MTPH.L Regulatory News (MTPH)

17 April 2015

Midatech Pharma PLC

("Midatech", the "Company" or the "Group")

Preliminary results for the year ending 31 December 2014

- Transformational year including IPO, acquisition of Q Chip, collaboration agreement and EU manufacturing grant

Midatech Pharma plc (AIM: MTPH), the international specialty pharmaceutical company with a diversified portfolio of high-value assets, today announces its maiden audited preliminary results for the twelve month period ended 31 December 2014.

Operational Highlights (including post-period end)

· Awarded a €7.9m Horizon 2020 European Union grant (€3.4m direct to the Group) to fund manufacturing scale-up - September 2014

· Acquisition of Q Chip Limited ("Q Chip") bringing complementary technology and products, enabling sustained release over extended periods of time - December 2014

· Positive results achieved in proof-of-concept OpsiSporin study with sustained release treatment for uveitis (ocular inflammation) - February 2015

· Research collaboration agreement signed with unnamed global pharmaceutical company in field of diabetes - March 2015

· Appointment of Nick Robbins-Cherry, Finance Director in February 2014 and Dr Craig Cook, Chief Operating Officer in January 2014

· Research collaboration agreement signed with Dana-Farber Cancer Institute - April 2015

Financial Highlights

· Oversubscribed flotation on the AIM market of the London Stock Exchange in December 2014 raising £32.0m (before expenses)

· Combined proforma revenue ahead of expectations at £0.73m

· Strong balance sheet with £30.33m cash and deposits at 31 December 2014 (2013: £2.39m)

· Net loss after tax of £7.38m (2013: £4.08m) with net cash inflow in the year of £27.94m (2013: £2.25m)

· Tax credit receivable of £0.84m (2013: £0.80m)

Commenting on the maiden preliminary results, Dr Jim Philips, CEO of Midatech, said: "2014 was a transformational year for Midatech Pharma. Our goal is to build Midatech into a world-leading international specialty pharmaceutical company with a diversified portfolio of high-value assets and we are well on our path to achieving this.

"Our growth strategy is based on the maturation of our technology platforms, a clear focus on the key therapeutic areas within our pipeline and on the delivery of strategic later stage product focussed acquisitions.

"I would like to thank all of our staff and investors for their support and I look forward to leading Midatech through the next stages of its corporate development."

Conference call today

Dr Jim Phillips, Chief Executive Officer and Nick Robbins-Cherry, Finance Director, will host a presentation and live conference call for analysts at 09:30 BST, today, at the offices of Consilium Strategic Communications, 41 Lothbury, London, EC2R 7HG. The conference call ID is: 11890120. 

UK: +44 1452 555 566, USA: +1 631 510 7498. 

A replay of the call will be available for 30 days post the event, using the same conference ID: 11890120. 

UK: +44 1452 550 000

USA: +1 866 247 4222

For more information, please contact:

Midatech Pharma plc

Jim Phillips, CEO

Tel: +44 (0)1235 841575

www.midatechpharma.com

Consilium Strategic Communications

Mary Jane Elliott / Ivar Milligan / Matthew Neal / Hendrik Thys

Tel: +44 (0)20 3709 5700

midatech@consilium-comms.com

Panmure Gordon (UK) Limited (Nominated Adviser and Broker)

Tel: +44 (0)20 7886 2500

Corporate Finance

Freddy Crossley / Adam James / Atholl Tweedie / Duncan Monteith

Broking

Tom Salvesen

About Midatech Pharma PLC

Midatech is a nanomedicine company developing and commercialising multiple therapeutic products to enhance the delivery of medicines in major diseases with high unmet medical needs. The Group has a strong pipeline of product candidates in clinical and pre-clinical development with a clear focus on the key therapeutic areas of diabetes, cancer and neurological/ophthalmological diseases.

Right place. Right time. Central to Midatech's business are two platform technologies that are designed to enable the targeted delivery and controlled release of existing drugs. Midatech's core platform is a pioneering drug conjugate delivery system based on gold-nanoparticles ("GNPs") combined with existing drugs for targeted release at specific organs, cells or sites of disease. The Group's secondary platform (acquired through the acquisition of Q Chip in 2014) involves the consistent and precise encapsulation of active drug compounds within polymer microspheres that are designed to release the drug into the body in a highly controlled manner over a prolonged period of time.

The Group has collaborations with a number of speciality and major pharmaceutical companies and academic institutions to develop its platform technologies across a broad range of programmes within Midatech's priority therapeutic areas. The business strategy is to expedite the pipeline developments into revenue opportunities.

Midatech operates an in-house state-of-the-art nanoparticle manufacturing facility, based in Bilbao, Spain. The site has capacity for manufacturing sufficient materials for clinical trials and is fully licensed by the Spanish Medicines Agency for European compliance.

The Group is headquartered in Oxford, UK and employs 49 staff including 14 in Oxford, UK, 17 in Cardiff, UK and 18 in Bilbao, Spain. Across the Group there are 32 qualified scientists. For further company information, please see: www.midatechpharma.com.

CHAIRMAN'S REVIEW

2014 was a transformational year for Midatech. Since the inception of Midatech Limited in 2000 the Company has tested its gold nano-particle technology in a broad range of therapeutic areas. In 2013 the Board decided that the Company would benefit from building on the significant experience gained and brought in Dr Jim Phillips to set the strategy going forward.

The first step was to strengthen the management team by bringing in a new Chief Operating Officer, Dr Craig Cook, and a new Finance Director, Nick Robbins-Cherry, both joining early in 2014. Jim had worked with both Craig and Nick in the past and knew they would help him execute on the new, commercially focussed strategy.

This strategy was developed during the course of the first quarter of 2014 and combined a focus on just three therapeutic areas, diabetes, oncology, and ophthalmology/neuroscience with a push to expand the Company's product pipeline through the acquisition of later stage assets.

At the beginning of 2014 the Company's most advanced programme was its trans-buccal insulin product, MidaformTM, developed through a joint venture with the US pharmaceutical company MonoSol Rx LLC. The highly promising Phase 1 clinical data made continuation of this programme a lead focus and this is now ready to commence its Phase 2 development in patients in 2015.

The second area of focus is in the field of oncology. Earlier experimental data had indicated that Midatech's gold nanoparticles ("GNPs") had the potential to transport chemotherapeutics to tumour sites with a high degree of specificity. Pre-clinical studies further indicated that GNPs would also reach the brain, passing the blood brain barrier. The enormous benefits this would bring to cancer patients made this an obvious area to develop further. Midatech's oncology programme is working on using its GNP technology to transport active ingredients that already exist in the market, thereby benefitting the regulatory path and improving the risk profile of the projects.

The ever-increasing demand for highly specific drugs and the growth into personalised medicine are opening the market need for drug delivery that can be precisely targeted and released. The potential for Midatech in this market is clear, whether in diabetes, oncology or ophthalmology/neuroscience.

Right place and right time

Regardless of its huge potential, many of Midatech's nano-technology projects are at an early stage of development and are therefore still somewhat risky. The other arm of the strategy therefore is to lower the risk profile by acquiring later stage assets within the areas of therapeutic focus and that offer a good strategic fit such as Cardiff based Q Chip Limited ("Q Chip").

Q Chip had a number of later stage products in its pipeline built around that Company's controlled release technology platform. This product portfolio included a number that aligned with Midatech's chosen therapeutic focus areas.

The combination of Q Chip upon its acquisition in December 2014 by Midatech has created a well-balanced and diverse product pipeline that gives the combined shareholder base multiple shots on goal and a reasonable expectation of having products in the market within the next five years.

IPO

Perhaps the most significant development in the year was the listing on AIM. The successful roadshow culminated in an oversubscribed IPO that allowed the Board to increase the size of the funds raised from the £30m targeted to £32m.

2014 has been a very successful year. Aside from the significant strategic and operational achievements, financial results have ended ahead of expectation in terms of revenue, loss before tax and cash expenditure. The Company's twin technology platforms offer a unique combination of highly targeted delivery and controlled release of existing therapeutics and looking forward, the highly significant product milestones on the near horizon have the potential to make 2015 a very exciting year for Midatech.

I would like to thank our shareholders for their support and the Board, management and staff for their continuing hard work and commitment to Midatech.

Rolf Stahel

Chairman

CHIEF EXECUTIVE'S STATEMENT

The exciting year under review has seen Midatech make great strides in advancing the Group towards becoming a specialty pharmaceutical business, progressing a development portfolio of multiple programmes towards commercialisation. There has been a significant expansion of the Senior Management team's capabilities, the successful AIM IPO in December and the focussing of the Group's pipeline strategy into the three core areas of diabetes, oncology and neuroscience including ophthalmology. The Group has two routes to commercialisation: licensing out and own product sales, which offers multiple shots on goal, a de-risked strategy and a significant amount of value potential for shareholders and patients.

The year also saw the acquisition of Q Chip, bringing a complementary technology and two advanced product candidates within two of the three core areas described above. This demonstrated Midatech's continuing hunger to enhance value and deliver results as a dynamic management team. 

The Company ended 2014 with £30.33m of cash, having raised £32.00m in the IPO process where we were able to attract key new investors resulting in an oversubscribed IPO and extension of funds raised.

2014 was also a good year for revenue, with our current service partnerships helping to generate £0.73m pro forma revenue in aggregate for the Midatech and Q Chip businesses for the year (£0.57m was pre acquisition), ahead of market expectations, as the Group booked more work through the second half of the year.

The Group's two technologies which enable the targeted delivery of currently marketed and approved drugs to "the right place at the right time" have the potential to transform many areas of medical treatment; by reducing toxic doses required to kill cancer cells, the ability to move drugs more efficiently into the brain and, via our diabetes joint venture MidaSol, enabling needle free insulin (or other hormone) delivery via a strip in the mouth (which is similar to a breath freshener strip). Our projects are, so far, all on track to potentially deliver substantial value over the coming years and they all use existing, well understood pharmaceutical ingredients - so reducing the risk of products failing.

The Group also completed a major upgrade to its manufacturing plant in Bilbao, Spain, on time and on budget, meaning we can now start to produce sterile products. In addition to this we were selected by the European Union's Horizon 20:20 programme to lead a consortium of our existing partners with €7.9m of European grant funding to develop the commercial scale manufacturing operations for our "nano" products. 

Outlook

During 2015 we will continue to execute on our three-pronged strategy of driving early revenue growth through the service partnership model, whilst driving forward the clinical development of our own pipeline, further developing our technology and continuing to look for attractive acquisition targets to enable us to more rapidly build our revenues and presence in key geographies.

I believe that the prospects for our business are good for the coming year and I am grateful for the exceptional contribution of all our employees and international collaborators that have helped transform Midatech over the last 12 months into a leading, international, emerging specialty pharmaceutical business.

Dr. Jim Phillips

Chief Executive Officer

STRATEGIC REPORT

Introduction

Midatech is a company domiciled in England. The Company was incorporated on 12 September 2014 and this is the first set of financial information prepared by the Company.

The Midatech Group was formed on 31 October 2014 when Midatech Pharma plc acquired the entire issued share capital of Midatech Limited and its wholly owned subsidiaries.

The acquisitions of the Midatech subsidiaries was outside the scope of IFRS 3 "Business Combinations" and has been treated under the principles of merger accounting for group reconstructions as set out under UK GAAP.

On 8 December 2014, Midatech was admitted to the London Stock Exchange's Alternative Investment Market ("AIM"), raising £32.00m, £29.8m net of costs, via the placing of 11,985,019 new ordinary shares at a price of £2.67.

Also on 8 December 2014 the Group acquired the entire issued share capital of Q-Chip Limited ("Q Chip") through the issue of 5,077,122 ordinary shares valued at £13.56m and a further 299,624 shares to be issued, valued at £800,000, representing total consideration of £14.36m. Q Chip provides the Group with a secondary platform of sustained release technology. Subsequent to the acquisition the name of Q Chip was changed to Midatech Pharma (Wales) Limited.

The acquisition of Q Chip included intangibles comprising £14.10m 'in-process research and development' and £2.90m of goodwill.

Principal activities and business review

The Group is principally engaged in the discovery and development of pharmaceutical products in the fields of nanomedicine and sustained release technology.

Strategy and outlook

The Directors' business and commercialisation strategy is based on maturing the Group's technology platforms with a clear focus on the key therapeutic areas of oncology, endocrinology and neuroscience (including ophthalmology), along with strategic late stage product focused acquisitions. Together, these strategies are expected to drive a commercial pipeline of products with improved essential parameters over and above the currently marketed source compound, including safety, tolerability, efficacy and compliance profiles. The Directors are of the opinion that the team has significant industry and technical experience and is highly capable of and committed to building the value of the Group.

Midatech's business model has three components:

a. Own products: development and commercialisation of products is done in-house without engaging partners to support the product. This applies particularly to oncology applications.

b. Partner products: development and commercialisation of the Group's partner-supported and licensed products, principally in diabetes, ophthalmology and neuroscience.

c. Acquisitions: of later stage, strategic opportunities with complementary focused portfolios or complementary technologies that are synergistic to those of Midatech, that accelerate revenue and are value accretive.

The Group also aims to expand its vertical integration by leveraging its integrated manufacturing capabilities.

The Directors' commercialisation strategy is intended to build a long term, profitable and commercially focused enterprise with revenues generated as follows:

a. Research and development collaborations: in the near term, revenues are anticipated to be driven by collaborations such as those that currently exist and by adding new customers using the Group's technologies to address their pharmaceutical challenges.

b. Partner licensing and royalty deals: in the period from 2015 to 2018, revenue growth is anticipated to be aligned to licensing transactions from those partnerships outlined in (a) above as well as new potential partnerships, with possible product royalties realised from 2016/17.

c. Own products commercialisation: in the third stage of the Group's evolution, expected to be from 2018/19, the Group's own products are anticipated to reach market in the specialised orphan sector and a commercial sales organisation to be deployed initially in the United States and then in Europe to drive sales and revenue growth from Midatech's own product launches.

d. Acquisition: in support of and in addition to the above, the Group will seek value accretive and synergistic target companies and portfolios that will accelerate 'own product' recurring revenues and profitability via products in market.

In diabetes, the Directors, alongside the Group's MidaSol Therapeutics ("MidaSol") joint venture partner MonoSol Rx LLC, intend to conduct a Phase 2a clinical trial with MidaForm™-Insulin-PharmFilm® in humans with type 1 diabetes in 2015. Pending successful completion thereof and positive results, the Group will prepare for Phase 2b and potential out-licensing deals. Midatech would seek revenues from an initial upfront payment, licence payments, manufacturing fees and royalties. A similar approach is anticipated with other Midatech diabetes products such as GLP-1 when appropriate.

In oncology, Midatech believes that it has the opportunity to roll out its own commercial capabilities in the US and Europe around the market entry of its orphan oncology programme products. These products require small dedicated medical liaison teams rather than full pharmaceutical sales forces. Midatech will also look for further in-licensing acquisition opportunities to grow revenues in this sector.

In neuroscience (including ophthalmology), commercialisation will focus on products for the treatment of uveitis and other conditions of the eye, Parkinson's, Alzheimer's and Multiple Sclerosis, in partnerships with leading speciality pharmaceutical companies, where Midatech will seek to earn licence payments, manufacturing revenue and royalties.

Key strengths

The Directors believe that Midatech's key strengths include:

· a rich science base having developed two platform technologies with broad application in healthcare that the Directors believe create value from multiple potential revenue opportunities within priority therapeutic areas;

· first mover advantage in GNPs and highly novel sustained release technology which has enabled the Group to focus on a number of therapeutic areas, primarily through the use of GNP carriers and sustained release formulations for existing medications;

· a strong intellectual property base comprising patents, 'know-how' and trade secrets, to maximise innovation, protection and commercial success. The Group has an IP portfolio of 53 granted patents, 96 applications in process and 30 patent families covering major geographic regions, owned solely by the Group, co-owned with others or in-licensed;

· in-house nanoparticle manufacturing facility which the Directors believe is the first licensed nano-conjugate cGMP facility of its kind in Europe. This state-of-the-art facility, based in Bilbao, Spain, aids in the rapid execution of projects, control of manufacturing quality and supply of all aspects of Midatech's GNP platform, thus avoiding reliance on external manufacturing partners;

· innovative therapies utilising its broadly applicable drug conjugate platforms for significant medical disorders with few or no existing clinical therapeutic options. As such the Directors believe that the Group's therapies have the potential to be transformative for patients and their families as first or second therapies for disease treatment and can yield high returns for these poorly treated indications;

· the management team's significant experience in the specialty pharmaceutical industry and of managing high growth companies. The Group's management team comprises seasoned industry entrepreneurs, executives and scientists, and the Directors believe that the team is capable of executing a major value proposition in the speciality pharma field.

FINANCIAL REVIEW

For the year ended 31 December 2014, Midatech generated consolidated revenues of £0.16m (2013: £0.15m) however the newly acquired Q Chip Limited (now Midatech Pharma (Wales) Limited ("MPW")) generated revenue for the full year of £0.57m giving a pro forma figure of £0.73m for the Group. This was ahead of expectation and represents a very encouraging outcome for the year and a good platform moving into 2015.

Excluding proceeds from share issues, net cash outflows for the year were £5.91m (2013: £3.54m) which was less than forecast. This was in part due to careful management of costs, including the R&D programmes, during the significant organisational changes that took place in the year.

Key performance indicators

Given Midatech's stage of development, KPIs are focussed on the key areas of cash management and operating results. Non-financial KPIs, including KPIs in respect of the research and development programmes, will be formalised as the business moves forward.

Administrative costs

Midatech's administrative costs of £4.41m increased on the prior year as a result of:

- The Group incurred significant professional fees in respect of the IPO process and admission onto AIM. Costs directly attributable to the issue of new shares of £1.35m were debited to the share premium account. 

- MPW was acquired resulting in professional fees of £0.17m.

- During the year the average number of staff employed grew by 9 to 38 (2013: 29) and the payroll cost increased by £0.47m to £2.81m (2013: £2.34m) which includes 23 days of MPW's payroll cost since becoming part of the Group.

Research and development expenditure

Research and development activities undertaken during the year were largely focussed on the development of our oral insulin therapy enabling needle-free insulin delivery (developed via our diabetes joint venture MidaSol). Costs of £3.64m were incurred in the year by Midatech on its programmes.

Capital expenditure

The total cash expenditure on fixed assets in 2014 was £1.03m (2013: £0.05m) as Midatech continued to invest in its R&D and manufacturing capabilities. Of this amount, £0.79m was spent upgrading the Group's manufacturing facility in Bilbao, Spain, to enable the production of sterile material. This is a critical stage in the Group's development as it allows our oncology programmes to move into human trials.

Cash flow

Net cash outflow from operating activities was £7.60m in 2014 (2013: £4.25m). As previously noted the Group raised £29.8m (net of costs) following the placing of shares through an initial public offering and admission to AIM resulting in an overall net cash inflow for the year of £27.94m (2013: outflow of £2.25m). This is the primary reason for the year end cash balance of £30.33m (2013: £2.39m).

Notes forming part of the financial statement for the year ended 31 December 2014

Basis of preparation

Midatech Pharma plc (the "Company") is a company domiciled in England. The Company was incorporated on 12 September 2014 and this is the first set of financial information prepared by the Company.

The Group was formed on 31 October 2014 when Midatech Pharma plc entered into an agreement to acquire the entire share capital of Midatech Limited and its wholly owned subsidiaries through the issue equivalent of shares in the Company which took place on 13 November 2014.

The acquisition of the Midatech subsidiaries is outside the scope of IFRS 3 "Business combinations" and has been treated under the principles of merger accounting as set out under UK GAAP. The capital structure for the comparative year reflects the former holding company, Midatech Limited. Following the group reconstruction the capital structure reflects that of Midatech Pharma plc.

Accordingly, although the units which comprise the Group did not form a legal group for the entire period, the current period and comparative results comprise the results of the subsidiary companies as if the Group had been in existence throughout the entire period.

Statement of compliance with IFRS

The financial information set out in this release does not constitute the Company's full statutory accounts for the year ended 31 December 2014 for the purposes of section 435 of the Companies Act 2006, but it is derived from those accounts that have been audited. Statutory consolidated accounts for the former Midatech Limited group for 2013 were not required to be prepared under the small company regime. Statutory accounts for 2014 will be delivered to the Registrar of Companies after the forthcoming AGM. The auditors have reported on the 2014 statutory accounts; their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statements under s498(2) or (3) Companies Act 2006.

While the financial information included in this announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full financial results for the year ended 31 December 2014 that comply with IFRS in April 2015.

The former group, Midatech Limited, adopted IFRS for the first time in its Historical Financial Information for the 3 years ended 31 December 2013 as presented in the Placing and Admission to AIM document dated 3 December 2014. Midatech Pharma plc is a continuation of Midatech Limited as reflected in the merger accounting principle adopted and therefore the group is not considered to be a first time adopter of IFRS in this financial information.

The principal accounting policies adopted in the preparation of the financial information is set out below. The policies have been consistently applied to all the periods presented.

The following new standards have been adopted during the period:

• IFRS 10 Consolidated Financial Statements

• IFRS 11 Joint Arrangements

• IFRS 12 Disclosure of Interests in Other Entities

• IAS 27 Separate Financial Statements

• IAS 28 Investments in Associates and Joint Ventures

• Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)

• Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)

• Recoverable amounts disclosures for non-financial assets (Amendments to IAS 36)

• Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)

The adoption of the above new standards has not had a material impact on this financial information during the year ended 31 December 2014.

New standards and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations are not effective for 2014 and therefore have not been applied in preparing this financial information. The effective dates shown are for periods commencing on the date quoted.

• Defined Benefit Plans: Employee Contributions: Amendments to IAS 19 (effective for periods beginning on or after 1 July 2014)

• Accounting for Acquisitions of Interests in Joint Operations: Amendments to IFRS 11 (effective 1 January 2016)

• Clarification of Acceptable Methods of Depreciation and Amortisation: Amendments to IAS 16 and IAS 38 (effective 1 January 2016)

• Equity Method in Separate Financial Statements (Amendments to IAS 27) (effective 1 January 2016)

• Sale or contribution of assets between an investor and its associate or joint venture (Amendments to IFRS 10 and IAS 28) (effective 1 January 2016)

• IFRS 15 Revenue from Contracts with Customers (effective 1 January 2017)

• IFRS 9 Financial Instruments (effective 1 January 2018)

• Disclosure Initiative: Amendments to IAS 1 (effective 1 January 2016)

• Annual improvements to IFRSs

The Group has considered the above new standards, interpretations and amendments to published standards that are not yet effective and concluded that they are either not relevant to the Group or that they would not have a significant impact on the Group's financial information, apart from additional disclosures.

Basis of consolidation

The Group financial information consolidates that of the parent company and all of its subsidiaries. The parent controls a subsidiary if it has power over the investee to significantly direct the activities, exposure, or rights, to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect the amount of the investor's returns. All subsidiaries have a reporting date of 31 December.

All transactions and balances between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Where unrealised losses on intra-Group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a Group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group.

The loss and other comprehensive income of the Midatech Pharma (Wales) Limited (formerly Q-Chip) group acquired during the year are recognised from the effective date of acquisition, i.e. 8 December 2014.

The consolidated financial information consists of the results of the following entities:

Revenue

The Group's income stream comprises milestone income from research and development contracts. Milestone income is recognised as revenue in the accounting period in which the milestones are achieved. Milestones are agreed on a project by project basis and will be evidenced by set deliverables.

Research and development contracts

Amounts received under collaborative joint agreements, representing contributions to the Group's research and development programmes, are recognised as a credit against research and development expense in the period over which the related costs are incurred. All costs related to these collaborative agreements are recorded as research and development expenditure.

Government grants and government loans

Government grants are credited to research and development expense in the same period as the expenditure towards which they are intended to contribute.

The group receives government loans that have a below-market rate of interest of 0%. These loans are recognised and measured in accordance with IAS 39. The benefit of the below-market rate of interest is measured as the difference between the initial carrying value of the loan discounted at a market rate of interest and the proceeds received.

The difference is held within deferred revenue as a government grant and is released as a credit to research and development expense in line with the expenditure to which it relates. In a situation where the proceeds were invested in plant and equipment, the deferred revenue is credited to research and development within the income statement in line with the depreciation of the acquired asset.

Goodwill represents amounts arising on acquisition, being the difference between the cost of the acquisition and the net fair value of the identifiable assets and liabilities acquired on a business combination. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units for the purposes of impairment testing and is not amortised. It is tested annually for impairment.

An intangible asset, which is an identifiable non-monetary asset without physical substance, is recognised to the extent that it is probable that the expected future economic benefits attributable to the asset will flow to the Group and that its cost can be measured reliably. The asset is deemed to be identifiable when it is separable or when it arises from contractual or other legal rights. 

Externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight line basis over their useful economic lives where they are in use.

The amounts ascribed to intangibles recognised on business combinations are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements below).

In-process research and development (IPRD) programmes acquired in business combinations are recognised as an asset even if subsequent expenditure is written off because the criteria specified in the policy for development costs below are not met. IPRD is subject to annual impairment testing until the completion or abandonment of the related project. No further costs will be capitalised in respect of this IPRD unless it meets the criteria for research and development capitalisation as set out below. As per IFRS 3, once the incremental research and development is completed, the carrying value of the acquired IPRD is reclassified as a finite-lived asset and amortised over its useful life.

The significant intangibles recognised by the Group and their useful economic lives are as follows:

Internally generated intangible assets (development costs)

Expenditure on the research phase of an internal project is recognised as an expense in the period in which it is incurred. Development costs incurred on specific projects are capitalised when all the following conditions are satisfied:

· Completion of the asset is technically feasible so that it will be available for use or sale

· The Group intends to complete the asset and use or sell it

· The Group has the ability to use or sell the asset and the asset will generate probable future economic benefits (over and above cost)There are adequate technical, financial and other resources to complete the development and to use or sell the asset, and

· The expenditure attributable to the asset during its development can be measured reliably.

Judgement is applied when deciding whether the recognition criteria are met. Judgements are based on the information available at each statement of financial position date. In addition, all internal activities related to the research and development of new projects are continuously monitored by the Directors. The Directors consider that the criteria to capitalise development expenditure are not met for a product prior to that product receiving regulatory approval in at least one country.

Development expenditure not satisfying the above criteria, and expenditure on the research phase of internal projects, are included in R&D costs recognised in the Consolidated Statement of Comprehensive Income as incurred. No projects have yet reached the point of capitalisation.

Impairment of non-financial assets

Assets that have an indefinite useful life, for example goodwill, or intangible assets not ready for use, such as in-process research and development, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of impairment at each reporting date.

Patents and trademarks

The costs incurred in establishing patents and trademarks are either expensed or capitalised in accordance with the corresponding treatment of the development expenditure for the product to which they relate.

Joint arrangements

The Group is a party to a joint arrangement when there is a contractual arrangement that confers joint control over the relevant activities of the arrangement to the Group and at least one other party. Joint control is assessed under the same principles as control over subsidiaries.

The Group classifies its interests in joint arrangements as either:

· Joint ventures: where the Group has rights to only the net assets of the joint arrangement

· Joint operations: where the Group has both the rights to assets and obligations for the liabilities of the joint arrangement.

In assessing the classification of interests in joint arrangements, the Group considers:

· The structure of the joint arrangement

· The legal form of joint arrangements structured through a separate vehicle

· The contractual terms of the joint arrangement agreement

· Any other facts and circumstances (including any other contractual arrangements).

The Group accounts for its interests in joint ventures using the equity method.

Any premium paid for an investment in a joint venture above the fair value of the Group's share of the identifiable assets, liabilities and contingent liabilities acquired is capitalised and included in the carrying amount of the investment in joint venture. Where there is objective evidence that the investment in a joint venture has been impaired the carrying amount of the investment is tested for impairment in the same way as other non-financial assets. 

The Group accounts for its interests in joint operations by recognising its share of assets, liabilities, revenues and expenses in accordance with its contractually conferred rights and obligations.

Foreign currency

Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in profit or loss.

On consolidation, the results of overseas operations are translated into sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve.

Exchange differences recognised in the profit or loss of Group entities on the translation of long-term monetary items forming part of the Group's net investment in the overseas operation concerned are reclassified to other comprehensive income and accumulated in the foreign exchange reserve on consolidation.

On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or loss on disposal.

Financial assets

The Group does not have any financial assets which it would classify as fair value through profit or loss, available for sale or held to maturity. Therefore all financial assets are classed as loans and receivables as defined below.

Loans and receivables

These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.

Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the consolidated statement of comprehensive income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

The Group's loans and receivables comprise trade and other receivables and cash and cash equivalents in the consolidated statement of financial position.

Cash and cash equivalents includes cash in hand, deposits held at call with original maturities of three months or less.

Financial liabilities

The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired.

Fair value through profit and loss

The Group had convertible loans where the conversion price was not fixed on inception of the instrument. Therefore the derivative element of the instrument is fair valued on inception using an option pricing model and held at fair value through profit and loss as either a current or non-current liability depending on the expiration of the instrument at the date of financial position. The instrument was re-measured at each period end and immediately before conversion. The balance of the financial instrument is held at amortised cost.

Other financial liabilities include the following items:

· Borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated statement of financial position. Interest expense in this context includes initial transaction costs and premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.

· Convertible loan notes, have been split between debt and fair value through profit and loss derivative. The debt element is recognised initially at fair value and subsequently carried at amortised cost.

· Government loans received on favourable terms below market rate are discounted at a market rate of interest. The difference between the present value of the loan and the proceeds is held as a government grant within deferred revenue and is released to research and development expenditure in line with when the asset or expenditure is recognised in the income statement.

· Redeemable preference shares are classified as liabilities as they accrued fixed interest payable in cash when distributable profits are available and confer no right to assets or equity distributions of the Company.

· Trade payables and other short-term monetary liabilities are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.

Share capital

Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Group has two classes of share in existence:

· Ordinary shares of £0.00005 each are classified as equity instruments;

· Deferred shares of £1 each are classified as equity instruments.

Retirement benefits: defined contribution schemes

Contributions to defined contribution pension schemes are charged to the consolidated statement of comprehensive income in the year to which they relate.

Share-based payments

The share based payment charge is immaterial to the financial information and has therefore not been recorded.

Leased assets

Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a "finance lease"), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the consolidated statement of comprehensive income over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.

Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an "operating lease"), the total rentals payable under the lease are charged to the consolidated statement of comprehensive income on a straight-line basis over the lease term. 

The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis.

Dividends

Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when declared by the Directors. In the case of final dividends, this is when approved by the shareholders at the AGM. There have been no dividends paid since the formation of the Group.

Deferred taxation

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the consolidated statement of financial position differs from its tax base, except for differences arising on:

· the initial recognition of goodwill;

· the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and

· investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future.

Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised.

The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax assets or liabilities are recovered or settled.

Shares to be issued

Deferred consideration shares of 299,624 Ordinary Shares will be issued to the sellers of Midatech Pharma (Wales) Limited in two tranches; 224,718 on 8 December 2015 and 74,906 on 30 June 2016 as part consideration for the acquisition of 100% of the share capital. The number of shares will be revised downwards following any warranty claims not considered as part of the purchase price.

Property, plant and equipment

Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs.

Depreciation is provided on all items of property, plant and equipment so as to write off their carrying value over their expected useful economic lives. It is provided at the following rates:

The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to losses for the year are as follows:

The taxation credit arises on the enhanced research and development tax credits accrued for the respective periods.

The Finance Act 2013 includes provision for the main rate of corporation tax to reduce from 23% to 21% from 1 April 2014 and to 20% from 1 April 2015.

The 2013 loss per share is based on the Midatech Limited weighted average number of shares in issue which has been restated to take account of the share division that took place on 28 November 2014 whereby each 0.001p Ordinary Share was sub divided into two 0.0005p Ordinary Shares.

On 8 December 2014, the group acquired 100% of the voting equity of Q Chip Limited and its subsidiaries, a UK company principally involved in design and development of the Q-Sphera TM drug encapsulation and delivery system and underpinning microsphere manufacturing technology. On 20 January 2015 Q Chip Limited changed its name to Midatech Pharma (Wales) Limited. The principal reason for this acquisition was to strengthen the Group's technology and product portfolios, and thereby diversify risk through the following:

a) Add controlled-release technology to Midatech gold nano-particle and portfolio

b) Expand the number of development projects

c) Q-Chip's product portfolio offered Midatech a lower risk profile than Midatech's own technology thereby mitigating against potential future failure

The revenue included in the Consolidated Statement of Comprehensive Income since 8 December 2014 contributed by Q Chip Limited was £nil. Q Chip Limited contributed a net loss of £0.3m over the same period.

If the acquisition had occurred on 1 January 2014, group revenue would have been £0.73m and group loss for the period would have been £9.41m.

Acquisition related costs of £0.17m were incurred in relation to this acquisition and are included within administrative expenses within the Consolidated Statement of Comprehensive Income for the period.

Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are:

The main factors leading to the recognition of goodwill are the presence of certain intangible assets, such as the assembled workforce of the acquired entity and the expected synergies of the enlarged group which do not qualify for separate recognition.

The goodwill and intangible assets recognised will not attract tax deductions.

The net cash inflow in the year in respect of acquisition comprised: