraße 29, 31137 Hildesheim, Germany
(7) 50 O’Connor, Suite 300, Ottawa ON, K1P 6L2, Canada
(8) Ljubljanska cesta 110, 1230 Domžale, Slovenia
(9) Unit 2218, Grand Central Plaza Tower 2, 138 Sha Tin Rural Committee Road, Sha Tin, New Territories, Hong Kong
(10) Str. MARTIN LUTHER Nr. 2, Județ Timiş, 300054 Municipiul Timişoara, Romania
All subsidiaries for which accounts are provided have year ends of 31 December.
b) Other investments
Group
Cost
At 1 January 2018, 31 December 2018 and 31 December 2019
Impairment
At 1 January 2018
Impairment loss
At 31 December 2018 and 31 December 2019
Carrying amount
At 31 December 2018
At 31 December 2019
Total
£000
100
50
50
100
–
–
At 31 December 2018, a subsidiary of Science Group plc holds 30% of the ordinary share capital of Creactive (ID) Design Limited, a
Cambridge-based industrial design consultancy, at a net book value of £nil. The annual impairment test on investments resulted in
an impairment of £50,000 being recognised on this investment.
The Directors do not consider that any of its investments are associates and to avoid a statement of excessive length, details of
investments that are not significant have been omitted.
76
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
16. Investments (continued)
c) Company investments
Cost
At 1 January 2018
Capital contribution to subsidiaries*
At 31 December 2018
Acquisitions through business combinations (Note 26)
Capital contributions to subsidiaries*
At 31 December 2019
Impairment
At 1 January 2018 and 1 January 2019
Impairment loss
At 31 December 2019
Carrying amount
At 31 December 2018
At 31 December 2019
Total
£000
38,456
775
39,231
9,219
1,124
49,574
2,185
–
2,185
37,046
47,389
* Capital contributions to subsidiaries are in relation to share based payment charges for employees of the subsidiaries.
17. Inventories
Raw materials
Work in progress
Finished goods
For inventories included in operating costs, see Note 6.
The Company had no inventories at 31 December 2019 (2018: £nil)
Group
2019
£000
340
490
1,230
2,060
2018
£000
–
–
–
–
77
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
18. Trade and other receivables
Current assets:
Trade receivables
Provision for impairment
Trade receivables – net
Amounts recoverable on contracts
Other receivables
Amounts owed by Group undertakings
VAT
Prepayments
Company
Group
2019
£000
2018
£000
–
–
–
–
–
–
–
–
–
–
10,107
5,726
316
60
13
2
10,483
5,741
2019
£000
7,365
(100)
7,265
1,541
144
–
51
1,238
10,239
2018
£000
7,980
(144)
7,836
1,017
11
–
6
847
9,717
All amounts disclosed above, except for prepayments, are receivable within 90 days.
The following table provides information about the exposure to credit risk and ECLs for trade receivables and amounts recoverable
on contracts at 31 December 2019. Probability of default rates are based on historical experience and informed credit assessment.
The loss rates in the current, 1-30 and 31-60 categories are minimal.
Group
Current (not past due)
1-30 days past due
31-60 days past due
61-90 days past due
More than 90 days past due
Probability
of default
–
–
–
50%
100%
Gross
Carrying
Amount
£000
7,024
1,363
410
20
89
8,906
Provision for
Impairment
Credit-
Impaired
£000
–
–
–
(11)
(89)
(100)
No
No
No
No
Yes
All of Science Group’s trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables were
considered to be impaired and a provision of £100,000 (2018: £144,000) has been provided at 31 December 2019. In addition,
some of the unimpaired trade receivables are past due as at the reporting date.
In relation to amounts owed by Group Undertakings, based on historical experience and informed credit assessment, the ECL is
expected to be immaterial.
Provision brought forward
Debts written off
Provision released
Provision made
Movement due to foreign exchange fluctuations
Provision carried forward
78
Group
2019
£000
144
–
(75)
32
(1)
100
2018
£000
362
(171)
(90)
45
(2)
144
Annual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
19. Cash and cash equivalents
Short term bank deposits – Group cash
Cash at bank and in hand – Group cash
Cash and cash equivalents – Group cash
Cash and cash equivalents – Client registration funds
Company
Group
2019
£000
37
2,707
2,744
–
2,744
2018
£000
37
7,428
7,465
–
7,465
2019
£000
39
13,873
13,912
1,517
15,429
2018
£000
37
21,483
21,520
1,487
23,007
The Group receives cash from clients which are pass through funds solely for the purpose of payment of registration fees to
regulatory bodies. This cash is separated in the day to day operations of the business, is separately identified for reporting
purposes and is unrestricted.
20. Trade and other payables
Current liabilities
Contract liabilities
Trade payables
Other taxation and social security
Amounts owed to Group undertakings
VAT
Accruals
21. Provisions
Group
At 1 January 2018
Provisions made during the year
Provisions used during the year
Provisions reversed during the year
Loss/(gain) on foreign exchange fluctuations
At 31 December 2018
Assumed in business combination
Provisions made during the year
Provisions used during the year
Provisions reversed during the year
Loss/(gain) on foreign exchange fluctuations
At 31 December 2019
Company
Group
2019
£000
–
24
30
5,488
–
262
5,804
2018
£000
–
50
35
3,212
–
105
3,402
2019
£000
10,341
2,548
884
–
120
6,688
20,581
2018
£000
10,752
1,110
786
–
392
4,336
17,376
Onerous
lease
£000
495
–
(190)
(95)
15
225
–
–
(126)
(94)
(5)
–
Dilapidations
Restructuring
Legal
Total
£000
£000
£000
199
170
–
(108)
1
262
300
31
–
–
(31)
562
–
199
(57)
–
–
142
–
–
(52)
–
–
90
597
391
–
(300)
17
705
–
–
(5)
(687)
(13)
–
£000
1,291
760
(247)
(503)
33
1,334
300
31
(183)
(781)
(49)
652
79
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
21. Provisions (continued)
Current liabilities
Non-current liabilities
Group
2019
£000
172
480
652
2018
£000
1,038
296
1,334
Provisions for onerous leases and dilapidation provisions have been recognised at the present value of the expected obligation.
These discounts will unwind to their undiscounted value over the remaining lives of the leases via a finance charge within the
income statement.
The average remaining life of the leases at 31 December 2019 is 2 years (2018: 1 year).
The restructuring provision relates to the costs associated with the closure of the Central/Eastern Europe offices and is
anticipated to be utilised during the next 18 months.
Legal provisions represent the best estimate of the future economic outflow of settling potential litigation claims and associated
costs such as legal fees. During the period ended 31 December 2019, a claim was settled by insurers with a cash outflow of £5,000
being required hence the remaining unutilised provision of £687,000 was released to the Consolidated Income Statement and is
separately disclosed as an adjusting item.
22. Contingent consideration
During the prior year, contingent consideration of £0.5 million was released to the Consolidated Income Statement. This related to
the consideration for the acquisition of TSG in 2017. Certain agreed conditions on the vendor ceased to be met in the year ended
31 December 2018 hence the contingent consideration was no longer payable and was released accordingly.
23. Called-up share capital
Allotted, called-up and fully paid
Ordinary shares of £0.01 each
Allotted, called-up and fully paid
Ordinary shares of £0.01 each
2019
£000
2018
£000
421
421
Number
Number
42,062,035
42,062,035
The allotted, called-up and fully paid share capital of the Company as at 31 December 2019 was 42,062,035 shares (2018:
42,062,035) and the total number of ordinary shares in issue (excluding treasury shares) was 41,700,440 (2018: 40,040,227). Of
the ordinary shares in issue, 104,400 (2018: nil) shares are held by the Frontier Smart Technologies Employee Benefit Trust (‘EBT’)
and hence the voting rights in the Company are 41,596,040.
Prior to acquisition of Frontier, the EBT held 2.0 million Frontier shares. On completion of the statutory merger (Note 26), the EBT
received £0.5 million in settlement of the shares of which £0.3 million was paid to SG Bidco Limited to settle an outstanding loan.
104,400 shares in Science Group plc were acquired by the EBT (by issuing shares held in treasury) which will be used to satisfy
employee share options issued to the Joint Managing Directors of the Frontier business.
80
Annual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
23. Called-up share capital (continued)
A reconciliation of treasury shares held by the Company is as follows:
Reconciliation of treasury shares
At beginning of year
Purchase of own shares
Sale of own shares
Settlement of share options
At end of year
Company
2019
Number
2018
Number
2,021,808
2,694,907
97,913
89,800
(1,187,401)
–
(570,725)
(762,899)
361,595
2,021,808
It is the intention of the Company to hold the treasury shares for the purpose of settling employee share schemes and for settling
liquidated sums of cash consideration in any future business acquisitions, and in limited circumstances to satisfy shareholder
demand which market liquidity is unable to meet. No dividend or other distribution may be made to the Company in respect of the
treasury shares.
The total charge relating to employee share based payment plans, all of which related to equity-settled share based payment
transactions, was £1,167,000 (2018: £812,000)
Reconciliation of outstanding options
2019
2018
At beginning of year
Granted during the year – PSP
Granted during the year – EEI
Exercised during the year
Lapsed during the year
At end of year
Number
Number
Weighted
average
exercise
price
(pence)
3,194,000
754,400
–
(570,725)
(435,000)
2,942,675
1.7
1.0
–
4.0
1.0
1.1
1,877,732
1,100,000
1,200,000
(762,899)
(220,833)
3,194,000
Weighted
average
exercise
price
(pence)
7.0
1.0
1.0
15.1
1.0
1.7
During the year ended 31 December 2019, share options were issued under the Performance Share Plan (‘PSP’).
The options outstanding at 31 December 2019 had a weighted average contractual life of 8.8 years (2018: 8.9 years).
Included within the total outstanding options at 31 December 2019 are 83,275 options which are exercisable (2018: 294,000). The
weighted average exercise price of exercisable options at the end of the year was 6.0 pence (2018: 1.7 pence).
Options exercised during the year had a weighted average share price at the date of exercise of 195 pence (2018: 217 pence).
Exercise of an option is subject to continued employment, and normally lapses within three months of leaving employment.
The fair values of options granted under the PSP in 2019 were determined using a variation of the Binomial Option Pricing model
that takes into account factors specific to the share incentive plans including performance conditions. The performance condition
attached to options granted in the year is such that 100% of the options vest dependent on the Company achieving earnings per
share targets. The performance condition, which is a market condition, has been incorporated into the measurement by means of
actuarial modelling. For options granted in the year, a risk-free rate of 0.25% and 0.50% and a dividend yield factor of 2.4% and
2.0% has been used for the options issued in October and November 2019 respectively. The share price on the date the options
were granted was 192.0 pence and 226.0 pence in October and November 2019 respectively. The other principal assumptions
used in the valuation are set out in the table below. The underlying expected volatility was determined by reference to historical
data of the Company’s shares over the vesting period.
81
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
23. Called-up share capital (continued)
The fair values of the options granted under the EEI in 2018 were determined using the Monte Carlo Option Valuation model that
takes into account factors specific to the share incentive plan. In May 2018, 1.2 million share options were granted under the EEI
with a condition of achieving share price hurdles with a vesting period of 5 years. These performance conditions which are market
conditions have been incorporated into the measurement by means of actuarial modelling. A risk-free rate of 0.91% and a dividend
yield factor of 1.7% has been used for EEI options. The share price on the date the options were granted was 250.0 pence. The
underlying expected volatility was determined by reference to historical data of the Company’s shares over the vesting period.
At 31 December 2019, options granted to subscribe for ordinary shares of the Company are as follows:
Option exercise period
Number of shares under option
Date of
grant
From
To Unapproved Performance
Share Plan
Enhanced
Executive
Incentive
Addendum
Exercise
Price
Fair Value
of options
Life
Volatility
(pence)
(pence)
(years)
Nov 2012
Nov 2015
Nov 2022
4,942
Sep 2013
Sep 2016
Sep 2023
Sep 2015
Sep 2018
Sep 2025
Aug 2016
Aug 2019
Aug 2026
Sep 2017
Sep 2020
Sep 2027
May 2018
May 2021 May 2028
May 2018
May 2023 May 2028
Jun 2018
Jun 2021
Jun 2028
Sep 2018
Sep 2021
Sep 2028
Oct 2019
Oct 2022
Oct 2029
Nov 2019
Nov 2022
Nov 2029
–
–
–
–
–
–
–
–
–
–
–
3,333
30,000
45,000
210,000
430,000
–
–
–
–
–
–
–
850,000
100,000
515,000
500,000
254,400
–
–
–
–
86.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
18.6
80.8
77.0
96.5
207.1
224.4
121.0
218.4
225.3
177.8
211.7
10
10
10
10
10
10
10
10
10
10
10
40%
25%
16%
21%
24%
25%
25%
25%
23%
17%
18%
4,942
2,087,733
850,000
There are 4,942 unapproved options at 31 December 2019.
At 31 December 2018, options granted to subscribe for ordinary shares of the Company are as follows:
Option exercise period
Number of shares under option
Date of
grant
From
To
Approved/
Unapproved
Performance
Share Plan
Enhanced
Executive
Incentive
Addendum
Exercise
Price
Fair Value
of options
Life
Volatility
(pence)
(pence)
(years)
Nov 2012
Nov 2015
Nov 2022
25,000
Sep 2013
Sep 2016
Sep 2023
Sep 2014
Sep 2017
Sep 2024
Apr 2015
Apr 2018
Apr 2025
Sep 2015
Sep 2018
Sep 2025
Aug 2016
Aug 2019
Aug 2026
Sep 2016
Sep 2019
Sep 2026
Sep 2017
Sep 2020
Sep 2027
May 2018
May 2021 May 2028
May 2018
May 2023 May 2028
Jun 2018
Jun 2021
Jun 2028
Sep 2018
Sep 2021
Sep 2028
–
–
–
–
–
–
–
–
–
–
–
–
6,666
8,334
4,000
250,000
270,000
100,000
250,000
450,000
–
–
–
–
–
–
–
–
–
–
1,200,000
100,000
530,000
–
–
86.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
18.6
80.8
74.8
86.7
77.0
96.5
81.6
207.1
224.4
121.0
218.4
225.3
10
10
10
10
10
10
10
10
10
10
10
10
40%
25%
18%
16%
16%
21%
22%
24%
25%
25%
25%
23%
25,000
1,969,000 1,200,000
For all options granted prior to 2013, the exercise price is also the share price at date of grant.
82
Annual Report and Financial Statements 2019
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
24. Borrowings
Group
Non-current bank borrowings
Current bank borrowings
Group
Opening balance
Increase in bank borrowing – term loan
Revolving credit facility assumed in business combination (Note 26)
Repayments in the year – term loan
Repayments in year – revolving credit facility
Arrangement fee associated with new borrowing
Impairment of loan arrangement fee
Amortisation of loan arrangement fee
Total borrowings
2019
£000
15,013
1,200
16,213
2019
£000
12,689
4,750
4,969
(1,200)
(5,000)
(39)
31
13
2018
£000
11,689
1,000
12,689
2018
£000
13,926
–
–
(1,250)
–
–
–
13
16,213
12,689
Science Group plc, the Company, had no bank borrowings at the start or end of the year.
During the year ended 31 December 2016, the Group entered into a 10-year fixed term loan of £15 million which is secured on the
freehold properties of the Group and on which interest is payable based on LIBOR plus 2.6% margin. The repayment profile of
the loan is £1 million per annum over the term with the remaining £5 million repaid on expiry of the loan in 2026. Costs directly
associated with entering into the loan of £90,000 were incurred, have been offset against the balance outstanding and are being
amortised over the period of the loan.
The reconciliation of bank loans interest expense is shown below.
Group
Interest expense
Interest paid
Impairment of loan arrangement fee
Amortisation of loan arrangement fee
Increase/(decrease) in accruals
2019
£000
717
(646)
(31)
(13)
27
2018
£000
451
(555)
–
(13)
(117)
During the year ended 31 December 2019, the Group increased the 10-year fixed-term loan by £4.8 million to £17.5 million
on otherwise similar terms. The repayment profile of the additional loan is £50,000 per quarter up to 30 June 2026 with the
remaining £3.2 million repayable on 30 September 2026. Costs directly associated with entering into the additional loan of
£39,000 were incurred, have been offset against the balance outstanding and are being amortised over the period of the loan.
The term loan has no operating covenants while the Group net bank debt is less than £10 million. If this threshold is crossed, two
conditions apply: a financial covenant, measured half-yearly on a 12 month rolling basis, such that annual EBITDA must exceed
1.25 times annual debt servicing (capital and interest); and a security covenant whereby the loan to value (’LTV’) ratio of the
securitised properties must remain below 75%. If either of these conditions is breached, a remedy period of 6 months is provided,
during which time the EBITDA or LTV condition can be remedied or the net bank debt can be reduced to less than £10 million.
The Group assumed a revolving credit facility of £5.0 million with the acquisition of Frontier Smart Technologies Group Limited
(Note 26) less unamortised arrangement fees of £31,000. The revolving credit facility was repaid in October 2019 and the
unamortised arrangement fees were expensed to finance costs (Note 7).
83
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
24. Borrowings (continued)
In accordance with an agreed repayment schedule with the bank, bank borrowings are repayable to Lloyds as follows:
Group
Within one year
Between 1 and 2 years
Between 2 and 5 years
Over 5 years
2019
£000
1,200
1,200
3,600
10,300
16,300
2018
£000
1,000
1,000
3,000
7,750
12,750
In order to address interest rate risk, the Group entered into phased interest rate swaps in order to fully hedge the loan resulting
in a 10-year fixed effective interest rate of 3.5%. The interest cost on the additional £4.8 million has been fixed by entering into an
interest rate swap at an effective interest rate of 4.0%. The combined effective interest rate is 3.6%.
The Group has adopted hedge accounting for the interest rate swaps under IFRS 9, Financial Instruments, and the loss on change
in fair value of the interest rate swaps of £408,000 (2018: gain of £66,000) was recognised directly within equity.
The fair value of the swap at 31 December 2019 was a liability of £115,000 (2018: asset of £293,000).
25. Leases
a. Leases as lessee (IFRS 16)
The Group leases office facilities on leases which were previously classified as operating leases under IAS 17. The leases are
typically for periods between 2 and 10 years, based on the non-cancellable period. At 31 December 2019, the leases had remaining
periods of 1 to 5 years.
The Group leases IT equipment with contract terms of 1 to 3 years. These leases are short-term and/or leases of low-value items.
The Group has elected not to recognise right-of-use assets and lease liabilities for these leases.
i. Right-of-use assets
Information about leases for which the group is a lessee is presented below.
Group
Balance at 1 January 2019
Acquisitions through business combination (Note 26)
Additions
Impairment loss
Depreciation charge for the year
Effect of movements in exchange rates
Balance at 31 December 2019
ii. Amounts recognised in profit or loss
2019 – Leases under IFRS 16
Interest on lease liabilities
Depreciation
Impairment loss
84
Land &
Buildings
£000
2,771
1,337
368
(796)
(1,033)
(153)
2,494
Total
£000
2,771
1,337
368
(796)
(1,033)
(153)
2,494
2019
£000
135
1,033
796
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
25. Leases (continued)
a. Leases as lessee (IFRS 16) (continued)
ii. Amounts recognised in profit or loss (continued)
An impairment loss of £796,000 has been recognised in relation to the closure of the Frontier London and Cambridge (Sawston)
offices and the reduction in physical office space in the Frontier Hong Kong office. This is included in the provisions relating to
onerous leases and impairments of right-of-use assets in Note 26.
2018 Operating leases under IAS 17
Lease expense
iii. Amounts recognised in statement of cash flows
Total cash outflow for leases
iv. Lease Liabilities
Information about leases for which the group is a lessee is presented below.
Group
Balance at 1 January
Assumed in business combination (Note 26)
Additions
Repayments in year
Reduction due to foreign exchange fluctuations
Balance 31 December 2019
Lease liabilities are payable as follows
Group
Within one year
Between 1 and 5 years
2018
£000
1,090
2019
£000
1,133
2019
£000
2,771
1,357
368
(998)
(175)
3,323
2019
£000
1,212
2,111
3,323
b. Leases as lessor
The Group leases out some of the Harston site to third parties on leases which normally have a termination notice period of 3 to 6
months and typically for a 36-month term.
The leases are classified as operating leases from a lessor perspective because they do not transfer substantially all the risk and
rewards to the ownership of the assets. Note 15 sets out information about the Harston leases.
Refer to Note 15 for rental income recognised by the Group during 2019.
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OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
25. Leases (continued)
b. Leases as lessor (continued)
The following table sets out a maturity analysis of lease payments, showing the undiscounted lease payments to be received after
the reporting date.
2019 - Operating leases under IFRS 16
Within one year
Between 1 and 2 years
Total
2018 Operating leases under IAS 17
Within one year
Between 1 and 2 years
Between 2 and 3 years
Total
26. Acquisition of subsidiary
£000
659
213
872
£000
837
802
424
2,063
The Group completed the acquisition of Frontier Smart Technologies Group Limited (‘Frontier’) in October 2019. The acquisition is
expected to increase the scale and profitability of the Group in line with the strategic review undertaken in 2018.
The acquisition of Frontier started in May 2019 when the initial on-market purchases of shares were made. On 11 July 2019, the
Group ownership reached 35.6% and the Group commenced equity accounting for the investment. The Group continued to
acquire shares on the market and made an offer for Frontier at 35 pence per share resulting in ownership of 47.5% on 19 July
2019. On 23 August 2019, through an issue of 4 million shares by Frontier, Science Group increased its ownership to 52.2%
obtaining control of Frontier and the consolidation of results commenced. Additional shares were acquired on the market taking
the ownership to 72.3% on 6 September 2019 with the remaining shares being acquired on 11 October 2019 by way of a statutory
merger. The statutory merger was effected by SG Bidco Limited (a 100% owned subsidiary of Science Group plc) merging with
Frontier Smart Technologies Group Limited, the parent company of the Frontier Group, through which Science Group obtained full
ownership of the Frontier business. The consideration for all the shares were paid in cash.
The Group incurred acquisition and integration costs of £3.6 million in relation to Frontier, which have been reported in the
Consolidated Income Statement and further details are shown below.
Acquisition and integration costs
Professional fees and charges relating to the acquisition
Provisions relating to onerous leases and impairment of right of use assets
Acquisition integration costs
Total
2019
£000
1,672
1,105
794
3,571
86
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
26. Acquisition of subsidiary (continued)
The Income Statement of Frontier for the period from 23 August 2019 to 31 December 2019 that was consolidated into the Group
is shown below:
Revenue
Operating expenses before adjusting items
Adjusted operating loss
Acquisition integration costs
Provisions relating to onerous leases and impairment of right-of-use assets
Share based payment charge
Operating loss
Finance costs
Loss before income tax
£000
7,540
(8,823)
(1,283)
(794)
(1,105)
(12)
(3,194)
(165)
(3,359)
If the acquisition of Frontier had been completed on the first day of the financial year, Group revenue would have been £14.4
million higher and Group profit attributable to equity holders of the parent would have been £3.6 million lower.
(a) Accounting treatment
Details of the acquisition and the accounting treatment of the investment in Frontier over the period 9 May 2019 to 11 October
2019 are summarised below:
Period
Ownership
Accounting Treatment
On 9 May 2019
Acquired 3.1% of voting shares
Fair value through profit or loss
10 May 2019 to
10 July 2019
11 July 2019
12 July 2019 to
22 August 2019
23 August 2019
Holding of voting shares increased to
29.7%
Acquired 5.9% of voting shares
Holding increased to 35.6%
Fair value through profit or loss
Equity accounted from 11 July 2019 (Note 1)
Holding of voting shares increased to
47.5%
Equity accounted
Frontier issued 4 million shares which
were acquired by Science Group
Holding increased to 52.2%
24 August 2019 to
10 October 2019
Holding of voting shares increased to
72.3%
11 October 2019
Completion of Statutory Merger
resulting in remaining shares being
acquired and holding increased to
100%
Control obtained, consolidation commenced
(Note 2)
Remeasure pre–existing equity interest at
acquisition date fair value
Goodwill calculated based on consideration,
net assets and non controlling interest (‘NCI’)
at 23 August 2019
Consolidated subsidiary with non–controlling
interest
Change in Group’s interest in Frontier
accounted for as an equity transaction
Remaining shares acquired accounted for as
an equity transaction
Total consideration
Consideration
Paid
£000
144
3,229
858
1,711
1,000
2,277
3,592
12,811
87
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
26. Acquisition of subsidiary (continued)
(a) Accounting treatment (continued)
Note 1
The Group commenced equity accounting for the investment as an associate on 11 July 2019 when the shareholding of voting
shares increased to 35.6%. Prior to this date, Science Group had no representation on the Board of Directors of Frontier. Further,
the Group was unable participate in policy-making decisions due to 4 other significant shareholders whose combined holding
totalled more than the voting shares held by Science Group. As a result, the Group was not able to exercise significant influence
over Frontier.
On 11 July 2019, the Group increased its ownership of voting shares to 35.6% at which point the Group’s shareholding exceeded
that of the other significant shareholders and hence was able to participate in the policy-making processes. As a result, the Group
was able to exercise significant influence and equity accounting commenced on this date.
Note 2
On 23 August 2019, the Group increased its holding of voting shares to 52.2%, obtained control of Frontier and commenced
consolidation of the results.
On 23 August 2019, the equity accounted interest in Frontier was remeasured to fair value based on the market price per share of
25p. The Group had acquired 19.4 million shares up until this date and paid an average price of 30.6 pence per share hence the
loss on remeasurement was £1.1 million.
In the period from 11 July 2019 to 22 August 2019, Frontier was equity accounted as an associate and the Group recorded its share
of loss of the equity accounted investment of £0.6 million. The loss on remeasurement of £1.1 million has therefore been recorded
in the Consolidated Income Statement as follows:
Share of loss of equity accounted investment (from 11 July 2019 to 22 August 2019)
Loss on remeasurement of equity-accounted investment (at 23 August 2019)
Transaction costs associated with acquisition
2019
£000
592
488
3
1,083
Frontier was accounted for as a subsidiary with a non-controlling interest (NCI) from 23 August 2019. During the period from 23
August 2019 to 11 October 2019, the remaining NCI was acquired by the Group and Frontier became a 100% owned subsidiary on
11 October 2019. The change in the Group’s interest in Frontier has not resulted in loss of control and has been accounted for as an
equity transaction.
88
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
26. Acquisition of subsidiary (continued)
(b) Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets acquired and liabilities assumed at the date of acquisition (23
August 2019):
Net assets acquired:
Acquisition related intangible assets
Property, plant and equipment (Note 15)
Right-of-use asset (Note 25)
Inventories
Trade and other receivables
Current tax asset
Cash and cash equivalents
Trade and other payables
Lease Liabilities (Note 25)
Provisions (Note 21)
Bank loan (Note 24)
Deferred tax asset/(liability) (Note 11)
Total identifiable net assets acquired
Fair value
£000
8,814
259
1,337
3,947
3,992
211
2,824
(7,350)
(1,357)
(300)
(4,969)
(1,628)
5,780
i. Measurement of fair values
The valuation techniques used for measuring the fair value of material assets acquired were as follows.
Assets acquired
Intangible Assets
Inventories
Valuation technique
Technology–based and customer–related intangible assets have been valued using the
replacement cost method and excess earnings method respectively.
The fair value has been determined based on estimated selling prices in the ordinary
course of business less the estimated costs of completion and sale, and a reasonable
profit margin based on the effort required to complete and sell the inventories.
(c) Consideration paid
The consideration of £12.8 million was paid in cash and the net cash outflow on acquisition is summarised in the table below.
Net cash outflow arising on acquisition
Total cash consideration
Cash and cash equivalents
Net cash outflow on acquisition
£000
12,811
(2,824)
9,987
The consideration has been reported in the Consolidated and Company Statement of Cash Flows under investing activities and
financing activities as shown below.
Group
Investing activities – purchase of subsidiary undertakings, net of cash received
Financing activities – acquisition of NCI
Net cash outflow on acquisition
£000
4,118
5,869
9,987
89
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
26. Acquisition of subsidiary (continued)
(d) Goodwill
Goodwill arising from the acquisition has been calculated as follows:
Consideration from 9 May 2019 to 22 August 2019
Share of loss of equity-accounted investment (between 11 July 2019 and 22 August 2019)
Consideration for shares on 23 August 2019
Carrying amount of equity-accounted investment in Frontier at 23 August 2019
Fair value adjustment at 23 August 2019 (Note 26 (e))
Fair value of investment in Frontier at 23 August 2019 based on 25p per share
NCI, based on their proportionate interest in the recognised amounts of assets and liabilities of Frontier at 23
August 2019
Fair value of identifiable net assets at 23 August 2019
Goodwill
£000
5,942
(592)
1,000
6,350
(488)
5,862
2,763
(5,780)
2,845
The goodwill is attributable mainly to the skills and technical knowledge of Frontier’s workforce and the synergies expected to be
achieved from the restructuring and integration programme.
(e) Acquisition of NCI
The Group increased its ownership in Frontier from 52.5% to 100% over the period from 24 August 2019 to 11 October 2019. The
carrying amount of Frontier’s net assets at 23 August 2019 was £5.8 million. Retained losses in the period from 23 August 2019 to
11 October 2019 were £1.1 million.
Carrying amount of NCI at 23 August 2019 (£5,780,000 x 47.8%)
NCI share of losses in between 23 August 2019 and 11 October 2019, based on average NCI ownership
Carrying amount of NCI at 11 October 2019
Consideration paid (including transaction costs)
Transaction costs
Consideration paid to NCI
A decrease in equity attributable to owners of the Company
£000
2,763
(162)
2,601
5,869
(3)
5,866
3,265
(f) Loss on remeasurement of equity-accounted investment
The loss on revaluation of investment in Frontier has been determined by the remeasurement of the equity investment in Frontier
to fair value at 23 August 2019, when Frontier became a 52.2% owned subsidiary.
Remeasurement of equity accounted investment in Frontier to fair value on 23 August 2019 (Note 26.d)
Transactions costs associated with acquisition
Total loss on revaluation of investment per consolidated income statement
£000
(488)
(3)
(491)
90
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
27. Commitments
a) Operating lease commitments
The minimum annual rentals under non-cancellable operating leases are as follows:
Group
Plant and equipment lease commitment
– Within 1 year
– In the second and fifth years inclusive
Property lease rental (see Note below regarding 31 December 2019)
– Within 1 year
– In the second and fifth years inclusive
Total operating lease commitments
2019
£000
2018
£000
40
26
66
–
–
–
66
74
64
138
814
2,217
3,031
3,169
Operating lease commitments represent rentals payable by the Group for certain of its property, plant and equipment to the next
lease break clause or to the end of the lease, whichever is sooner.
Property rental commitments at 31 December 2019 are reported under IFRS 16 in Note 25.
b) Other financial commitments
At 31 December 2019 the Group and the Company had other financial commitments of £nil (2018: £nil).
28. Contingent liabilities
At 31 December 2019, there were £nil contingent liabilities (2018: £nil).
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OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
29. Related party transactions
The Group provides support and consultancy services to its subsidiaries and made loans, all of which eliminate on consolidation,
and are therefore not disclosed.
The Company held intercompany balances, and charged management fees as follows:
Company
Sagentia Limited
Sagentia Technology Advisory Limited
Oakland Innovation Limited
Leatherhead Research Limited
Technology Sciences Group Limited
Technology Sciences Group Consulting Limited
TSGE Forum
TSG Iberia
TSG Inc.
TSG Canada
SG Bidco Ltd
Frontier Smart Technologies Limited
2019
Loans due
(to)/from
2019
Sale of
goods and
services
2018
Loans due
(to)/from
2018
Sale of
goods and
services
(1,061)
706
5,612
166
10
–
–
(52)
(4,170)
(11)
(1)
133
(193)
3,592
6,372
4,619
–
–
–
–
–
–
–
–
–
–
–
10
–
–
(52)
(2,961)
(11)
(1)
104
(187)
–
–
–
64
94
–
77
–
–
45
–
–
–
706
2,514
446
Sagentia Limited holds 30% of the ordinary share capital of Creactive (ID) Design Limited (“Creactive”). During the year, Creactive
did not provide any consultancy services to Sagentia Limited (a subsidiary of Science Group plc) (2018: £120,000). Creactive had a
licensing agreement in place with Sagentia Limited to occupy office space. During the year ended 31 December 2019, £3,000 was
charged to Creactive in relation to this agreement (2018: £17,700).
Science Group plc also entered into a transaction with Cambridge Medical Technologies Limited (‘CMT’) (previously known as
Clinitech Limited). One of the Directors of Science Group plc, Michael Lacey-Solymar, is also a Director of CMT and Director and
Shareholder of CMT’s ultimate parent company. Sagentia Limited (a subsidiary of Science Group plc) entered into an agreement
with CMT on 26 September 2014 to lease office space to CMT. During the year ended 31 December 2019, £11,300 (2018: £11,700)
was charged to CMT in relation to this agreement.
The remuneration of the key management personnel of the Group, recognised in the income statement, is set out below in
aggregate. Key management personnel include all members of the plc Board and the Operating Board of Science Group.
Aggregate remuneration
Year ended 31 December
Short-term employee benefits
Pension costs
Share based payment transactions
92
2019
£000
1,591
42
233
1,866
2018
£000
1,754
49
237
2,040
Annual Report and Financial Statements 2019 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2019
30. Critical accounting estimates and judgements
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable under the circumstances. Science Group makes estimates and
assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are discussed below.
(a) Critical accounting estimate
Property residual values
Residual values have been estimated for the Epsom and Harston properties based on estimates of the amounts the Group would
receive currently for the properties if they were already of an age and in the condition expected at the end of their useful lives.
Impairment testing
The recoverable amounts of cash generating units and individual assets have been determined based on the higher of the value-
in-use calculations and fair value less costs to sell. These calculations require the use of estimates and assumptions. It is possible
that the cash flow assumption may change which may then impact our estimations and may then require a material adjustment to
the carrying value of intangible and tangible assets.
Science Group reviews and tests the carrying value of assets when events or changes in circumstance suggest that the carrying
amount may not be recoverable. Assets are grouped at the lowest level for which identifiable cash flows are largely independent
of cash flows of other assets and liabilities. If there are indications that impairment may have occurred, estimates are prepared of
expected future cash flows for each group of assets.
Fair values
The fair values of the identifiable assets acquired and liabilities assumed were determined as part of the purchase price allocation
of the acquisition. The management determined the fair values with the assistance of external independent valuation experts.
Further information about the techniques and assumptions made in measuring fair values is included in Note 26 (b).
(b) Significant accounting judgement
Accounting for freehold property at Harston Mill
Science Group owns and maintains the freehold property at Harston Mill for use in the supply of its Business Services and for
administrative purposes.
Whilst there is remaining space on site not required to fulfil these activities, Science Group lets out space to third party tenants.
The revenues and costs attributable to this activity are disclosed as third-party property income activities within the business
segment disclosures. It is not accounted for as an investment property, the reasons being:
(i)
the third-party leases include the use of common areas and because of this the areas that are leased to third parties could not
be sold separately;
(ii) the leases normally have notice periods of no more than six months giving Science Group the flexibility to start using the areas
if required, i.e. the leased areas are not held for capital appreciation or a return of investment through rental income.
Date of acquisition of Frontier
The acquisition of Frontier was an acquisition which commenced with an initial holding of 3.1% on 9 May 2019 through to 100%
acquired on 11 October 2019. The acquisition was progressive and occurred over 6 months and judgement has been exercised in
order to determine the following key dates:
(i)
the date at which Frontier became an associate of the Group was determined by reference to the ability to exercise significant
influence over Frontier, as set out in Note 26 (a) Note 1; and
(ii) the date at which the Group obtained control over Frontier, was determined by reference to the holding of voting shares
exceeding 50%, as set out in Note 26 (a) Note 2.
31. Post balance sheet events
There are no post balance sheet events to disclose.
93
OVERVIEWREPORT OF THE DIRECTORSSTRATEGIC REPORTFINANCIAL STATEMENTSAnnual Report and Financial Statements 2019 NOTES
94
Annual Report and Financial Statements 2019 NOTES
Website
www.sciencegroup.com
Registered office
Harston Mill
Harston
Cambridge
CB22 7GG
Company number
06536543
95
Annual Report and Financial Statements 2019 Harston Mill, Harston, Cambridge, CB22 7GG
T +44 1223 875200
E info@sciencegroup.com
www.sciencegroup.com