Netscientific Regulatory News (NSCI)

 27 April 2020

NetScientific plc

("NetScientific" or the "Group")

NetScientific Full Year Preliminary Results for the year ended 31 December 2019

London, UK - 27 April 2020 - NetScientific plc (AIM: NSCI), the transatlantic healthcare IP commercialisation Group, announces its full year preliminary results for the year ended 31 December 2019.

Financial highlights (including post-period end highlights)

· Loss after tax of £4.9 million (2018: loss £9.4 million) reflects the portfolio business model

o Core portfolio companies develop and commercialise their proprietary technologies

o All portfolio companies are currently loss making

· Cash used in operations reduced to £4.1 million (2018: £8.3 million) due to sale of Vortex and Wanda and lower head office costs

· Cash and cash equivalents at HQ and portfolio companies of £3.5 million (2018: £2.9 million)

· There were several Board changes during the year and post-period, including the Chairman and CEO.

Portfolio highlights (including post-period end highlights)

ProAxsis Ltd ("ProAxsis")

· Continued strong progress with revenue growth up 234% to £735k; cashflow breakeven

o ProAxsis NEATstik ELISA kit sales up by 226%

o Contract with a large researcher conducting Phase 2 clinical trials in the last quarter of 2019

· NEATstik® featured in a high-profile bronchiectasis study published in the European Respiratory Journal in 2019

· Short term loan and interest repaid to NetScientific plc

· Post-period, ProAxsis has revised its plans to take into account COVID-19 related delays and the opportunities being pursued.

Glycotest, Inc. ("Glycotest")

· Completed $10.0 million series A funding round with Shanghai Fosun Pharmaceutical Co. Ltd, a leading Chinese healthcare group

o First and second tranches of $3.0 million each received on 14 February 2019 and 21 November 2019

· Liver diagnostic test technology access granted to Fosun to enable Chinese regulatory filings and eventual commercialisation

· Completed proprietary assay analytical validation for HCC Panel at NMS Labs

· Initiated clinical validation trial for the HCC panel with 66 cases and 202 controls enrolled at year end

· Post-period, Glycotest has revised its plans to take into account COVID-19 related delays

PDS Biotechnology Corporation ("PDS")

· Completed merger with Edge Therapeutics on 18 March 2019, creating a NASDAQ listed immune-oncology biotechnology company developing novel products treating early-and late-stage cancer

· Collaboration with Merck in Phase 2 studies for PDS0101

· As part of a broader $12m raise, Net Scientific subscribed $650,000 for a further 500,000 shares of PDS common stock, total holding of 1,042,833 PDS common stock represents approximately 7.18% of the undiluted share capital.

· Post-period, PDS announced an expanded infectious disease pandemic development program, including exploring novel vaccines for COVID-19 and universal influenza, in addition to its previously announced tuberculosis development collaboration with Farmacore Biotechnology

· Post-period, PDS announced COVID-19 related delays to its Phase 2 PDS0101 clinical trial programme.

Vortex Biosciences, Inc. ("Vortex")

· Sold on 22 March 2019 to Deeptech Disruptive Growth Investments Ltd ("Deeptech"), a special purpose vehicle "SPV" of EMV Capital Ltd, for total consideration of £113,999.

Wanda, Inc. ("Wanda")

· Sold on 22 March 2019 to Deeptech, for total consideration of £37,001.

Commenting on the Group's 2019 full year results, Ian Postlethwaite, CEO/CFO of NetScientific, said:

"The Company's strategy remains to seek to maximise shareholder value from its core and other portfolio companies, which continue to perform and are making progress. During 2019, the Company carried out a review of all areas and significantly reduced the central function costs and headcount back to the essentials, thereby extending the Company's cash runway and using as much of the remaining cash as possible to maximise the value of the portfolio companies."

For more information, please contact:

About NetScientific

NetScientific PLC is a transatlantic healthcare IP commercialisation Group focused on technologies and companies that have the potential to treat chronic disease and significantly improve the health and well-being of people. 

For more information, please visit the website at www.NetScientific.net

CHAIRMAN'S AND CHIEF EXECUTIVE OFFICER'S STATEMENT

NetScientific PLC ("NetScientific", the "Group" or the "Company") is a transatlantic healthcare IP commercialisation group focused on technologies and companies that have the potential to treat chronic disease and significantly improve the health and well-being of people.

As announced in November 2018, the Group conducted a strategic review to maximise value for Shareholders, which included the potential sale of the Group or of a portfolio company. In early 2019, the Company had not received any offers for any of its portfolio companies nor was it in receipt of any approaches regarding a sale of the Company. The Board assessed all of its strategic options, including a potential cancellation from trading on AIM in order to reduce the Company's costs and to prolong the cash runway allowing for the maximum opportunity to realise cash from shareholdings in its investee companies. However, the general meeting to approve the cancellation was indefinitely adjourned.

Following this decision, in line with the circular sent to Shareholders on 15 February 2019, the Company's strategy has remained to seek to maximise shareholder value from its portfolio companies. During 2019, the Company carried out a review of all areas and significantly reduced the central function costs and headcount to the essentials, thereby extending the Company's cash runway and using as much of the remaining cash as possible to maximise the value of the portfolio companies.

In February and November 2019, Glycotest Inc. issued in total 11,822,605 shares to Fosun Pharmaceutical Co. Ltd ("Fosun Pharma"), a leading healthcare group based in China as part of a $10 million Series A financing deal, diluting the Group's interest in Glycotest by 21.85% to 65.65%, a deemed disposal of a stake in a subsidiary. Since receiving the funding, Glycotest has increased expenditure on clinical trial preparations, administration and research and development on the path to commercialisation.

In March 2019, the Company completed a £0.15m cash sale to Deeptech Disruptive Growth Investments Ltd ("Deeptech"), a Special Purpose Vehicle of EMV Capital Ltd, of its interests in Vortex and Wanda, together with any outstanding loans and convertible loan notes owed to the Company by Wanda or Vortex. Immediately prior to completion, NetScientific was interested in approximately 95.0% and 70.8% of the issued shares of common stock of Vortex and Wanda, respectively, and 100% of the Preferred Shares of Wanda. The results of Vortex and Wanda included within the consolidated accounts of NetScientific amounted, to a gain of £0.6 million and a loss of £1.9 million, respectively, and the net assets of Vortex and Wanda at the same date were £0.3 million and £0.1 million, respectively net of intercompany balances. The loss for the year by the Vortex and Wanda discontinued operations was £1.3 million (2018: £5.4 million) reducing the operational funding requirement of the Group substantially going forward as look to preserve cash.

PDS has seen its fair value decline during 2018, 2019 and into early 2020 due primarily to a weak market for smaller listed companies and specifically to a stock overhang and a lack of new clinical trial information to drive the value forward. At year end PDS's share price was $2.65 per share valuing our investment at £1.1 million (2018: £2.6 million). The Board continues to believe that PDS has strong prospects and participated post year end in a $12m raise to acquire a further 500,000 shares for $650,000 taking its total holding to 1,042,000, representing approximately 7.18% of the undiluted share capital. This provides PDS with funding to initiate Phase 2 trials.

During the period there has been a significant reshaping of the Board. Francois Martelet resigned as a Director on 30 April 2019. On 14 October 2019, Dr. Ilian Iliev joined the Board as a non-executive director. Barry Wilson retired from the Board on 13 December 2019 following seven years as Non-Executive Director and John Clarkson joined the Board as Non-Executive Director. On the 15 January 2020, it was announced that Ian Postlethwaite had served six months' notice to step down as CEO, CFO and Company Secretary during April 2020. On 31 March 2020, it was announced that Sir Richard Sykes would retire from the Board following nine years as Chairman. John Clarkson, took over as the Chairman of the Board with immediate effect. It is expected that Dr. Ilian Iliev, currently a Non-Executive Director, will become a part time Executive Director and interim CEO, and Stephen Crowe, currently Financial Controller, will take over as interim CFO.

The Group is following the latest health authority and government advice in light of Covid-19. The primary focus is the health, wellbeing and safety of all its employees and local communities. The Group has reviewed all the major budgeted assumptions and sensitivities and drawn up cash preservation plans in case revenue does not continue as planned, or it faces delays in planned payments from third parties. It has initiated further cost saving plans across the Group and delayed expenditure where possible, until there is more clarity on the financial impact of the pandemic. In some cases, the crisis restrictions will delay trials and programs, which will defer expenditure and thus extend the cash runway. Also, there may be opportunities to take advantage of the financial support measures and divert effort and resources to address Covid-19 issues and generate new revenue streams, further ensuring the Group has options and cash for at least the next twelve months.

CHAIRMAN'S AND CHIEF EXECUTIVE OFFICER'S STATEMENT continued

Portfolio Review

ProAxsis Ltd ("ProAxsis")

ProAxsis is a medical diagnostics company, based in Northern Ireland, developing a range of products for the capture, detection and measurement of active protease biomarkers of disease. The company is primarily focused on chronic respiratory diseases such as COPD and bronchiectasis but has recently demonstrated the adaptability of its technology for use in other clinical areas such as oncology.

ProAxsis has made strong operational progress during 2019 and has now reached cashflow breakeven based on higher revenue up 234% at £735k versus 2018. This increase in revenue is mainly due to the increase of ProAxsis NEATstik ELISA kit sales, up by 226%, and a large researcher conducting Phase 2 clinical trials in the last quarter of 2019. The outlook for the company in 2020 is positive, with several contracts already in place with global pharmaceutical companies.

The company's lead product, NEATstik®, was featured in a high-profile bronchiectasis study published in the European Respiratory Journal in May 2019, which demonstrated encouraging data on its ability to monitor bacterial infections in real time in patients suffering from lung diseases.

In March 2020, ProAxsis repaid the £0.1 million loan to NetScientific plus interest from 2019.

NetScientific's shareholding in ProAxsis is 56.5% (fully diluted being 54.0%) and as at 31 December 2019, the Group had invested £2.1 million (2018: £2.1 million).

Grant funding received to develop both the underlying technology and new applications has exceeded £1.2 million (2018: £1.2 million).

Glycotest, Inc. ("Glycotest")

Glycotest is a US-based liver diagnostics start-up company seeking to commercialise new and unique blood tests for life threatening liver cancers and fibrosis-cirrhosis.

On 14 February 2019 and 21 November 2019, respectively Glycotest received the first and second tranches of $3m each of the $10 million Series A financing from Fosun Pharmaceutical Co. Ltd ("Fosun Pharma"), a leading healthcare group based in China. As part of the Series A raise Glycotest granted access to its liver diagnostic test technology to Fosun during 2019 to enable the preparation of regulatory filings and eventual commercialization in China.

The company has continued to make good progress. During 2019, Glycotest completed proprietary assay analytical validation at NMS Labs for the HCC panel, and initiated clinical validation trial for the Panel with 14 sites open to enrolling patients and with a further six sites in the process of signing patients. As at 31 December 2019, 66 cases and 202 controls were enrolled. Glycotest also initiated fibrosis and cholangiocarcinoma assay projects during 2019. These development projects continue in 2020.

Glycotest also appointed a new reagent manufacturer, Rockland Immunochemicals, in Q3 2019.

Grant funding received to develop the underlying technology, prior to Glycotest's formation, was £5.9 million.

NetScientific's shareholding in Glycotest is 65.6% (2018: 87.5%), fully diluted being 51.5% (2018: 51.5%) and as at 31 December 2019, the Group had invested £3.9 million (2018: £3.9 million).

CHAIRMAN'S AND CHIEF EXECUTIVE OFFICER'S STATEMENT continued

PDS Biotechnology Corporation

PDS is a clinical stage immunotherapy company developing a next generation of simpler, safer and more effective immunotherapies for cancer and infectious diseases. It continued to see strong progress with its T-cell activating technology platform, Versamune®, which combines three critical attributes for an effective immunotherapy: T-cell induction, reduced tumour suppression and priming of a potent anti-tumour response without the conventional associated toxicities.

In November 2018, PDS entered into a merger agreement with Edge Therapeutics, which completed on 14 March 2019, to form a Nasdaq-Listed Clinical-Stage Cancer Immunotherapy company. The merger created a publicly traded immune-oncology biotechnology company (now re-named PDS Biotechnology Corporation) developing novel products treating early-and late-stage cancer. This follows positive phase I and 2 clinical data on its lead product candidate, PDS0101, indicating immunotherapeutic anti-cancer activity and favourable safety profile in early stage cervical cancer. PDS plans to initiate multiple phase 2b and 3 clinical trials of PDS0101 in HPV-associated cancers.

The year-end share price has been used to re-value the Group's equity holding therein. The Company's ownership of the enlarged PDS Biotechnology Corporation, trading on Nasdaq under the ticker PDSB, on a fully diluted basis is 8.15%. At year end PDS's share price was $2.65 per share valuing our investment at £1.1 million (2018: £2.6 million). As at 22 April 2020 the share price is $0.91 per share valuing the investment at £0.8m.

In May 2019, PDS announced a peer-reviewed publication supporting the novel mechanisms of action of its proprietary Versamune® platform in cancer immunotherapy. The article "Antigen Priming with Enantiospecific Cationic Lipid Nanoparticles Induces Potent Antitumor CTL Responses through Novel Induction of a Type I IFN Response" was published online on 3 May 2019 in the Journal of Immunology, and described the way PDS' Versamune® platform recruits and activates killer T-cells to recognize and effectively attack cancer cells while simultaneously making cancer cells more susceptible to T-cell attack.

In October 2019, PDS announced that it would be collaborating with Merck in Phase 2 studies for PDS0101 in combination with Merck's anti-PD-1 therapy, KEYTRUDA® (pembrolizumab), as a first line treatment in patients with recurrent or metastatic head and neck cancer and high-risk human papillomavirus-16 (HPV16) infection. The planned clinical trial is evaluating the efficacy and safety of the combination as a first-line treatment and was initiated in the first quarter of 2020.

The Group has invested £2.7 million in PDS to 31 December 2019. On the balance sheet the investment in PDS is shown as equity investments classified as fair value through other comprehensive income (FVTOCI).

On 12 February 2020, it was announced that PDS had issued new shares of common stock to raise gross proceeds of approximately US$12 million ("New Issue"). NetScientific plc subscribed $650,000, for 500,000 shares of PDS common stock in the new issue. NetScientific now owns approximately 7.18% of the undiluted share capital.

On 9 April 2020 PDS appointed Dr. Ilian Iliev to its Board of Directors.

On 16 April 2020 PDS announced an expanded infectious disease pandemic development program, including novel vaccines for COVID-19 and universal influenza, in addition to its previously announced tuberculosis development collaboration with Farmacore Biotechnology. PDS also announced that initiation of its multi-center Phase 2 VERSATILE-002 trial for PDS0101 in advanced/metastatic head and neck cancer had been delayed due to the severe adverse impact on clinical trial operations from the COVID-19 pandemic.

Vortex Biosciences, Inc. ("Vortex")

Vortex Biosciences, Inc. was sold to Deeptech on 22 March 2019 for total consideration of £112,999, being £1 for the shares and £112,998 for the transfer of the debt.

NetScientific shareholding in Vortex was 95.0%, fully diluted being 66.1% and as of 31 December 2019, the Group had invested £21.4 million (2018: £21.4 million).

Wanda, Inc. ("Wanda")

Wanda, Inc. was sold to Deeptech on 22 March 2019 for total consideration of £37,001, being £1 for the shares and £37,000 for the preferred stock and debt.

NetScientific's shareholding in Wanda was 70.8%, fully diluted being 61.8% and as at 31 December 2019, the Group had invested £11.6 million (2018: £11.6 million). 

CHAIRMAN'S AND CHIEF EXECUTIVE OFFICER'S STATEMENT continued

Early stage Investments Portfolio

During the year, the Group reviewed its five early stage investments (the 'Early Stage Portfolio'). Limited investment has been made to date, mostly in the form of convertible loans. The five assets are in the following companies CytoVale, Inc., Epibone, Inc., Longevity Biotech, Inc., G-Tech, Inc., and Nemitra, Inc. Only two of the five early stage investments, CytoVale and Epibone currently have any material value. Of note from the Early Stage Portfolio:

Cytovale, a clinical stage company using cell mechanics and machine learning to revolutionise diagnostics starting with sepsis, announced a preferred Series B funding round in 2019 valuing the company at $50m, decreasing slightly the value of the NetScientific investment to £0.4m.

Epibone, a ground-breaking research company that transforms skeletal repair by remodelling stem cells into a personalized bone graft ready for implantation, announced a Series A funding round in January 2020 raising $8 million. NetScientific's convertible loan note and accrued interest valued at £0.3m at year end converted into preferred shares valued at £0.3m on the closing of the financing. and values the Company post investment at $35 million. NetScientific is in active dialogue regarding developments.

On the balance sheet (as explained in note 3) the investment in Cytovale is shown within equity investments classified as FVTOCI whilst the other early stage investment portfolios are all shown within financial assets classified as FVTPL as warrants and convertible loan notes at a fair value of £0.3m which now relates to a single convertible loan note investment in Epibone.

Finance

For the year, the Group made a loss of £4.9 million (2018: £9.4 million), split between continuing and discontinued operations as follows:

The loss reflects the business model where the core portfolio companies are mainly subsidiaries. These companies are commercialising or still developing their technologies and are all currently loss making.

Cash

Cash on the balance sheet as at 31 December 2019 was £3.5 million (2018: £2.9 million). Cash used in operations in 2019, was £4.1 million (2018: £8.3 million). Group companies are not expected to require any further funding hereafter in 2020. ProAxsis required a short loan in January 2020 which has now been repaid. £1.2m is held in the Company, giving it and the Group enough cash to operate until the end of 2021. The cash held within subsidiary Glycotest, Inc., of £2.2m (2018: £0.1m) is not freely available for use within the wider group as it would need the consent of a 40% minority shareholder.

In February 2020, NetScientific plc subscribed for $650,000 of PDS common stock in its new issue. Upon completion of the new issue, NetScientific owns approximately 7.18% of the undiluted share capital of PDS. NetScientific had cash to fund this investment, however, on 7 April 2020 for prudent financial management, the Group entered into an 18-month secured £700,000 line of credit with the Beckman Group. The facility, which incurs interest of 10.0% pa on drawn amounts and 3.0% pa on undrawn amounts and had an arrangement fee of 1%, can be extended by mutual agreement for an additional six months and is secured on the whole of NetScientific's interest in PDS.

Going concern

The Directors have prepared and reviewed budget cashflows which were approved by the Board of Directors in the Board meeting of 5 December 2019, and further reviewed at the Board meeting on 18 March 2020 for the impact of Covid-19 and subsequently approved on 25 March 2020. The budgeted cash flows included a number of implemented cash saving initiatives, including:

a) significantly reducing the Company's central cost base by reductions in headcount, closing the office at 6 Bevis Marks London at the end of March 2019 and reviewing all expenditure commitments;

b) selling Vortex and Wanda for net proceeds of £0.15 million on 22 March 2019 and consequently reducing the operational cost base and funding requirement of the Group;

c) allocating the remaining cash to manage the remaining portfolio companies which the board believes provide the most realistic prospects of delivering shareholder returns within the anticipated lifespan of the Company; and

d) making a planned partial drawdown of the £700k line of credit towards the end of 2020.

The Group has reviewed the major budgeted assumptions and sensitivities in light of Covid-19 and drawn up cash preservation plans in case revenue does not continue as planned, or it faces delays in planned payments from third parties. It has initiated further cost saving plans across the Group and delayed expenditure where possible, until there is more clarity on the financial impact of the pandemic. In some cases, the crisis restrictions will delay trials and programs, which will defer expenditure and thus extend the cash runway. Also, there may be opportunities to take advantage of the financial support measures and divert resources to support the Covid-19 effort and generate new revenue streams, further ensuring the Group has options and cash for at least the next twelve months.

The Going concern status of the group is dependent on meeting its forecast including generating revenues, receiving planned payments from third parties and achieving planned cost savings. In the event the Group is unable to meet its forecasts it will need to raise further finance. These events or conditions indicate that a material uncertainty exists that may cast significant doubt on the Group and the company's ability to continue as a going concern.

The financial statements do not include any adjustments that would be necessary if the group or company was unable to continue as a going concern.

CHAIRMAN'S AND CHIEF EXECUTIVE OFFICER'S STATEMENT continued

Board changes

There were four Board changes during the year (2018: 1).

Francois Martelet resigned as a Director on 30 April 2019. On 14 October 2019 Dr. Ilian Iliev joined the Board as a non-executive director. Barry Wilson retired from the Board on 13 December 2019 following seven years as Non-Executive Director, and John Clarkson joined the Board as Non-Executive Director. On 15 January 2020 it was announced that Ian Postlethwaite had served six months' notice to step down as CEO, CFO and Company Secretary. On 31 March 2020 it was announced that Sir Richard Sykes would retire from the Board following nine years as Chairman. John Clarkson, took over as the Chairman of the Board with immediate effect. It is expected that Dr. Ilian Iliev, currently a Non-Executive Director, will become a part time Executive Director and interim CEO. Finally, it is anticipated that Stephen Crowe, currently Financial Controller, will take over as interim CFO during April 2020.

Summary and Outlook

The Board believes that the portfolio companies continue to hold great potential which the Group will look to unlock. The Company's strategy remains to maximise shareholder value from the portfolio companies by:

a) reducing the Company's central functions and costs significantly such that as much of the remaining cash as possible can be allocated to the portfolio companies and their active management; and

b) assessing the funding requirements of each portfolio company against its prospects of generating a shareholder return.

Consolidated Income Statement

For the year ended 31 December 2019

Consolidated Statement OF Comprehensive Income

For the year ended 31 December 2019

Consolidated Statement of Financial Position

As at 31 December 2019

*Fair value through other comprehensive income

**Fair value through profit and loss

Consolidated Statement of Changes in Equity

As at 31 December 2019

Consolidated Statement of Cash Flows

As at 31 December 2019

Notes to the Financial Information for the Year Ended 31 December 2018

1. GENERAL INFORMATION

The Company is a public limited company incorporated on 12 April 2012 and domiciled in England with registered number 08026888 and its shares are listed on the Alternative Investment Market (AIM) of the London Stock Exchange. The address of the registered office is Anglo House, Bell Lane Office Village, Bell Lane, Amersham, Buckinghamshire HP6 6FA.

2. BASIS OF PREPARATION

The preliminary results of the year ended 31 December 2019 have been extracted from audited accounts which have not yet been delivered to Companies House.

The financial information set out in this announcement does not constitute statutory accounts for the year ended 31 December 2019.

The report of the auditors on the statutory accounts for the year ended 31 December 2019 did not contain a statement under Section 498 of the Companies Act 2006 but drew attention to a material uncertainty in respect of going concern and included the following wording in that respect;

Material uncertainty related to going concern

As set out in note 3, the group is loss generating and is reliant upon fundraising and cost savings in order to obtain the resources necessary to continue. The Going concern status of the group is dependent on meeting its forecast including generating revenues, receiving planned payments from third parties and achieving planned cost savings. In the event the group is unable to meet its forecasts it will need to raise further finance. These events or conditions indicate that a material uncertainty exists that may cast significant doubt on the group and the company's ability to continue as a going concern.

These events or conditions, along with other matters as set out in Note 3, indicate that a material uncertainty exists which may cast significant doubt over the Group's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

The financial statements for the year ended 31 December 2019 included in this announcement were authorised for issue in accordance with a resolution of the Board of Directors on 24 April 2020.

3. GOING CONCERN

The Directors have prepared and reviewed budget cashflows which were approved by the Board of Directors in the Board meeting of 5 December 2019, and further reviewed at the Board meeting on 18 March 2020 for the impact of Covid-19 and subsequently approved on 25 March 2020. The budgeted cash flows included a number of implemented cash saving initiatives, including:

a) significantly reducing the Company's central cost base by reductions in headcount, closing the office at 6 Bevis Marks London at the end of March 2019 and reviewing all expenditure commitments;

b) selling Vortex and Wanda for net proceeds of £0.15 million on 22 March 2019 and consequently reducing the operational cost base and funding requirement of the Group;

c) allocating the remaining cash to manage the remaining portfolio companies which the board believes provide the most realistic prospects of delivering shareholder returns within the anticipated lifespan of the Company; and

d) making a planned partial drawdown of the £700k line of credit towards the end of 2020.

The Group has reviewed the major budgeted assumptions and sensitivities in light of Covid-19 and drawn up cash preservation plans in case revenue does not continue as planned, or it faces delays in planned payments from third parties. It has initiated further cost saving plans across the Group and delayed expenditure where possible, until there is more clarity on the financial impact of the pandemic. In some cases, the crisis restrictions will delay trials and programs, which will defer expenditure and thus extend the cash runway. Also, there may be opportunities to take advantage of the financial support measures and divert resources to support the Covid-19 effort and generate new revenue streams, further ensuring the Group has options and cash for at least the next twelve months.

The Going concern status of the group is dependent on meeting its forecast including generating revenues, receiving planned payments from third parties and achieving planned cost savings. In the event the Group is unable to meet its forecasts it will need to raise further finance. These events or conditions indicate that a material uncertainty exists that may cast significant doubt on the Group and the company's ability to continue as a going concern.

The financial statements do not include any adjustments that would be necessary if the group or company was unable to continue as a going concern.

4. SIGNIFICANT ACCOUNTING POLICIES

The Group financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union as they apply to the financial statements of the Group for the year ended 31 December 2019. The principal accounting policies adopted in the preparation of the financial information are set out below. The policies have been consistently applied to all the years presented.

While the financial information included in this preliminary announcement has been prepared in accordance with IFRS, this announcement does not in itself contain sufficient information to comply with IFRS. The Group expects to publish full financial statements that comply with IFRS by 1 May 2020.

5. LOSS PER SHARE

The basic and diluted loss per share is calculated by dividing the loss for the financial year by the weighted average number of ordinary shares in issue during the year. Potential ordinary shares from outstanding options at 31 December 2019 of 3,475,984 (2018: 2,782,651) are not treated as dilutive as the entity is loss making.

6. IFRS 16 LEASES

Effective 1 January 2019, IFRS 16 has replaced IAS 17 Leases and IFRIC 4 Determining whether an Arrangement Contains a Lease.

IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, together with options to exclude leases where the lease term is 12 months or less, or where the underlying asset is of low value. The Group does not have significant leasing activities acting as a lessor.

Transition Method and Practical Expedients Utilised

On adoption of IFRS 16, the Group recognised right-of-use assets and lease liabilities in relation to leases of office space, which had previously been classified as operating leases.

The judgement that the Group was reasonably certain to extend for the full term of the lease beyond the contractual breaks in the third, fifth and seventh years of the lease have made a material difference to the carrying value of the asset/liability. The impact of this judgement is to increase the initial asset/liability amounts by £216k, £181k and £114k respectively.

The lease liabilities were measured at the present value of the remaining lease payments, discounted using the incremental borrowing rate as at 1 January 2019. The incremental borrowing rate is the rate at which a similar borrowing could be obtained from an independent creditor under comparable terms and conditions. The rate applied was 3.5%.

Transition to IFRS 16

The table below shows the impact due to the transition to IFRS 16 and the initial effect on the balance sheet as at 1 January 2019.

Instead of recognising an operating expense for its operating lease payments, the Group will instead recognise interest on its lease liabilities and amortisation on its right-of-use assets. This will increase the reported total loss for the year by the amount of its current operating lease cost, which for the year ended 31 December 2018 was £54k for continuing operations. Due to the short terms of the Group's leases, approximately there will only be a nominal charge to interest of approximately £9k with the rest of the charge being recognised as depreciation of £32k. There are several short-term leases where the lease commitment is under six months in length where the Group will continue to spread the lease payments on a straight-line basis over the lease term.

7. INVESTMENTS IN SUBSIDIARY UNDERTAKINGS

The Group had the following subsidiaries at 31 December 2019:

For all undertakings listed above, the country of operation is the same as its country of incorporation or registration.

* Held via an intermediate holding company.

** Sold to Deeptech in March 2019, a SPV of EMV Capita Ltd for total consideration of £150k.

All of the ownerships shown above relate to ordinary shareholdings.

(i) Options have been issued by ProAxsis Ltd and Glycotest, Inc. which if exercised would dilute the Company's shareholding by 3% and 14% respectively.

(ii) Following issue of further shares during the year the Group's interest was reduced to 77.5% on 14 February 2019 and then to 65.6% on the 21 November 2019.

(a) Anglo House, Bell Lane Office Village, Bell Lane, Amersham, Buckinghamshire, HP6 6FA

(b) Unit 1B, Concourse Building, 3, Catalyst Inc, Titanic Quarter, 6 Queens Road, Belfast, BT3 9DT, Northern Ireland

(c) 1650 Market Street, Suite 4900, Philadelphia, Pennsylvania, 19103-7300, United States of America

(d) 5627 Stoneridge Drive, Suite 312, Pleasanton, CA 94588, United States of America

(e) 350 Sansome Street, Unit 800, San Francisco, CA 94104, United States of America

(f) 77 Water Street, Suite 817, New York, NY 10005, United States of America

The addresses listed above are also the registered offices of the relevant entities.

8. EQUITY INVESTMENTS CLASSIFIED AS FVTOCI 

The Company's ownership of the enlarged PDS Biotechnology Corporation, now trading on Nasdaq under the ticker PDSB, on a fully diluted basis is 8.15% (2018: 9.12%), which at the year-end listing price of $2.65 values NetScientific's holding in PDS at £1,097k (2018: £2,380k). It is the Company's intention to hold the shares and to make a decision on its position in due course. The Group's interest in PDS Biotechnology is non-controlling.

The fair value for the prior year end was derived from the listed entity Edge Therapeutics, Inc. and using its share price as a proxy to value PDS. On the 18 March 2019 PDS announced the closing of its merger with Edge Therapeutics, Inc. following the approval of Edge stockholders on 14 March 2019.

CytoVale Inc. remains not quoted on an active market at year end and fair value has been established initially using inputs from other than quoted prices that are observable; i.e. the price of recent investments by third parties during December 2019. CytoVale raised $15.0m all at the same valuation per share, the fundraise was restricted to a small group of sophisticated investors. At the time this was the only observable valuation on which to value CytoVale.

9. FINANCIAL ASSETS CLASSIFIED AS FVTPL 

The warrant has been valued using the Black-Scholes Model and a level 3 fair value hierarchy, given the unobservable data for volatility and its fair value. These warrants may be exercised at any time prior to May 2021.

The Epibone convertible loan note is the only financial asset to have a material value individually or collectively the rest have been fully impaired.

Convertible loans FVTPL of £253k in the prior year have been moved out of trade and other receivables to financial assets classified as FVTPL. The amount was not material at 1 January 2018 and there is no impact on net assets.