Last checked at 14 Apr 2008 07:00
Avacta Group plc
Interim results for the six months ended 31 January 2008
Avacta Group plc ("Avacta" or the "Company") announces its interim results for the six months ended 31 January 2008. Avacta provides advanced biophysics technology and services to the biopharmaceutical, pharmaceutical, defence, security, and clinical diagnostics sectors.
KEY POINTS
* Acquisition of Oxford Medical Diagnostics Limited announced on 14 November 2007 - complementary gas analysis diagnostic technology added to the Avacta range * Accelerated product development programmes all on plan - Optim, the leading product in the portfolio, is set for launch late 2008 / early 2009 * Reseller partner identification and recruitment continues apace * Analytical services revenues ahead of plan at ‚£225,000 (2007 : ‚£78,000) - strategic alliances have extended service capability and market reach * Loss per share of 0.06p (2007 : loss 0.12p) * Cash at bank of ‚£1.9m (2007 : ‚£0.4m) * Key hires made to complete the team for the commercial phase
Alastair Smith, Chief Executive Officer, commented:
"The progress over the past six months in all areas of the business has been excellent. Technology product developments and their commercialisation are on track and the growth of the analytical services business, which provides critical market intelligence as well as cash flow, is exceeding our expectations. We have put ourselves in a very strong position to deliver against the challenging targets we set for ourselves for 2008 and 2009 and I look forward to being able to report further strong progress over the next few months."
14 April 2008Enquiries:Avacta Group plc Tel: 0870 835 4367 Alastair Smith, Chief Executive Officer Tim Sykes, Chief Financial Officer Nexus Financial Limited Tel: 020 7451 7050
Nicholas Nelson / Kathy Boate Nicholas.nelson@nexusgroup.co.uk
WH Ireland Limited Tel: 0161 832 2174 David Youngman Novum Securities Limited Tel: 020 7562 4700 Henry Turcan / Michael Brennan
CHAIRMAN'S AND CHIEF EXECUTIVE OFFICER'S REPORT
We are delighted to report the interim results for the six month period ended 31 January 2008.
Overview
The Company has made solid progress in both its Technology and Analytical services businesses over the last six months. Market validation of the proposed products from the Technology business has been extremely encouraging. The Analytical services business has grown revenues to ‚£225,000, almost threefold against the same period last year, following well targeted marketing spend, a widening of our service offering and enhanced operational capabilities.
Financial overview
Revenues improved to ‚£225,000 for the six month period (2007 : ‚£78,000). There is no particular seasonality to the business. The operating loss before non-recurring items and share based payment charges was ‚£484,000 (2007 : ‚£660,000).
The improvement reflects the growth in the Analytical services business following a period of targeted investment in marketing which is supporting continued investment in the research and development of our analytical and diagnostic technologies.
As at 31 January 2008 the Group had net cash of ‚£1.9m.
The year ended 31 July 2008 is the first year that the Company will present its consolidated financial statements under International Financial Reporting Standards ("IFRS") and this is the first consolidated half-yearly financial information prepared under IFRS. The impact of the transition has been relatively low. The area most affected is the treatment of the reverse acquisition under IFRS3 `Business combinations'. Under IFRS, the Group cannot amortise goodwill but must review it annually for impairment. This means that ‚£ 0.2m of previously amortised goodwill accounted for under UK GAAP has been reinstated resulting in ‚£3.5m of goodwill being recognised from the reverse. With the provisional goodwill arising on the subsequent acquisition of OMD of ‚£ 4.4m (based on the maximum contingent value that could be due), we are carrying ‚£7.9m of goodwill on the Group balance sheet.
The other area that is affecting the Company relates to costs incurred on the specific product development programmes that will meet the criteria requiring those costs to be capitalised. As at 31 January 2008, costs that met the criteria amounted to ‚£0.1m.
Technology
The Company's portfolio of products, built around the core technologies of laser analysis and automated fluid handling, is moving closer to market and all products under development are progressing to plan.
The Directors expect that the first product, Optim, will start generating revenues within the next twelve months. Optim is a high value specialised analytical instrument which will provide drug developers with vital information at an early stage of the drug development process and is designed to reduce the risk of late stage failure and help to bring successful drugs to market more quickly and more cheaply. Optim is unique in its ability to provide multiple different measurements which are carried out simultaneously on very small sample volumes, automatically handled within Avacta's own design disposable micro-fluidic chips.
Optim has been designed to appeal to a wide range of end users avoiding the need for expert operators and ensuring that it can be adopted by a broad range of potential customers across the sector. Furthermore, Optim augments the Company's Analytical services business by providing customers with on-line access to Avacta's scientific team to assist in data interpretation, when required. The Company intends to go to market directly with Optim, believing that its brand and reach in the biopharmaceutical/biotech market is sufficiently established. The Company has researched the likely demand for Optim with existing Analytical services clients and a wider population of prospective customers and has had very encouraging feedback.
Avacta's core technologies for biopharmaceutical analysis lend themselves to applications in detection and diagnosis and the Company's strategy is to approach customers via third party resellers and original equipment manufacturers.
Indeed, four prototype products aimed at chemical/biological hazard detection and veterinary/human point-of-care diagnostics are nearing completion and the Company has progressed discussions with several commercial partners regarding manufacturing and distribution agreements.
Much investment has been made in these unique products and the Board has made a commitment to ensuring that all valuable intellectual property ("IP") is appropriately protected. Valuable intellectual property is crucial to the success of Avacta and the Company has acquired potentially valuable IP relating to a technique which allows for detection of pathogens through their DNA sequences. Such methods have the potential to replace the widespread and hugely valuable method of polymerase chain reaction ("PCR") because they produce results much more rapidly.
Analytical services
The Company's Analytical services business displayed continuing growth in the pipeline following well targeted marketing activity which positions the business strongly for the second half and beyond. There is a strong element of repeat business which is encouraging in these, still early, days of the business. Avacta has also established several commercial partnerships to extend its reach and widen the services under offer and revenues have already commenced from these relationships.
The Company continues to expand its client base within the biopharma/biotech sector which will assist greatly in the direct sales strategy of our complementary technology products.
Acquisition of Oxford Medical Diagnostics Limited
The acquisition of OMD meets the Company's long term objectives of providing high value solutions in the veterinary and human diagnostics markets whilst also contributing a nearer term revenue stream through industrial gas sensing applications where commercial progress has been greatly accelerated since acquisition. OMD's technology will be developed into products for detecting trace amounts of gases in the breath or in the headspace above clinical samples in closed containers to provide a non-invasive and rapid diagnostics tool. The Directors believe that breath diagnostics has the potential to create a step change in point-of-care patient testing and OMD has a strong intellectual property position in this area. It has been given an exclusive licence to a patent granted in the US, has ongoing applications in other geographies and is in the process of negotiating a collaboration agreement with a European company and a leading hospital clinician to develop the first applications.
Outlook
The technological and commercial progress that we have made in our unique applications and services in the field of biophysics has ensured a growing awareness of Avacta amongst the drug development community.
We expect to bring products to market over the next twelve months through direct sales into our core markets of biopharmaceutical, biotech and general life sciences and from partnerships with resellers in other sectors. The growth in our Analytical services business is continuing apace and is creating a solid market presence to drive sales of our first product, Optim, and we look forward to providing further positive news in the coming months.
Gwyn Humphreys Alastair Smith Chairman Chief Executive Officer
Consolidated income statement
for the six months ending 31 January 2008
Unaudited Unaudited Unaudited 6 months to 6 months to Year ended 31 Jan 2008 31 Jan 2007 31 July 2007 ‚£000 ‚£000 ‚£000 Revenue 225 78 212 Operating costs (734) (846) (1,482) ------------- ------------- ------------- Operating loss before non (484) (660) (1,137)recurring items and share based payment charges Non-recurring items - 83 83 Share based payment charges 25 25 50 ------------- ------------- ------------- Total operating loss (509) (768) (1,270) Finance income 57 15 53 Finance expenses (2) - (2) ------------- ------------- ------------- Loss before taxation (454) (753) (1,219) Taxation 21 - - ------------- ------------- ------------- Loss for the period (433) (753) (1,219) ------------- ------------- ------------- Loss per ordinary share : - Basic and diluted 2 (0.06p) (0.12p) (0.18p) ------------- ------------- -------------
There were no recognised gains or losses in the period other than the profit for the period and therefore no statement of recognised income and expenses is presented.
Consolidated statement of changes in equity
as at 31 January 2008 Unaudited Unaudited Unaudited Unaudited Unaudited Share Share Shares to be Other Retained capital premium issued reserve earnings ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 At 1 August 2006 702 1,549 - (1,869) (211) Result for the period - - - - (753) Arising on reverse - - - 3,703 -takeover Shares issued 45 1,090 - - - Costs of issuing shares - (271) - - - Share based payment - - - - 25charges ------------- ------------- ------------- ------------- ------------- At 31 January 2007 747 2,368 - 1,834 (939) Result for the period - - - - (466) Shares issued 109 2,514 - - - Share based payment - - - - 25charges ------------- ------------- ------------- ------------- ------------- At 1 August 2007 856 4,882 - 1,834 (1,380) Result for the period - - - - (433) Shares issued 22 930 - - - Shares to be issued in respect of the acquisition of Oxford - - 1,563 - -Medical Diagnostics Limited Share based payment - - - - 25charges ------------- ------------- ------------- ------------- ------------- At 31 January 2008 878 5,812 1,563 1,834 (1,788) ------------- ------------- ------------- ------------- -------------Consolidated balance sheetas at 31 January 2008 Unaudited Unaudited Unaudited As at 31 Jan As at 31 Jan As at 31 July 2008 2007 2007 ‚£000 ‚£000 ‚£000 Non-current assets Property, plant & equipment 249 67 148 Intangible assets - 120 - -development costs Intangible assets - goodwill 7,927 3,563 3,563 ------------- ------------- ------------- 8,296 3,630 3,711 ------------- ------------- ------------- Current assets Trade and other receivables 331 154 170 Cash and cash equivalents 1,925 433 2,527 ------------- ------------- ------------- 2,256 587 2,697 ------------- ------------- ------------- Total assets 10,552 4,217 6,408 ------------- ------------- ------------- Current liabilities Trade and other payables (306) (207) (164) Hire purchase agreements (12) - (11) ------------- ------------- ------------- (318) (207) (175) ------------- ------------- ------------- Non-current liabilities Hire purchase agreements (35) - (41) Deferred consideration (1,900) - - ------------- ------------- ------------- (1,935) - (41) ------------- ------------- ------------- Total liabilities (2,253) (207) (216) ------------- ------------- ------------- Net assets 8,299 4,010 6,192 ------------- ------------- ------------- Equity attributable to equity holders of the Company Called up share capital 878 747 856 Share premium account 5,812 2,368 4,882 Shares to be issued 1,563 - - Other reserve 1,834 1,834 1,834 Retained earnings (1,788) (939) (1,380) ------------- ------------- ------------- Total equity 8,299 4,010 6,192 ------------- ------------- -------------
Consolidated cash flow statement
for the six months ending 31 January 2008
Unaudited Unaudited Unaudited 6 months to 6 months to Year ended 31 Jan 2008 31 Jan 2007 31 July 2007 Note ‚£000 ‚£000 ‚£000 Operating activities Loss for the period (433) (753) (1,219) Depreciation 19 8 20 Net finance income (55) (15) (51) Income tax credit (21) - - Share based payment charges 25 25 50 ------------- ------------- ------------- Operating cash outflow before changes in working capital (465) (735) (1,200) Movement in trade and other (88) (152) (124)receivables Movement in trade and other 104 112 76payables ------------- ------------- ------------- Operating cash outflow from operations (449) (775) (1,248) Interest received 57 15 53 Interest paid (2) - (2) Income tax received /(paid) 21 - - ------------- ------------- ------------- Net cash flow from operating activities (373) (760) (1,197) ------------- ------------- ------------- Investing activities Purchase of plant and (119) (37) (130)equipment Development expenditure (120) - -capitalised Acquisition of subsidiaries 3 (4) 192 192 ------------- ------------- ------------- Net cash flow from investing (616) (605) (1,135)activities ------------- ------------- ------------- Financing activities Net proceeds from the issue of 20 863 3,435shares New finance lease agreements - - 58 Payments to acquire tangible fixed assets under finance (6) - (6)lease agreements ------------- ------------- ------------- Net cash flow from financing 14 863 3,487activities ------------- ------------- ------------- Net decrease in cash and cash equivalents (602) 258 2,352 Cash and cash equivalents at the beginning of the period 2,527 175 175 ------------- ------------- ------------- Cash and cash equivalents at the end of the period 1,925 433 2,527 ------------- ------------- -------------
Notes to the half yearly financial information
1. Basis of preparation
This interim report, for a six month period, does not comprise full accounts within the meaning of the Companies Act 1985. The interim financial information is not audited.
These interim financial statements adopt the recognition and measurement requirements of those Standards expected to be applied in the Group's first financial statements prepared under International Financial Reporting Standards ("IFRS"). The resulting accounting policies are set out in note 5. A reconciliation of equity and profit under UK GAAP with equity and profit under IFRS is also set out at note 4.
Comparative figures for the year ended 31 July 2007 are based on the statutory accounts prepared under UK GAAP which have been filed with the Registrar of Companies and on which the auditors gave an unqualified report, as adjusted for the first time adoption of IFRS. Comparative figures for the six month ended 31 January 2007 are also based on the statutory accounts covering that period, prepared under UK GAAP, which have been filed with the Registrar of Companies and on which the auditors gave an unqualified report, as adjusted for the first time adoption of IFRS.
The financial information contained in this interim report does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The Group's statutory accounts for the year ended 31 July 2007, prepared under UK GAAP, have been filed with the Registrar of Companies. The auditors' report on those accounts was unqualified and did not contain a statement made under Section 237(2) or Section 237(3) of the Companies Act 1985.
Explanatory notes to the adjustments from UK GAAP to IFRS
The year ended 31 July 2008 is the first year the Group will present its consolidated financial statements under IFRS and this is the first consolidated half-yearly financial information prepared under IFRS.
In preparing its comparative information for the six months to 31 January 2007, the Group has adjusted amounts previously reported in the half yearly financial information prepared in accordance with UK GAAP. An explanation of how the transition from UK GAAP to IFRS has affected the Group's financial position and financial performance, not previously reported in the annual financial statements for the year ended 31 July 2007, is set out in the tables below. The adjustments have been required to comply with the following reporting standards:
IFRS3 `Business combinations' requires goodwill to be capitalised and subjected to an annual impairment test rather than amortised by way of equal annual charges as required by UK GAAP. The standard also requires separable, identifiable, intangible assets arising on acquisition to be capitalised at fair value and amortised over their estimated useful economic lives.
IAS38 `Intangible assets' requires that development expenditure meeting certain criteria be capitalised and amortised over its useful economic life. Under UK GAAP all such development expenditure was expensed as incurred.
2. Loss per ordinary share
Unaudited Unaudited Unaudited 6 months to 6 months to Year ended 31 Jan 2008 31 Jan 2007 31 July 2007 Retained (433) (753) (1,219)loss for the period (‚£000) Weighted 774,304 644,956 692,426average number of shares (`000) Basic and (0.06p) (0.12p) (0.18p)diluted loss per ordinary shares (pence per share) ------------- ------------- ------------- 3. Acquisitions
On 14 December 2007, the Company acquired the entire issued ordinary share capital of OMD by way of a share for share exchange with approximately ‚£64,000 of cash. The Company allotted and issued 21,954,035 new Ordinary shares of 0.1p ("Ordinary Shares") fully paid to the shareholders of OMD. Further, the Company agreed to allot a further 21,954,035 new Ordinary Shares to the shareholders of OMD, deferred subject to the agreement of the completion net asset value of OMD. These Ordinary Shares were issued on 10 March 2008. Further still, the Company agreed to issue a number of new Ordinary shares and options over new Ordinary Shares to the value of approximately ‚£2,530,000 of which approximately ‚£1,900,000 is contingent upon the realisation of certain future commercial and technological milestones. ‚£630,000 relates to the future conversion of OMD preference shares into approximately 12.1m new Ordinary Shares and the value of 2.8m replacement options. The assets and liabilities of the OMD have been consolidated at their provisional fair values to Avacta as set out below. The Company is assessing the level of separately identifiable intangible assets that meet the appropriate criteria and are capable of being measured as intangible assets other than goodwill.
‚£000 Tangible fixed assets 61 Debtors 73 Cash at bank and in hand 41 Creditors (33) ------------- Net assets acquired 142 Goodwill 4,364 ------------- 4,506 ------------- Purchase consideration Fair value of shares issued 933 Fair value of shares or options over shares 3,463to be issued Costs 110 ------------- 4,506 ------------- Gross cash outflow on acquisition 69 Unpaid costs at 31 January 2008 (65) ------------- 4 -------------
On 8 August 2006, the Company acquired the entire issued ordinary share capital of Avacta Limited by way of a share for share exchange. The Company allotted and issued 499,999,998 new Ordinary shares of 0.1p fully paid to the shareholders of Avacta Limited as consideration. The Company has accounted for this acquisition using reverse acquisition accounting which requires that Avacta Limited be recognised as the substantial acquirer of the Company. The assets and liabilities of the Company have been consolidated at their fair values to Avacta Limited as set out below.
‚£000 Cash at bank and in hand 192 Prepayments 1 Accruals (3) Placing proceeds receivable 909 ------------- Net assets acquired 1,099 Goodwill 3,563 ------------- 4,662 Purchase consideration Fair value of shares issued 4,662 ------------- Cash inflow on acquisition 192 -------------
4. Reconciliation of equity and profit under UK GAAP with equity and profit under IFRS
Reconciliation of profit - six months ended 31 January 2007
Unaudited Unaudited Unaudited UK GAAP Effect of IFRS transition to IFRS ‚£000 ‚£000 ‚£000 Revenue 78 - 78 Operating costs (933) 87 (846) ------------- ------------- ------------- Operating loss before non (747) 87 (660)recurring items and share based payment charges Non-recurring items 83 - 83 Share based payment charges 25 - 25 ------------- ------------- ------------- Total operating loss (855) 87 (768) Finance income 15 - 15 Finance expenses - - - ------------- ------------- ------------- Loss before taxation (840) 87 (753) Taxation - - - ------------- ------------- ------------- Loss for the period (840) 87 (753) ------------- ------------- ------------- Loss per ordinary share : - Basic and diluted (0.13p) 0.01p (0.12p) ------------- ------------- -------------
Reconciliation of profit - year ended 31 July 2007
Unaudited Unaudited Unaudited UK GAAP Effect of IFRS transition to IFRS ‚£000 ‚£000 ‚£000 Revenue 212 - 212 Operating costs (1,656) 174 (1,482) ------------- ------------- ------------- Operating loss before non (1,311) 174 (1,137) recurring items and share based payment charges Non-recurring items 83 - 83 Share based payment charges 50 - 50 ------------- ------------- ------------- Total operating loss (1,444) 174 (1,270) Finance income 53 - 53 Finance expenses (2) - (2) ------------- ------------- ------------- Loss before taxation (1,393) 174 (1,219) Taxation - - - ------------- ------------- ------------- Loss for the period (1,393) 174 (1,219) ------------- ------------- ------------- Loss per ordinary share : - Basic and diluted (0.21p) 0.03p (0.18p) ------------- ------------- -------------
The ‚£87,000 (year ended 31 July 2007 : ‚£174,000) adjustment relates to the impact of the adoption of IFRS3 `Business combinations'. Under UK GAAP, goodwill was amortised over a 20 year useful economic life and ‚£87,000 of amortisation had been charged as at 31 January 2007 (‚£174,000 as at 31 July 2007). Under IFRS, goodwill is the subject of an annual impairment review with the effect that the goodwill amortisation is reversed.
Reconciliation of equity at 31 July 2007
Unaudited Unaudited Unaudited UK GAAP Effect of IFRS transition to IFRS ‚£000 ‚£000 ‚£000 Non-current assets Property, plant & equipment 148 - 148 Intangible assets 3,389 174 3,563 ------------- ------------- ------------- 3,537 - 3,711 ------------- ------------- ------------- Current assets Trade and other receivables 170 - 170 Cash and cash equivalents 2,527 - 2,527 ------------- ------------- ------------- 2,697 - 2,697 ------------- ------------- ------------- Total assets 6,234 174 6,408 ------------- ------------- ------------- Current liabilities Trade and other payables (164) - (164) Hire purchase agreements (11) - (11) ------------- ------------- ------------- (175) - (175) ------------- ------------- ------------- Non-current liabilities Hire purchase agreements (41) - (41) ------------- ------------- ------------- Total liabilities (216) - (216) ------------- ------------- ------------- Net assets 6,018 174 6,192 ------------- ------------- ------------- Equity attributable to equity holders of the Company Called up share capital 856 - 856 Share premium account 4,882 - 4,882 Other reserve 1,834 - 1,834 Retained earnings (1,554) 174 (1,380) ------------- ------------- ------------- Total equity 6,018 174 6,192 ------------- ------------- -------------
The ‚£174,000 adjustment relates to the impact of the adoption of IFRS3 `Business combinations'. Under UK GAAP, goodwill was amortised over a 20 year useful economic life and ‚£174,000 of amortisation had been charged as at 31 July 2007. Under IFRS, goodwill is the subject of an annual impairment review with the effect that the goodwill amortisation is reversed.
Reconciliation of equity at 31 January 2007
Unaudited Unaudited Unaudited UK GAAP Effect of IFRS transition to IFRS ‚£000 ‚£000 ‚£000 Non-current assets Property, plant & equipment 67 - 67 Intangible assets 3,476 87 3,563 ------------- ------------- ------------- 3,543 87 3,630 ------------- ------------- ------------- Current assets Trade and other receivables 154 - 154 Cash and cash equivalents 433 - 433 ------------- ------------- ------------- 587 - 587 ------------- ------------- ------------- Total assets 4,130 87 4,217 ------------- ------------- ------------- Current liabilities Trade and other payables (207) - (207) ------------- ------------- ------------- Total liabilities (207) - (207) ------------- ------------- ------------- Net assets 3,923 87 4,010 ------------- ------------- ------------- Equity attributable to equity holders of the Company Called up share capital 747 - 747 Share premium account 2,368 - 2,368 Other reserve 1,834 - 1,834 Retained earnings (1,026) 87 (939) ------------- ------------- ------------- Total equity 3,923 87 4,010 ------------- ------------- -------------
The ‚£87,000 adjustment relates to the impact of the adoption of IFRS3 `Business combinations'. Under UK GAAP, goodwill was amortised over a 20 year useful economic life and ‚£87,000 of amortisation had been charged as at 31 January 2007. Under IFRS, goodwill is the subject of an annual impairment review with the effect that the goodwill amortisation is reversed.
Reconciliation of equity at 1 August 2006
Unaudited Unaudited Unaudited UK GAAP Effect of IFRS transition to IFRS ‚£000 ‚£000 ‚£000 Non-current assets Property, plant & equipment 38 - 38 ------------- ------------- ------------- Current assets Trade and other receivables 46 - 46 Cash and cash equivalents 175 - 175 ------------- ------------- ------------- 221 - 221 ------------- ------------- ------------- Total assets 259 - 259 ------------- ------------- ------------- Current liabilities Trade and other payables (88) - (88) ------------- ------------- ------------- Total liabilities (88) - (88) ------------- ------------- ------------- Net assets 171 - 171 ------------- ------------- ------------- Equity attributable to equity holders of the Company Called up share capital 702 - 702 Share premium account 1,549 - 1,549 Merger reserve (1,869) - (1,869) Retained earnings (211) - (211) ------------- ------------- ------------- Total equity 171 - 171 ------------- ------------- -------------
5. Significant accounting policies
Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of net assets of the subsidiary acquired, the difference is recognised directly in the income statement.
All intra-group balances and transactions, including unrealised profits arising from intra-group transactions, are eliminated fully on consolidation.
Property, plant and equipment
Property, plant and equipment are held at cost less accumulated depreciation and impairment charges.
Depreciation is provided at the following annual rates in order to write off the cost less estimated residual value, which is based on up to date prices, of property, plant and equipment over their estimated useful lives as follows:
Leasehold improvements - 10 years Plant and machinery - 5 to 10 years Fixtures and fittings - 3 to 10 years Computer equipment - 3 years
Intangible assets - Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses.
Impairment
The carrying amount of the Group's non-financial assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated.
For goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date.
An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the consolidated income statement.
An impairment loss is recognised for the amount by which the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and the value in use. For the purposes of assessing impairments, assets are grouped at the lowest levels for which there are identifiable cash flows.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units (group of units) and then, to reduce the carrying amount of the other assets of the unit (group of units) on a pro-rata basis.
Trade and other receivables
Trade receivables are recognised and carried at original invoice amount less allowance for any uncollectible amounts. Where receivables are considered to be irrecoverable an impairment charge is included in the income statement.
Classification of financial instruments issued by the Group
Following the adoption of IAS32 `Financial instruments: presentation', financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions:
- they include no contractual obligations upon the group to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the group; and
- where the instrument will or may be settled in the company's own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the company's own equity instruments or is a derivative that will be settled by the company's exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the company's own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares.
Finance payments associated with financial liabilities are dealt with as part of finance expenses. Finance payments associated with financial instruments that are classified in equity are treated as distributions and are recorded directly in equity.
Financial assets
The Group classifies its financial assets into one of the following categories, depending on the purpose for which the asset was acquired:
Loans and receivables: These assets are non-derivative financial assets with fixed and determinable payments that are not quoted in an active market. They arise principally through the provision of services to customers (trade receivables). They are carried at fair value on initial recognition less provision for impairment. Cash and cash equivalents comprise cash in hand, deposits held at call with banks and bank overdrafts.
Financial liabilities
Financial liabilities are comprised of trade payables and other short-term monetary liabilities, which are recognised at amortised cost.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the group's cash management are included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.
Revenue recognition
Revenue represents the amounts receivable, excluding sales related taxes, for services supplied during the period to external customers shown net of VAT and discounts.
Revenue is recognised when the service has been performed.
Research and development
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
An intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, the Group can demonstrate all of the following:
- the technical feasibility of completing the intangible asset so that it will be available for use or sale;
- its intention to complete the intangible asset and use or sell it;
- its ability to use or sell the intangible asset;
- how the intangible asset will generate probable future economic benefits. Among other things, the Group can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;
- the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
- its ability to measure reliably the expenditure attributable to the intangible asset during its development.
Internally generated intangible assets are amortised over their useful economic life. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.
Leases
Leases where the lessor retains substantially all of the risks and rewards of ownership are classified as operating leases. Rentals payable under operating lease rentals are charged to the income statement on a straight line basis over the term of the lease.
Leases where the Group retains substantially all of the risks and rewards of ownership are classified as finance leases or hire purchase agreements. Assets held under finance leases or hire purchase agreements are capitalised and depreciated over their useful economic lives. The capital element of the future obligations under finance leases and hire purchase contracts are included as liabilities in the balance sheet. The interest elements of the rental obligations are charged to the income statement over the periods of the finance leases and hire purchase agreements and represent a constant proportion of the balance of capital outstanding.
Non-recurring items
Non-recurring items are material items in the Income Statement which derive from events or transactions which fall within the ordinary activities of the Group and which individually or, if of a similar type, in aggregate the Group has highlighted as needing to be disclosed by virtue of their size or incidence if the financial statements are to give a true and fair view.
Post retirement benefits
The Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group in an independently administered fund. The amount charged to the income statement represents the contributions payable to the scheme in respect of the accounting period.
Share based payments
The fair value of awards to employees that take the form of shares or rights to shares is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is due only to share prices not achieving the threshold for vesting.
Taxation
Tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the tax currently payable based on taxable profit for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in previous years.
Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit.
Deferred tax on temporary differences associated with shares in subsidiaries and joint ventures is not provided if reversal of these temporary differences can be controlled by the group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the group are assessed for recognition as deferred tax assets.
Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.
Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to equity (such as the revaluation of land) in which case the related deferred tax is also charged or credited directly to equity.
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