Notes to the interim condensed consolidated financial statements

six months to 30 June 2015

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/PK (Absorption, Distribution, Metabolism, Excretion, Toxicity, and Pharmacokinetic) information to a number of different industries including the Pharmaceutical, Biotechnology, Cosmetic, Personal Care, Agrochemical, Chemical Industries and Academia. Cyprotex's vision is to provide, in partnership with our customers in drug discovery and development, the highest quality, fastest turnaround and most cost effective ADMET and pharmacokinetic data to those customers.

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, BioHub at Alderley Park, Alderley Edge, Cheshire, SK10 4TG,  313 Pleasant Street, Watertown, Massachusetts, MA02472 USA and 4717 Campus Drive, Kalamazoo, Michigan MI49008 USA. It trades through its wholly owned subsidiaries, Cyprotex Discovery Limited based in Macclesfield and Alderley Park 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.

Cyprotex's interim condensed consolidated financial statements ('the interim financial statements') are presented in Pounds Sterling (£), which is also the functional currency of the parent company. These interim financial statements have been approved for issue by the Board of Directors on 18 August 2015.

The financial information for the year ended 31 December 2014 set out in these interim financial statements does not constitute statutory accounts as defined in section 435 of the Companies Act 2006.  The Group's statutory financial statements for the year ended 31 December 2014 have been filed with the Registrar of Companies.  The auditor's report on those financial statements was unqualified and did not contain statements under section 498(2) or section 498(3) of the Companies Act 2006.

2.         Basis of preparation, going concern and accounting policies

Basis of preparation

These interim financial statements are for the six months to 30 June 2015.  They have been prepared in accordance with IAS 34, Interim Financial Reporting.  They do not include all of the information required for full annual financial statements, and should be read in conjunction with the annual consolidated financial statements of the Group for the year ended 31 December 2014.

Going concern

The Directors have reviewed the budget, financial forecast including cash flow forecasts and other relevant information. They believe that the Group has adequate resources to continue in operation for the foreseeable future.

Accounting policies -

New standards, interpretations and amendments adopted by the Group

The accounting policies adopted in the preparation of the interim financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2014, except for the adoption of new standards and interpretations effective as of 1 January 2015.

The Directors do not consider that the adoption of these standards and interpretations would have a material impact on the consolidated or company financial statements in the period of initial application.

3.         Seasonal fluctuations

Historically revenues are strongest in the second half of the year.  Revenues slow following the Christmas and New Year holidays, and again during the summer holidays, particularly from European clients.

The provision of ADMET services is subject to seasonal fluctuations, historically with peak demand in the second half of each year.  For the six months ended 30 June 2015, revenues represented 59.9% of the annual level of revenues in the year ended 31 December 2014.

4.         Segmental information

The Group has a single operating and reporting segment, that of providing in vitro and in silico ADMET/PK (Absorption, Distribution, Metabolism, Excretion, Toxicity, and Pharmacokinetic) 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 periods are derived from the Group's single operating and reportable segment. This 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:

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.

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 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 conversion 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 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. Any decrease in debt, relating to share price movements of the Company, is accounted for under International Financial Reporting Standards ("IFRS") as an additional finance income 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 is measured to fair value at the issue date.

This results in recognition of £164,496 (net of associated issue costs) as an equity component and the initial recognition of the debt 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 is measured to fair value at the issue date and a gain of £122,734 is deferred in respect of differences in market and coupon rates at the 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 finance cost/income in the income statement.

The carrying value attributed to the Loan Notes are as follows:

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

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

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

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

6.         Loss per ordinary share 

The calculation of the basic loss per share is based on the loss attributable to ordinary shareholders divided by the weighted average number of 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 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. 

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

^ rebased for ten for one share consolidation on 24 July 2014

Where a loss is reported for a period the weighted average number of ordinary shares in issue, for the purpose of calculating diluted loss/earnings per share, is the same as that used for the basic loss/earnings per share calculation. This is because outstanding share options would have the effect of reducing the loss per ordinary share and would therefore not be dilutive.

On 24 July 2014, following approval by shareholders at 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 after that date are rebased by multiplying by a factor of ten.

Under the Share Consolidation every ten existing ordinary shares with nominal value £0.001 were 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

No shares were issued in the 6 month period to 30 June 2015 or 6 months to 30 June 2014.

During the year ended 31 December 2014, 8,643 ordinary shares were issued pursuant to the conversion of Loan Notes at 60 pence per share. The share issues in exchange for the cancellation of Loan Notes yielded £nil in cash and increased equity by £5,186. The share price at the date of conversion was 51 pence.

Shares issued and movements in share capital may be summarised as follows:

The Company has only one class of shares.  

8.         Share based payment

The Company adopted a Long Term Incentive Plan ('LTIP') on 22 January 2014. The purpose was to allow participants, who are executives in the Company, to potentially share in the creation of value for shareholders. A total of 2,999,999 share options under the LTIP have been awarded. The vesting of these executive options is on grant, at an exercise price of 60 pence per share, and are exercisable only upon change of control of the Company within a ten year period, dependent upon the Company's share price performance and subject to a minimum share price of 120 pence.

In order to calculate the fair value of potential awards a Monte Carlo simulation was used. The principal inputs to the valuation model were as follows:

^ rebased following ten for one share consolidation on 24 July 2014

The amounts charged to the income statement in respect of these awards, is as follows:

9.         Additions and disposals of property, plant and equipment

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

10.        Intangible fixed assets

The following tables show the movement on intangible fixed assets:

Additions in the period to 30 June 2014 and year ended 31 December 2014 to technology & knowhow relate to development work associated with Drug Transporter technology.

Additions in the period to 30 June 2014 to goodwill arose on the acquisition of certain assets and trade of CeeTox, Inc.

11.        Contingent consideration

On 4 August 2010 prior to the acquisition of Cyprotex US, LLC by Cyprotex PLC; Cyprotex US, LLC acquired certain assets and the trade of Cellumen, Inc under an asset purchase agreement. Under the terms of that agreement Cyprotex US, LLC agreed to pay a contingent payment based on future sales revenues using the CellCiphr^TM technology acquired for a period up to four years at a rate of between 10% and 20%. These potential payments were classified as contingent consideration and terminated in August 2014.

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 initial purchase price of £0.84 million was paid on completion. 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 to a maximum of £3.1 million.

These potential payments have been classified as contingent consideration and the provision below represents an estimate of potential payments that may fall due under that agreement. No payments have been made to date.

12.        Taxation

At 30 June 2015, the Group has tax losses and tax deductibles of approximately £8.0 million that are available for offset against future profits arising from the same trade.