REG - Kromek Group PLC - Final Results <Origin Href="QuoteRef">KMK.L</Origin> - Part 2
30/07/2015 07:03
- Part 2: For the preceding part double click ID:nRSd5082Ua
group's accounting policies
The following are the critical judgements that the Directors have made in the
process of applying the Group's accounting policies and that have the most
significant effect on the amounts recognised in the financial statements.
Development costs
As described in note 3, the Group expenditure on development activities is
capitalised if it meets the criteria as per IAS38.
These capitalised assets are amortised on a straight-line basis over their
useful lives. The useful life is determined by the expected future cash flows
anticipated to be derived from these assets, based on management's revenue
forecasts. Where no internally-generated intangible asset can be recognised,
development expenditure is expensed in the period in which it is incurred.
Impairment of non-financial assets
The Group assesses whether there are any indicators of impairment as at the
transition date and thereafter for all non-financial assets at each reporting
date. Goodwill is tested for impairment annually and at other times when such
indicators exist, such as negative cash flows and operating losses of
subsidiaries. Other non-financial assets are tested for impairment when there
are indicators that the carrying amounts may not be recoverable.
When value in use calculations are undertaken, management must estimate the
expected future cash flows from the asset or cash generating unit and choose a
suitable discount rate in order to calculate the present value of those cash
flows.
Valuation of acquired intangible assets
Acquisitions may result in identifiable intangible assets such as customer
relationships, supplier relationships, licences and technology being
recognised. These are valued by professional valuation firms, using discounted
cash flow methods which require the application of certain key judgments and
estimates are required to be made in respect of discount rates and future cash
flows.
Recoverability of receivables
As disclosed in note 3, in order to obtain market penetration through
technology based customers, the Group recognises that normal payment terms
from these customers may not be adhered to when assessing recoverability of
receivables. This is as a result of the necessary marketing support that
customers may require in promoting the products.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation
uncertainty at the statement of financial position date, that have a
significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year, are discussed below.
i) Development costs
Development costs are capitalised in accordance with the accounting policy
noted above. Initial capitalisation of costs is based on management's
judgement that technological and economic feasibility is confirmed, usually
when a product development project has reached a defined milestone.
ii) Impairment of goodwill
The Group determines whether goodwill is impaired on at least an annual basis
or more frequently when there are indications of possible impairment. The
impairment review requires a value in use calculation of the cash-generating
units to which the goodwill is allocated. In estimating the value in use,
management is required to make an estimate of the expected future cash flows
attributable to the cash-generating unit and to choose an appropriate discount
rate to calculate the present value of those cash flows. The carrying amount
of goodwill at 30 April 2015 was £1,275k (2014: £1,275k). Further details are
given in note 11.
5. Revenue
An analysis of the group's revenue is as follows:
2015 2014
£'000 £'000
Continuing operations
Sales of goods and other services 5,879 4,351
Revenue from grants 913 978
Revenue from contract customers 1,309 643
Total revenue 8,101 5,972
Grant income 4 229
Other income 56 490
Total income 8,161 6,691
6. Operating segments
Products and services from which reportable segments derive their revenues
For management purposes, the Group is organised into two business units (USA
and UK) and it is on these operating segments that the Group is providing
disclosure.
The chief operating decision maker is the Board of Directors who assess
performance of the segments using the following key performances indicators;
revenues, gross profit and operating profit. The amounts provided to the Board
with respect to assets and liabilities are measured in a way consistent with
the Financial Statements.
The turnover, profit on ordinary activities and net assets of the Group are
attributable to one business segment, i.e. the development of digital colour
x-ray imaging enabling direct materials identification, as well as developing
a number of detection products in the industrial and consumer markets.
Analysis by geographical area
A geographical analysis of the Group's revenue by destination is as follows:
2015£'000 2014£'000
United Kingdom 387 385
North America 5,681 3,416
South America 11 -
Middle East 18 -
Asia 1,899 1,089
Europe 66 1,054
Australasia 39 28
Total revenue 8,101 5,972
A geographical analysis of the Group's revenue by origin is as follows:
Year ended 30 April 2015
UK Operations £'000 US Operations£'000 Total for Group£'000
Revenue from salesRevenue by segment:-Sale of goods and services 2,584 4,795 7,379
-Revenue from grants 218 695 913
-Revenue from contract customers 480 829 1,309
-Other revenue - 638 638
Total sales by segment 3,282 6,957 10,239
Removal of inter-segment sales (376) (1,762) (2,138)
Total external sales 2,906 5,195 8,101
Segment result - operating loss (2,972) (92) (3,064)
Interest received 31 - 31
Interest expense (95) (7) (102)
Loss before tax (3,036) (99) (3,135)
Tax credit 989 - 989
Loss for the year (2,047) (99) (2,146)
Reconciliation to adjusted EBITDA:
Net interest 64 7 71
Tax (989) - (989)
Depreciation 300 373 673
Amortisation 333 378 711
Non-recurring other income - (58) (58)
Share-based payment charge 181 - 181
Adjusted EBITDA (2,158) 601 (1,557)
Other segment information
Property, plant and equipment additions 2,021 338 2,359
Depreciation of PPE 300 373 673
Intangible asset additions 1,244 1,013 2,257
Amortisation of intangible assets 333 378 711
Statement of financial position
Total assets 11,500 11,024 22,524
Total liabilities (2,829) (3,493) (6,322)
Year ended 30 April 2014
UK Operations £'000 US Operations£'000 Total for Group£'000
Revenue from salesRevenue by segment:-Sale of goods and services 1,597 3,021 4,618
-Revenue from grants 235 743 978
-Other revenue - 643 643
Total sales by segment 1,832 4,407 6,239
Removal of inter-segment sales (10) (257) (267)
Total external sales 1,822 4,150 5,972
Segment result - operating loss (3,143) (637) (3,780)
Interest received 15 - 15
Interest expense (530) - (530)
Loss before tax (3,658) (637) (4,295)
Tax credit 1,106 - 1,106
Loss for the year (2,552) (637) (3,189)
Reconciliation to adjusted EBITDA:
Net interest 515 - 515
Tax (1,106) - (1,106)
Depreciation 364 373 737
Amortisation 253 307 560
Non-recurring other income (649) - (649)
Share-based payment charge 125 - 125
Adjusted EBITDA (3,050) 43 (3,007)
Other segment information
Property, plant and equipment additions 98 89 187
Depreciation of PPE 364 373 737
Intangible asset additions 1,230 398 1,628
Amortisation of intangible assets 253 307 560
Statement of financial position
Total assets 15,290 6,790 22,080
Total liabilities (3,649) (695) (4,344)
Inter-segment sales are charged on an arms-length basis.
No other additions of non-current assets have been recognised during the year
other than property, plant and equipment, and intangible assets.
No impairment losses were recognised in respect of property, plant and
equipment and goodwill.
The accounting policies of the reportable segments are the same as the Group's
accounting policies described in note 3. Segment loss represents the loss
incurred by each segment. This is the measure reported to the Group's Chief
Executive for the purpose of resource allocation and assessment of segment
performance.
Revenues from major products and services
The Group's revenues from its major products and services were as follows:
2015£'000 2014£'000
Product revenue 3,841 4,746
Research and development revenue 4,260 1,226
Consolidated revenue 8,101 5,972
Information about major customers
Included in revenues arising from USA operations are revenues of approximately
£1,224k (2014: £1,249k) which arose from sales to the Group's largest
customer. Included in revenues arising from UK operations are revenues of
approximately £1,203k (2014: £nil) which arose from a major customer.
7. Loss for the year
Loss for the year has been arrived at after (crediting)/charging:
2015£'000 2014£'000
Net foreign exchange losses/(gains) 226 (84)
Research and development costs recognised as an expense 2,669 2,020
Depreciation of property, plant and equipment 673 737
Amortisation of internally-generated intangible assets 711 560
Cost of inventories recognised as expense 1,266 1,911
Staff costs 5,620 5,104
8. Tax
Recognised in the income statement
2015 2014
£'000 £'000
Current tax credit:
UK corporation tax on losses in the year 1,002 696
Foreign taxes paid - (1)
Total current tax 1,002 695
Deferred tax:
Origination and reversal of timing differences (13) 411
Total deferred tax (13) 411
Total tax credit in income statement 989 1,106
Corporation tax is calculated at 20.92% (2014: 22.83%) of estimated taxable
loss for the year. Taxation for other jurisdictions is calculated at the rates
prevailing in the respective jurisdictions.
Reconciliation of tax credit
The charge for the year can be reconciled to the profit in the income
statement as follows:
2015 £'000 2014£'000
Loss before tax 3,135 4,295
Tax at the UK corporation tax rate of 20.92% 656 981
(2014: 22.83%)
Expenses not deductible for tax purposes (97) (57)
Effect of R&D 804 791
Rate differences effect of R&D (444) (727)
Income not taxable 146 155
Unrecognised movement on deferred tax 80 (360)
Effects of overseas tax rates (156) 323
Total tax (charge)/credit for the year 989 1,106
There are no tax items charged to other comprehensive income.
The Finance Act 2013 enacted a rate reduction in the main rate of corporation
tax to 21% from 1 April 2014 and to 20% from 1 April 2015. The Government has
subsequently announced in the Summer Budget, on 8 June 2015, that the rates of
corporation tax will be further reduced to 19% with effect from 1 April 2017
and 18% with effect from 1 April 2020. As the enabling legislation has not
been substantively enacted these rates do not apply to the deferred tax
position at 30 April 2015. As there is no UK deferred tax recognised there is
no impact of the above on the tax provisions reported in these accounts.
There is a potential deferred tax asset on excess tax deductions arising from
share based payments on exercise of share options of £1,366k (2014: £1,147k).
The asset has not been recognised as it is not considered probable that there
will be future profits available.
9. Dividends
The directors do not recommend the payment of a dividend (2014: £nil).
10. Losses per share
The calculation of the basic and diluted earnings per share is based on the
following data:
Losses
2015 2014
£'000 £'000
Losses for the purposes of basic and diluted losses per share being net losses attributable to owners of the Group (2,146) (3,189)
2015 2014
Number of shares Number Number
Weighted average number of ordinary shares for the purposes of basic losses per share 107,818,329 61,870,643
Effect of dilutive potential ordinary shares:
Share options 6,223,395 5,080,789
Weighted average number of ordinary shares for the purposes of diluted losses per share 114,041,724 66,951,432
2015 2014
£ £
Basic and diluted (0.02) (0.05)
Due to the Group having losses in each of the years, the fully diluted loss
per share for disclosure purposes, as shown in the income statement, is the
same as for the basic loss per share.
11. Goodwill
£'000
Cost
At 1 May 2014 1,275
At 30 April 2015 1,275
Accumulated impairment losses
At 1 May 2014 -
At 30 April 2015 -
Carrying amount
At 30 April 2015 1,275
At 30 April 2014 1,275
Goodwill acquired in a business combination is allocated, at acquisition, to
the cash generating units (CGUs) that are expected to benefit from that
business combination. Before recognition of impairment losses, the carrying
amount of goodwill had been allocated as follows:
2015£'000 2014£'000
US operations 1,275 1,275
The goodwill arose on the acquisition of Nova R&D, Inc in 2010, and represents
the excess of the fair value of the consideration given over the fair value of
the identifiable assets and liabilities acquired.
Goodwill has been allocated to Nova R&D, Inc as a cash generating unit (CGU)
and is reported in note 6 within the segmental analysis of the US operations.
Negative goodwill arose on the acquisition of eV Products, Inc which was
released to the income statement in 2013.
The Group tests goodwill annually for impairment or more frequently if there
are indications that goodwill might be impaired, by comparing the net book
value of the goodwill and non-current assets for the CGU to its value in use
on a discounted cash flow basis.
The recoverable amount has been determined on a value in use basis on each
cash-generating unit using the management approved 5 year forecasts for each
cash-generating unit. The base 5 year projection is year on year growth over
the next 5 years, with overheads remaining relatively stable. The growth rate
of the CGU is expected to remain flat in Year 2 as a result of the CGU
continuing to develop its technical capabilities in the forthcoming year.
Growth is then expected to increase to 7% in Year 3, 14% in Year 4 and remain
flat thereafter in Year 5. These cash flows are then discounted at the
Company's weighted average cost of capital of 15% (2014: 16%).
Based on the results of the current year impairment review, no impairment
charges have been recognised by the Group in the year ended 30 April 2015
(2014: £nil). Management have considered various sensitivity analyses in order
to appropriately evaluate the carrying value of goodwill.
Having assessed the anticipated future cash flows the directors do not
consider there to be any reasonably possible changes in assumptions that would
lead to such an impairment charge in the year ended 30 April 2015. For
illustrative purposes, a compound reduction in revenue of 10% in each of years
1-5 whilst holding overheads constant would not affect the conclusion of the
review.
The Directors have reviewed the recoverable amount of the CGU and do not
consider there to be any indication of impairment in 2015 or 2014.
12. Other intangible assets
Development costs£'000 Patents,Trademarks & other intangibles£'000 Total£'000
Cost
At 1 May 2014 3,538 4,585 8,123
Additions 1,886 371 2,257
Exchange differences 33 237 270
At 30 April 2015 5,457 5,193 10,650
Amortisation
At 1 May 2014 56 1,102 1,158
Charge for the year 177 534 711
Exchange differences 7 49 56
At 30 April 2015 240 1,685 1,925
Carrying amount
At 30 April 2015 5,217 3,508 8,725
At 30 April 2014 3,482 3,483 6,965
The amortisation period for development costs incurred on the group's product
development is over the period during which the company is expected to benefit
and the amortisation will be based on the number of units sold over the
expected product lifetime.
Patents and trademarks are amortised over their estimated useful lives, which
is on average 10 years.
Other intangible assets with indefinite useful lives arose as part of the
acquisitions of Nova R&D, Inc. in June 2010 and eV Products, Inc. in February
2013. The recoverable amounts of these assets have been calculated on a value
in use basis at both 30 April 2015 and 30 April 2014. These calculations use
cash flow projections based on financial forecasts and appropriate long-term
growth rates. To prepare value in use calculations, the cash flow forecasts
are discounted back to present value using a pre-tax discount rate of 15%
(2014: 16%) and a terminal value growth rate of 2% from 2021. The Directors
have reviewed the recoverable amount of these indefinite useful life assets
and do not consider there to be any indication of impairment.
The carrying amounts of the acquired intangible assets arising on the
acquisitions of Nova R&D, Inc. and eV Products, Inc. as at the 30 April 2015
was £1,858k (2014: £2,134k ), with amortisation to be charged over the
remaining useful lives of these assets which is between 3 and 13 years.
The amortisation charge on intangible assets is included in administrative
expenses in the consolidated income statement.
13. Property, plant and equipment
Computer Equipment£'000 Plant and machinery£'000 Fixturesandfittings£'000 Total£'000
Cost or valuation
At 1 May 2014 586 4,426 144 5,156
Additions 34 2,306 19 2,359
Exchange differences 10 208 4 222
At 30 April 2015 630 6,940 167 7,737
Accumulated depreciation and impairment
At 1 May 2014 398 2,389 84 2,871
Charge for the year 58 587 28 673
Exchange differences 19 23 4 46
At 30 April 2015 475 2,999 116 3,590
Carrying amount
At 30 April 2015 155 3,941 51 4,147
At 1 May 2014 188 2,037 60 2,285
Assets held under finance leases with a net book value of £39k (2014: £nil)
are included in the above table within plant and machinery.
14. Amounts recoverable on contracts
2015£'000 2014£'000
Contracts in progress at the balance sheet date:
Amounts due from contract customers included in trade and other receivables 281 214
281 214
Contract costs incurred plus recognised profits less recognised losses to date 1,915 625
Less: progress billings (1,634) (411)
281 214
15. Trade and other receivables
2015£'000 2014£'000
Amount receivable for the sale of goods 3,458 1,501
Amounts recoverable on contracts (see note 14) 281 214
Other receivables 288 90
Prepayments 62 102
4,089 1,907
Current tax assets 1,002 696
5,091 2,603
Trade receivables
Trade receivables disclosed above are classified as loans and receivables and
are therefore measured at amortised cost.
The average credit period taken on sales of goods is 60 days. The Group
initially recognises an allowance for doubtful debts of 100% against
receivables over 120 days. However, this is subject to management override
where there is evidence of recoverability, most notably, where specific
support is being provided to strategic partners in the marketing of new
products.
Before accepting any new customer, the Group uses an external credit scoring
system to assess the potential customer's credit quality and defines credit
limits by customer.
The Group does not hold any collateral or other credit enhancements over any
of its trade receivables.
At 30 April 2015, trade receivables are shown net of an allowance for bad
debts of £252k (2014:£nil) arising from the ordinary course of business, as
follows:
2015£'000 2014£'000
Balance at 1 May 2014 - -
Provided during the year 252 -
Balance at 30 April 2015 252 -
The bad debt provision records impairment losses unless the Group is satisfied
that no recovery of the amount owing is possible, at which point the amounts
considered irrecoverable are written off against the trade receivables
directly.
Ageing of past due but not impaired receivables at the statement of financial
position date was:
2015£'000 2014£'000
31-60 days 363 70
61-90 days 56 13
91-120 days 159 207
121+ days 593 343
Total 1,171 633
In determining the recoverability of a trade receivable the Group considers
any change in the credit quality of the trade receivable from the date credit
was initially granted up to the reporting date.
The directors consider that the carrying amount of trade and other receivables
is approximately equal to their fair value.
Ageing of impaired receivables at the statement of financial position date
was:
2015£'000 2014£'000
31-60 days - -
61-90 days - -
91-120 days - -
121+ days 466 -
Total 466 -
16. Trade and other payables
2015£'000 2014£'000
Trade payables and accruals 3,359 3,210
Deferred income 784 -
4,143 3,210
Trade payables and accruals principally comprise amounts outstanding for trade
purchases and ongoing costs. The average credit period taken for trade
purchases is 35 days. For all suppliers no interest is charged on the trade
payables. The Group has financial risk management policies in place to ensure
that all payables are paid within the pre-agreed credit terms.
Deferred income relates to government grants received which have been deferred
until the conditions attached to the grants are met.
The directors consider that the carrying amount of trade payables approximates
to their fair value.
17. Borrowings
2015£'000 2014£'000
Secured borrowing at amortised cost
Revolving credit facility 1,003 -
Finance lease liabilities 29 -
1,032 -
Total borrowings
Amount due for settlement within 12 months 1,022 -
Amount due for settlement after 12 months 10 -
Sterling US Total
£'000 dollars £'000
£'000
Analysis of borrowings by currency:
30 April 2015
Revolving credit facility 1,003 - 1,003
Finance lease liabilities - 29 29
1,003 29 1,032
In February 2015 the Group agreed a 24 month facility with its bank for a £3m
revolving credit facility. This facility is secured by a debenture and a
composite guarantee across the Group. The terms of the revolving credit
facility are a nominal interest rate of LIBOR+2.5% and a repayment term of 6
months from date of drawdown.
At the year ended 30 April 2015, the total undrawn amounts relating to the
facility was £1m, available for the future working capital needs of the
Group.
Finance lease liabilities are secured by the assets leased. The borrowings are
at a fixed interest rate with repayment periods not exceeding five years.
The weighted average interest rates paid during the year were as follows:
2015% 2014%
Revolving credit facility 3.10 -
Finance lease liabilities 0.82 -
18. Notes to the cash flow statement
2015 2014
£'000 £'000
Loss for the year (2,146) (3,189)
Adjustments for:
Finance income (31) (15)
Finance costs 102 530
Income tax credit (989) (1,106)
Government grants credit (4) -
Depreciation of property, plant and equipment 673 737
Amortisation of intangible assets 711 560
Share-based payment expense 181 125
Operating cash flows before movements in working capital (1,503) (2,358)
Decrease/(increase) in inventories 183 (291)
Increase in receivables (2,099) (455)
Increase in payables 354 120
Cash used in operations (3,065) (2,984)
Income taxes received 704 766
Net cash used in operating activities (2,361) (2,218)
Cash and cash equivalents
2015 2014
£'000 £'000
Cash and bank balances 1,183 6,563
Cash and cash equivalents comprise cash and short-term bank deposits with an
original maturity of three months or less, net of outstanding bank overdrafts.
The carrying amount of these assets is approximately equal to their fair
value.
19. Events after the balance sheet date
On 29 July 2015 the Group entered into a placing agreement to raise up to
£11.0m gross, or up to £10.4m net of expenses, by a conditional non
pre-emptive placing of 36,000,000 new ordinary shares of 1p each in the
ordinary share capital of the Group ("Ordinary Shares") and an open offer of
up to 8,012,836 Ordinary Shares at a price of 25p per share. The firm placing
and open offer are inter alia, upon the passing of certain resolutions by the
shareholders of the Group.
On 17 August 2015, a general meeting of the Group will be held where the
Directors expect the shareholders of the Company to approve the firm placing
and open offer. On 18 August 2015, subject, inter alia, to shareholder
approval the firm placing and open offer shares will be admitted and dealings
will commence. As a result of the firm placing and open offer the Directors
expect to raise a minimum of £8.4m cash.
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