Notes to the final results

year to 31 December 2014

1.             Nature of operations and general information

Cyprotex PLC ('Cyprotex') and subsidiaries' (together 'the Group') principal activity is the provision of in vitro and in silico ADMET and PK (Absorption, Distribution, Metabolism, Excretion, Toxicity and Pharmacokinetics) information to a number of different industries including the Pharmaceutical, Biotechnology, Cosmetic, Personal Care, Agrochemical, Chemical Industries and Academia.

Cyprotex's vision is to accurately predict the human clinical outcome following exposure to a chemical or drug using high quality, robust in vitro methods combined with in silico technology. Rather than being a pure data provider, we add value and relevance to the ADME-Tox data supplied to our customers in the Pharmaceutical, Cosmetics, Personal Care, Chemical Industries and Academia.

Cyprotex PLC is the Group's ultimate parent company.  It is incorporated and domiciled in England and Wales.  The address of Cyprotex PLC's registered office is 100 Barbirolli Square, Manchester M2 3AB. The addresses of its principal places of business are 15 Beech Lane, Macclesfield, Cheshire, United Kingdom, SK10 2DR and 313 Pleasant Street, Watertown, Massachusetts MA 02472 USA and 4717 Campus Drive, Kalamazoo, Michigan MI49008 USA.  It trades through its wholly owned subsidiaries: Cyprotex Discovery Limited based in Macclesfield in the UK and Cyprotex US, LLC in Watertown and Kalamazoo in the USA. Cyprotex PLC's shares are listed on the Alternative Investment Market of the London Stock Exchange.

The consolidated financial information set out in this announcement is presented in Pounds Sterling (£), which is also the functional currency of the parent. The consolidated financial information has been approved for issue by the Board of Directors on 15 April 2015.

The information in this preliminary announcement does not constitute statutory accounts within the meaning of sections 434 to 436 of the Companies Act 2006 and no statutory accounts have yet been filed with the Registrar of Companies for the year ended 31 December 2014.  Statutory accounts for the year ended 31 December 2013 have been filed with the Registrar of Companies. The auditors report on these accounts was unqualified and did not contain an emphasis of matter, nor did it contain a statement under section 498 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2014 will be delivered to the registrar of Companies following the Company's Annual General Meeting.

The Group's statutory financial statements for the year ended 31 December 2013 and 31 December 2012, prepared under International Financial Reporting Standards (IFRS) have been filed with the Registrar of Companies.

Whilst the financial information included in this final results announcement has been computed in accordance with IFRS, this announcement in itself does not contain sufficient information to comply with IFRS.

2.             Basis of preparation

The consolidated final results are for the year ended 31 December 2014. They have been prepared in accordance with the requirements of International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), including International Accounting Standards (IAS) and interpretations issued by the International Financial Reporting Interpretation Committee (IFRIC) and applied in accordance with the Companies Act 2006. Practice is continuing to evolve on the application and interpretation of IFRS. Further standards may be issued by the International Accounting Standards Board (IASB) and standards currently in issue and endorsed by the EU may be subject to interpretations issued by IFRIC.

The consolidated final results have been prepared in accordance with the accounting policies set out in the Group's statutory financial statements for the year ended 31 December 2014.

The accounting policies have been applied consistently throughout the Group for the purposes of preparation of this consolidated financial information.

3.             Going concern

The Group recorded a loss after taxation of £4,171,426 in the year ended 31 December 2014; this included an impairment charge to goodwill relating to the Group's US operations of £3,040,047 and an exceptional finance income of £242,319 based upon a revaluation of the embedded derivative associated with the  Loan Notes issued by the Company in the previous financial year. The market value of the Company's Loan Notes is based upon the share price performance of the Company and only crystallises at the maturity date of 30 September 2018 or earlier on a change of control or scheme of arrangement. Cash outflows from operations in the year ended 31 December 2014 were at £1.32 million; however substantial unforeseen delays in novating an EPA contract had adversely impacted this figure by £0.9 million. The novation has now been completed which will reverse this impact. Cash and Deposits at 31 December 2014 are £2.9 million. The Directors have reviewed the budget, financial forecasts including cash flow forecasts and other relevant information. The general economic environment in its main European and US markets could adversely affect demand for the Group's services and there is the possibility that the Group's actual trading performance during the coming year may be different from management's expectation. Having considered all relevant factors, the Directors believe that the Group has adequate resources to continue in operation for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual financial statements.

4.             Revenue and Segmental information

Revenue represents the amounts derived from the provision of goods and services which fall within the Group's ordinary activities and is stated net of value added tax and trade discounts.

The Group has a single operating and reportable segment, that of providing in vitro and in silico ADMET and PK (Absorption, Distribution, Metabolism, Excretion, Toxicity and Pharmacokinetics) information to a number of different industries including the Pharmaceutical, Biotechnology, Cosmetic, Personal Care, Agrochemical, Chemical Industries and Academia. The revenue and operating profit or loss for the year are derived from the Group's single operating and reportable segment. This segment has been determined by reference to the information that the Chief Operating Decision maker receives about the Group.

The Group gives a geographic analysis of revenue by destination. Key markets for the Group are identified as North America, Mainland Europe and the United Kingdom.

5.             Finance income and finance cost

Finance income comprises the following:

Finance cost comprises the following:

6.             (Loss)/earnings per share

The calculation of the basic (loss)/earnings per share is based on the (loss)/earnings attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue during the period.  

The calculation of diluted earnings per share is based on the basic earnings per share, adjusted to allow for the issue of ordinary shares and the post tax effect of dividends and/or interest, on the assumed conversion of all dilutive options and other dilutive potential ordinary shares to the extent that the result is not anti-dilutive.

Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below.

(a)   On 24 July 2014, following approval by shareholders at a General Meeting the Company proceeded to effect a ten for one share consolidation. The effect of this share consolidation was to reduce the number of shares in issue by 90% from 224,340,569 to 22,434,056. Accordingly historic reported (loss)/earnings per share are rebased by multiplying by a factor of ten. Under the Share Consolidation every ten existing ordinary shares with nominal value £0.001 was consolidated into one new ordinary share with nominal value £0.01. The rights attaching to the New Ordinary Shares are identical in all respects to those of the Existing Ordinary Shares. Application was made for 22,434,056 New Ordinary Shares of £0.01 each to be admitted to trading on AIM with dealing commencing on 28 July 2014, with any fractional entitlements aggregated and sold in the market and the proceeds given to charity. Following the ten for one share consolidation the conversion or notional conversion price for Loan Notes issued by the Company, and the target and exercise price of any share option awards are all adjusted upwards by a factor of ten.

7.             Share issues

The Company has only one class of shares. During the year to 31 December 2014, 8,643 ordinary shares were issued on conversion of Convertible Loan Notes on 30 September 2014. In the previous year 653,084 ordinary shares were issued on exercise of employee share options. Shares issued may be summarised as follows:

8.             Taxation

At 31 December 2014, the Group has tax losses and deductibles totalling approximately £7.8 million that are available for offset against future profits arising from the same trade.

9.             Additions and disposals of property, plant and equipment

The following tables show the significant additions and disposals of property, plant and equipment.

10.           Finance lease and hire purchase arrangements

The Group entered into no new finance lease or hire purchase agreements in the year ended 31 December 2014, (2013: two; 2012: four). The cost of this equipment and amount of funding received are as follows:

These additions to property, plant and equipment can be reconciled to the amounts disclosed in the statement of cash flows and the statement of financial position as follows:

11.           Intangible assets

The following tables show the significant movements in intangible fixed assets.

Additions to Goodwill in the year ended 31 December 2014 relate to the acquisition of trade and certain assets of Ceetox, Inc. (note 15).

Additions to Technology & Know-How (internally generated) in the year ended 31 December 2014 relate to development work carried out on Transporter services.

Goodwill is subject to a yearly impairment test. Goodwill and other intangible assets relate to the acquisition of Cyprotex US, LLC (formerly known as Apredica, LLC) in August 2010 supplemented by the acquisition of certain trade and assets on Ceetox, Inc on 1 January 2014, by Cyprotex US, LLC. Cyprotex US, LLC is defined as the cash-generating unit for impairment testing purposes.

The Group performed its annual impairment test as at 31 December 2014. As a listed entity on the AIM market of the London Stock Exchange, at the highest level, the Group considers the relationship between its market capitalisation and book value.

Where Goodwill has been separately identified to a particular set of assets and liabilities, as in the case with Cyprotex US, LLC, a value-in-use calculation has been determined using detailed cash flow projections based upon those forecast to be generated by the Cyprotex US, LLC unit over the next five years. Beyond five years, a terminal growth rate is used with reference to previous growth achieved in the ADME-Tox market by the Group taking into consideration the forecast growth in the market or markets in which Cyprotex US, LLC currently operates. The results of this year's value-in-use calculation performed by the Board indicate a shortfall equivalent to the carrying value of goodwill and a provision for impairment of £3,040,047 has been recognised.

All amortisation and impairment costs are included in administration costs.

During the previous year the Board decided to rebrand its US operations. The Apredica trade name which was acquired in August 2010 was superseded and the US now trades as Cyprotex, US. Accordingly the carrying amount associated with the Apredica trade name was subject to full impairment in the year to 31 December 2013 and the remaining balance of £135,801 was written off.

Additions in the year ended 31 December 2012 to Technology & Know-How (internally generated) related to development work carried out on CellCiphr^® technologies.

12.           Other borrowings

In the previous year, the Group entered into a Subscription Agreement on 21 August 2013 with Trident Private Equity Fund III LP, the ultimate outcome of which was the issue of £3 million of unsecured Redeemable Loan Notes ("Redeemables") and £4 million of unsecured Convertible Loan Notes ("Convertibles") in September 2013. By way of an Open Offer the Company issued £4 million nominal value of Convertible Loan Notes at par. Additionally it also, by way of subscription, issued £3 million nominal value of Redeemable Loan Notes at par. Details of this fundraising  were sent to all shareholders by way of a circular. Both instruments pay interest in the form of 'payment in kind' ('PIK') notes at the rate of 5% per annum on a compound basis, payable on each anniversary of issue for a period of five years. Under the Open Offer, Convertible Loan Notes were offered and issued such that each shareholder would be entitled to 0.01783003 of nominal value £1.00 Convertible Loan Notes. Convertible Loan notes are convertible at 6 pence per ordinary share, now 60 pence following a ten for one share consolidation in July 2014. Redeemable Loan Notes were issued subject to a notional conversion price of 6 pence per ordinary share, now 60 pence following a ten for one share consolidation in July 2014. Issue costs associated with this fundraising amounted to £122,000. Net proceeds from the issue of Loan Notes amounted to £6,878,000.

The Convertible Loan Notes and associated PIK notes can be converted at the election of the holders of Convertible Loan Notes into ordinary shares of the Company on 30 September 2014 and/or on each anniversary of that date. Subject to conversation rights being exercised by the Noteholder, Loan Notes are repayable by the Company on the earlier of:

· the Offer Date where there is a change in control of the Company or a scheme of arrangement put in place.

· the Maturity Date (30 September 2018). The Maturity Date in respect of the Convertible Loan Notes and Redeemable Loan Notes may also be extended by up to two years at the option of a 50% majority of the holders of Convertible Loan Notes and Redeemable Loan Notes respectively.

The amount to be paid by the Company in respect of the redemption of the Loan Notes will be the greater of:

i) the nominal amount of the Loan Notes and the PIK Notes: and

ii) where a change in control of the Company or a scheme of arrangement is put in place, the amount calculated by applying the Offer Price per ordinary share applicable to the Offer to the number of Ordinary Shares represented by the Notes on the assumption that the nominal value of the Loan Notes then in issue (including any PIK notes issued or to be issued on or immediately prior to the Offer Date) had been converted in to Ordinary Shares at the Conversion Price (60 pence) or Notional Conversion Price (60 pence), as the case may be, on the Offer Date: and

          iii)   where the Loan Notes are redeemed on the Maturity Date the amount calculated by applying the average mid-market closing price of the Ordinary Shares in the 30 Business days prior to the Maturity Date to the number of Ordinary shares represented by the Loan Notes on the assumption that the nominal value of the Loan Notes then in issue (including any PIK notes issued or to be issued on or immediately prior to the Maturity Date) had been converted into Ordinary shares at the Conversion Price (60 pence) or the Notional Conversion price (60 pence) on the Maturity date (30 September 2018).

The Convertible Loan Notes and Redeemable Loan Notes are subject to a multiplier based upon the increase in share price from the Conversion or Nominal Conversion price of 60 pence. In both cases any increase in the average mid-market closing price of Cyprotex shares from a nominal base of 60 pence in the 30 prior market dealing days leads to a broadly proportionate increase in the amount of potential Loan Note related debt repayable on maturity. This increase in debt, relating to share price movements of the Company, is accounted for under International Financial Reporting Standards ("IFRS") as an additional finance cost in the income statement.

The Convertible Loan Notes have three separate economic components as follows:

·      a liability component being a discounted fixed rate debt;

·      an equity component due to the holders right to convert into Ordinary shares; and

·      an embedded derivative due to conversion rights being linked to the Company's share price.

Each of these components was measured at fair value at the issue date.

This resulted in recognition of £164,496 (net of associated issue costs) as an equity component and the initial recognition of the liability component.

The Redeemable Loan Notes have two separate economic components as follows:

·      a liability component being a discounted fixed rate debt; and

·      an embedded derivative due to conversion rights being linked to the Company's share price via a notional issue price

Each of these components was measured at fair value at the issue date and a gain of £122,734 was deferred in respect of differences in market and coupon rates at date of issue.

Subsequently, the liability components of both the Convertible and Redeemable Loan Notes are recorded at amortised cost using the effective interest method, with interest-related charges recognised as an expense in finance cost in the income statement.

The embedded derivatives associated with the Convertible and Redeemable Loan Notes are subsequently measured at fair value at each balance sheet date, and the gain or loss on re-measurement to fair value is recognised as a finance cost/income in the income statement.

For the year ended 31 December 2014, re-measurement of the embedded derivatives resulted in additional income for both the Redeemable and Convertible Loan Notes totalling £242,319 (2013: (£1,592,319) charge).

The carrying values attributed to the Loan Notes and associated PIK notes at 31 December 2014 are as follows:

A summary of the components of the finance costs/(income) associated with the Redeemable and Convertible Loan Notes is as follows:

The number of Redeemable Loan Notes in issue at 31 December is as follows:

The number of Convertible Loan Notes in issue at 31 December is as follows:

In the case of the embedded derivatives in calculating their values, principal assumptions used were a share price volatility of 38% (2013: 38%), a credit spread of 20% (2013: 20%) and a risk-free rate of 1.1% (2013: 2.0%).

13.           The Annual Report

The 2014 Annual Report and Accounts of the Group will be available to shareholders on 21 May 2015. Copies will be available on request from the Company Secretary, Cyprotex PLC, 15 Beech Lane, Macclesfield, Cheshire, SK10 2DR.

14.           Annual General Meeting

The Annual General Meeting of the Company is scheduled to be held at 10:00am on Thursday 25 June 2015 at the offices of N+1 Singer Advisory LLP, One Bartholomew Lane, London EC2N 2AX.

15.           Purchase of the trade and certain assets of CeeTox, Inc

On 1 January 2014 the group's US subsidiary, Cyprotex US, LLC, under an asset purchase agreement ('APA'), purchased certain assets and trade of Ceetox, Inc. (CeeTox) from North American Science Associates, Inc ('NAMSA'). CeeTox is based in Kalamazoo, Michigan, USA. The purchase price was £0.84 million. Under the APA the group acquired fixed assets and working capital balances and the balance of the purchase price and any additional consideration in excess of the fair value of assets acquired is allocated to goodwill. There is potentially further consideration payable to NAMSA at a rate of 5% of net sales until 31 December 2016 if sales of certain identified assays exceed the level achieved in the year to 30 September 2013 in subsequent 12 month periods post acquisition to a maximum of £3.1 million. In the year to 30 September 2013, CeeTox recorded total revenues of £2 million and reported an operating loss of £1 million.

In the year ended 31 December 2014, our Kalamazoo operations reported sales of £1.1 million and an operating loss of £0.6 million.  This acquisition enabled the Group to widen its customer base into the Cosmetic, Personal Care and Household Chemicals market where we believe ADME-Tox screening requirements are growing and where we were underrepresented in the market.  The base in Kalamazoo, MI, USA added to our geographical base in the US, the largest market for our services.   Additionally the Kalamazoo facility can operate many of its assays to GLP (Good Laboratory Practice) an important consideration for screening data required for regulatory approval. 

External acquisition related costs of £32,900 have been expensed.