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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Midatech Pharma Plc | LSE:MTPH | London | Ordinary Share | GB00BNGF1L75 | ORD GBP0.02 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 18.00 | 17.00 | 19.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMMTPH
RNS Number : 7039L
Midatech Pharma PLC
23 April 2018
Midatech will host a conference call and live Q&A session today (Monday 23 April 2018) at 1400 BST / 0900 EDT for analysts and investors to discuss the Full Year 2017 Results. Dr Craig Cook, Chief Executive Officer-designate, and Nick Robbins-Cherry, Chief Financial Officer, will lead the presentation.
The conference call dial-in details are: UK: +44 (0) 1452 580570 US: +1 866-223-0481 ID: 8963358
The presentation will be available on Midatech's website shortly before the call, and a recording will be available shortly afterwards.
23 April 2018
Midatech Pharma PLC
("Midatech", "Company" or "Group")
Audited financial results for the year ended 31 December 2017
Midatech Pharma (AIM: MTPH; NASDAQ: MTP), the international specialty pharmaceutical company focused on commercialising and developing products in oncology, immunology and other therapeutic areas, today announces its audited financial results for the twelve-month period ended 31 December 2017.
Financial highlights
-- Total gross revenues(1) for the year up 31% to GBP12.08m (2016: GBP9.21m), in line with expectations
-- Total revenue(2) for the year up 10% to GBP7.60m (2016: GBP6.92m) -- Statutory revenue(3) for the year up 6% to GBP6.76m (2016: GBP6.38m) -- US product net sales for the year up 28% to GBP6.65m (2016: GBP5.19m)
-- GBP13.20m cash and deposits at 31 December 2017 (2016: GBP17.61m), in line with market forecasts
-- Net loss after tax of GBP16.06m (2016: GBP20.16m) with net cash outflow in the year of GBP4.15m (2016: GBP0.97m inflow)
-- Tax credit receivable of GBP1.19m (2016: GBP1.44m)
-- Entered into a senior secured $15m loan agreement with MidCap Financial Trust in Q4 2017. $7m has been received, the remaining $8m is dependent on clinical development milestones
Operational highlights including post period end highlights
-- MTD201 Q-Octreotide for carcinoid cancer: regulatory submission in EU for first in-human clinical trial; approval received shortly after year-end, with data read-out expected H2 2018
-- MTX110 for DIPG childhood brain cancer: regulatory submission to the US Food and Drug Administration for first in-human clinical trial at University of California San Francisco and Memorial Sloane Kettering (New York); approval received shortly after year-end
-- MTD119 for HCC liver cancer: commenced IND enabling toxicology programme with data readout expected H2 2018; MTD119 was granted Orphan Drug Designation by the European Medicines Agency in February 2018
-- Manufacturing: licence granted to the Group's Bilbao manufacturing operation by the Spanish Medicines Agency (AEMPS), enabling the production of our sustained release formulations for clinical and commercial use - a pivotal step on the road to commercialising MTD201 Q-Octreotide
-- US commercial business as a standalone operation achieved breakeven on an EBITDA basis for the second half of 2017
Hot Features
Premium
1) Total gross revenues represents the full list
price of products shipped to wholesalers and
other customers before product returns, discounts,
rebates and other incentives based on the sales
price and grant revenue.
2) Total revenue represents Statutory Revenue (defined
below) plus grant income
3) Statutory Revenue represents total gross revenue,
excluding grant revenue and after deductions
for product returns, discounts, rebates and
other incentives.
Commenting on the Full Year 2017 Results, Midatech's Chief Executive Officer-designate, Dr Craig Cook, said: "2017 was a year of significant change and progress for Midatech. We have continued the development of our three lead oncology drug candidates and we now have exciting value inflection points coming up in 2018. Additionally we made good progress with our immunotherapy assets, which are now advancing toward potential clinical development. Our US commercial business recorded solid growth, achieving a breakeven EBITDA in the second half of the year.
"As we announced earlier in the year, Midatech has an updated leadership team and we are fully focused on advancing our R&D pipeline into clinical development and beyond. With additional funding secured, we are well-resourced to drive towards our clinical objectives. We are enthused by the prospect of delivering transformative therapies to improve patients' lives and progressing our R&D pipeline forward to address unmet needs in significant markets, driving future profitability and creating value for stakeholders."
This announcement contains inside information for the purposes of Article 7 of Regulation (EU) 596/2014 (MAR).
- Ends -
For more information, please contact:
Midatech Pharma PLC
Dr Craig Cook, CEO-designate
Tel: +44 (0)1235 841575
www.midatechpharma.com
Panmure Gordon (UK) Limited (Nominated Adviser and Broker)
Corporate Finance
Freddy Crossley / Ryan McCarthy
Tel: +44 (0)20 7886 2500
Consilium Strategic Communications (Financial PR)
Mary Jane Elliott / Ivar Milligan / Nicholas Brown
Tel: +44 (0)20 3709 5700
Email: midatech@consilium-comms.com
Westwicke Partners (US Investor Relations)
Chris Brinzey
Tel: +1 339 970 2843
Email: chris.brinzey@westwicke.com
Notes for Editors
About Midatech Pharma PLC
Midatech is an international specialty pharmaceutical company focused on the research and development of a pipeline of medicines for oncology and immunotherapy, and marketing these through its established US commercial operation which includes four cancer care supportive products and two further co-promoted products. Midatech's strategy is to internally develop oncology products, and to drive growth both organically and through strategic acquisitions. The Company's R&D activities are focused on three innovative platform technologies to deliver drugs at the "right time, right place": gold nanoparticles ("GNPs") to enable targeted delivery; Q-Sphera polymer microspheres to enable sustained release ("SR") delivery; and Nano Inclusion ("NI") to provide local delivery of therapeutics, initially to the brain. The Group, listed on AIM: MTPH and Nasdaq: MTP, employs c.100 staff in four countries. For further company information see: www.midatechpharma.com
Forward-Looking Statements
Certain statements in this press release may constitute "forward-looking statements" within the meaning of legislation in the United Kingdom and/or United States. Such forward-looking statements include, but are not limited to, statements regarding the ability of Midatech to successfully test, manufacture, produce or commercialize products for conditions using the nanoparticle and sustained release drug delivery platforms, and the ability for products in development to achieve positive clinical results, and the ability to meet or achieve timelines associated with pre-clinical studies, clinical trials or regulatory submissions. Any forward-looking statements are based on currently available competitive, financial and economic data together with management's views and assumptions regarding future events and business performance as of the time the statements are made and are subject to risks and uncertainties. We wish to caution you that there are some known and unknown factors that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
Reference should be made to those documents that Midatech shall file from time to time or announcements that may be made by Midatech in accordance with the London Stock Exchange AIM Rules for Companies ("AIM Rules"), the Disclosure and Transparency Rules ("DTRs") and the rules and regulations promulgated by the US Securities and Exchange Commission, which contains and identifies other important factors that could cause actual results to differ materially from those contained in any projections or forward-looking statements. These forward-looking statements speak only as of the date of this announcement. All subsequent written and oral forward-looking statements by or concerning Midatech are expressly qualified in their entirety by the cautionary statements above. Except as may be required under the AIM Rules or the DTRs or by relevant law in the United Kingdom or the United States, Midatech does not undertake any obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise arising.
CHAIRMAN AND CHIEF EXECUTIVE'S STATEMENT
The Group's hard work in 2017, dealing successfully with some significant challenges, means Midatech is well-positioned to reach key value inflection points in our lead development projects during 2018 and beyond, and for the first time, we forecast that our US marketing operation will be profitable on an EBITDA basis for a full year in 2018.
Introduction
2017 saw Midatech make important progress towards achieving our objective of creating significant shareholder value through advancing our three key R&D projects for rare cancers and by profitably commercialising our cancer supportive care products.
As a fully integrated business, we have made great strides with our development programmes, scale-up of our manufacturing capabilities, and also with our commercial organisation as we start to prepare our in-house products for launch.
Progress against strategy
In-house oncology products
Q-Octreotide
During the past year, Midatech has completed the formulation of Q-Octreotide, its pre-clinical testing phase as well as manufacture for the forthcoming clinical trial. This followed a lengthy but valuable and comprehensive liaison with the US Food and Drug Administration ("FDA") regarding the clinical trial design, in order to optimise the conduct of the clinical trial. We also satisfactorily addressed manufacturing challenges which was necessary prior to commencement of the study. The initial clinical trial application was submitted in October 2017. The study received Polish regulatory approval in January 2018, and is expected to commence in April 2018. The trial programme has two components, an initial exploratory phase, which should complete during the first half of the year, and a second confirmatory phase expected to be completed by the end of 2018.
Whilst our existing manufacturing capability is sufficient to meet anticipated early demand, the next stage of development would require further investment in full commercial scale manufacturing capacity ahead of filing for marketing authorisation. If the product shows interchangeability with Sandostatin LAR, the Company expects to file for marketing authorisation with the FDA in 2020.
MTX110
Our licence deal with Novartis, signed in 2017, gave us access to a highly potent drug, panobinostat, to use in our children's brain tumour product, MTX110. Midatech's nano-inclusion technology platform enables local delivery of panobinostat directly to the tumour via a catheter system called Convection Enhanced Delivery, diffusing the drug into and around the tumour. This technique allows for elevated drug concentrations to be delivered to the tumour, while at the same time minimizing systemic toxicity and peripheral side effects.
Following comprehensive and constructive discussion with the FDA regarding the clinical trial design, the Investigative New Drug ("IND") application was submitted to the FDA in Q4 2017 and approval was granted in January 2018. We were then required to obtain ethics approval for the trial, which is expected to be granted in April 2018. The study is expected to formally commence Q2 2018.
The study, a combined Phase I/II in up to 43 patients, will be conducted at the University of California San Francisco and at Memorial Sloan Kettering Cancer Centre in New York. It is expected to take up to two years to complete but, as it is open label, if encouraging results are seen as the study progresses, then discussions with the FDA can be accelerated to enable greater patient access through compassionate use and/or accelerated approval.
MTD119
The pre-clinical programme for MTD119, comprising the anti-cancer compound maytansine bound to GNP, was completed in July 2017, with studies demonstrating potent anti-tumour activity. Peak reduction in tumour growth due to MTD119 suggests that it has the potential to be more effective than the standard of care, Sorafenib. Improved tolerability may reflect specific targeting of maytansine to tumour cells by MTD119.
Midatech has now entered formal IND enabling studies, with completion of the first pilot animal studies in the first half of 2018, and completion of the remainder of the studies expected in the fourth quarter of 2018 or early 2019. These studies will allow Midatech to review the data for efficacious dose levels versus toxic dose levels and optimise the dosing regime for a potential future first in-human study. Assuming favourable data, Midatech hopes to complete an IND submission to the FDA H1 2019, for first-in-human studies in H2 2019. On February 22, 2018, Midatech announced that the European Medicines Agency granted orphan drug designation for MTD119.
Manufacturing Operations
A highlight of 2017 was the upscaling of our manufacturing capability in Bilbao, Spain, enabling us to produce our sustained release microcapsule formulations for clinical and commercial use. This includes the required clinical grade batches of Q-Octreotide (MTD201) allowing that key programme to commence. The upgrade involved a EUR1.6 million investment during 2016 and 2017, and considerable effort in process development from our teams in Bilbao and Cardiff. Some significant upscaling challenges were overcome and the upgraded facility was signed off by the Spanish Medicines Agency to GMP (Good Manufacturing Practice) standard in the second half of the year.
US Commercial Organisation
The US commercial arm of the organisation has reached a significant point in its development. During the first half of 2017, increased discounting pressure in the market had some impact on margins. However, we had a strong second half of the year, and for H2 2017, despite the above challenges, the US commercial business on a standalone basis has broken even, on an EBITDA basis, for the first time.
We recently initiated a market expansion study - a Phase 4 clinical trial - for one of our marketed products in the US, Gelclair. This study received approval in December, and we will be testing the product for use in patients undergoing bone marrow transplants over the next 12 months. If that study shows the product to be as effective for treating oral mucositis as it is in current users undergoing chemo- or radiotherapy, we would expect to see a significant expansion of use.
Partnerships
The Emergex collaboration, signed during 2016, had a positive first year with the successful application of Midatech know-how to rapidly deliver multiple, novel, peptide-bearing gold nanoparticles for application as vaccines against a variety of infectious diseases. As communicated previously, our collaboration with Ophthotech in the US came to an end during the year due to Ophthotech's internal issues.
Financing
In October, we undertook a GBP6 million fund raise and placing of shares to existing and new investors, the proceeds of which are being used to drive forward the clinical development programmes. In conjunction with the fund raise, the Group went through a cost reduction exercise, including decreasing the costs of the Board and senior management team.
This equity fundraise was followed, in December, by the Company entering into a four-year senior secured loan agreement with MidCap Financial of up to $15 million. $7 million was drawn on closing and provides the necessary working capital to reach the value-driving inflection points in our product development programmes in 2018. Drawdown of the remaining $8 million is dependent on clinical development milestones. This agreement was also a strong, independent validation of the progress the business has made.
Risk management
Our development programmes, targeted at new delivery mechanisms for approved therapies, are complemented by our balanced portfolio of commercialised products which serves to mitigate risk. The Board monitors risks on an ongoing basis, and during 2017 put in place a formal Compliance Committee, which reports to the Board.
People
Across the business, the entire Midatech team has worked continuously to meet difficult deadlines and challenging targets. On behalf of ourselves and the rest of the Board, we would like to thank colleagues for their dedication and contributions during 2017 that has enabled the Group to achieve a strong platform on which to build for the future.
In recognition of our employees' commitment to the business, the Board introduced a share save scheme, the Midatech Pharma Share Incentive Plan, allowing employees to invest in Midatech through the acquisition of shares and to participate in the future success of the Group.
Outlook
Looking forward, we expect important advances in all areas of the business during 2018. Positive clinical trial readouts for Q-Octreotide would accelerate the path to product registration. Early data from the MTX110 children's brain tumour study will be an important indicator of the product's efficacy and may also lead to early registration for this ultra-rare indication in children. The Gelclair study readouts later in the year could widen the product's application and as a result have a significant impact on sales and growth potential. Beyond our internal priorities, we continue to look for prospective partnerships to take on commercial rights for our own development projects. We will be pursuing multiple opportunities in the coming months, and look forward with cautious optimism to a pivotal year ahead.
On 15 March 2018, the Company announced that Dr Jim Phillips would step down as CEO at the end of May 2018 after having served the Company for five years. On behalf of the Board, we thank Jim for his contribution to the Group since IPO. The Board has appointed Dr Craig Cook (currently Chief Operating Officer and Head of Research & Development) to succeed Dr Phillips as CEO and proposed Board member from 1 June 2018, following a transition period of approximately three months in order to ensure a smooth handover.
Dr Cook, who joined Midatech in April 2014, has more than 20 years of international experience in the pharmaceutical, biomedical and high technology sectors including roles across a range of therapeutic areas covering both drug development and medical affairs. The Company is fortunate that, in Dr Cook we have an internal candidate who can take over responsibility as CEO, ensuring continuity and a controlled handover. He will provide strong leadership, demonstrated expertise, a deep understanding of the business, and a relentless focus on delivery of key value-driving programmes to take Midatech into its next phase of value creation. The Board is also evaluating options for obtaining non-dilutive funding, that would enable the Group to deliver on its key value-driving programmes and to take Midatech into its next phase of value creation without a reliance in the short-term on equity finance. We have every confidence that Dr Cook, together with his senior management team, will drive Midatech to a successful future.
On behalf of the Board, we would like to thank all of Midatech staff, investors, clinicians and patients for their continued support during 2017.
Rolf Stahel Dr Jim Phillips Chairman Chief Executive Officer
OUR DEVELOPMENT PIPELINE
We are advancing the development of multiple, high value, therapies, and 2018 is expected to see the first in-human studies for two of our lead programmes: MTD201 for carcinoid cancer using our sustained release technology, and MTX110 for childhood brain cancer based on our nano-inclusion technology. We also expect to progress towards the clinic for our gold nanoparticle based programmes, MTD119 for liver cancer and our brain cancer immunotherapy programmes MTR111 and MTR116.
Focus Programme: Q Octreotide
Long-acting formulation of octreotide, using Midatech's sustained release Q-Sphera(TM) technology for the treatment of carcinoid cancer and acromegaly.
-- Estimated global market in excess of $2 billion, dominated by Sandostatin(R) and Somatuline(R)
-- The targeted profile of Q Octreotide is as follows:
- Interchangeable with the market leading Sandostatin LAR(R) , the current Standard of Care (SoC)
- Faster to reconstitute than SoC, which will reduce nurse time and patient waiting times
- Simpler to reconstitute than SoC, reducing the need for nurse training and the risk of error
- Improved reconstituted product stability and simpler process will reduce the risk of wastage of doses, the need to repeat part of the reconstitution process, or the occurrence of injection blockages and partial doses, all of which can be significant problems with current competitor products
- Reduced need to perform 2-week test period, as is required for competitor products -- Streamlined manufacturing process in Midatech's Bilbao facility - Terminal sterilisation aseptic manufacture - High-throughput process producing 'printed' microspheres - Transferable to future Q-Sphera(TM) projects -- Next steps - Human studies to commence in H1 2018 - 505(b)(2) submission in the US anticipated H1 2020 - US marketing authorisation anticipated in 2020 - Launch anticipated in 2020-21
Focus Programme: MTX110 for DIPG
Treatment for ultra-rare childhood brain tumour (DIPG), with delivery of therapeutic constructs directly into tumour using Midatech's nano-inclusion technology.
-- Estimated addressable global market around $100 million -- Less than 1,000 cases per year worldwide -- Universally fatal, with median survival time of 9 months -- No effective current treatment; surgical resection is not possible
-- The chosen delivery technique allows elevated drug concentrations of solubilised MTX110 to be infused directly into the tumour, while minimising systemic toxicity and peripheral side-effects
-- Compassionate use/named patient programme in UK and US: - Six patients treated to date - treatments have thus far been well tolerated
-- Utilises Panobinostat API, licensed from Novartis in June 2017, and demonstrated very high potency against DIPG tumour cell lines in the laboratory and in animal studies
-- Next steps - Build on the high level of regulatory support received in 2017 - US and/or EU studies estimated to commence in H1 2018 - Potential for orphan drug designation and paediatric extensions - Product could receive fast track approval and be commercially available as early as 2020/21
Focus Programme: MTD119 for liver cancer
Targeted therapy treatment for liver cancer using Midatech's gold nanoparticle technology
-- Estimated addressable global market $1 billion by 2024 -- Second leading cause of cancer deaths worldwide; around 800,000 affected - 95% non-curable, non-operable and median survival less than one year - Successful outcomes with chemotherapy are rare and generally short lived
-- MTD119 focus is to increase tolerability to an otherwise lethal dose of the active drug, mertansine, and to generate higher anti-tumour efficacy through improved bio-distribution of the active
-- Initial animal data, to be confirmed in IND enabling studies, suggests peak reduction in tumour growth is better than the current standard of care (Sorafenib), and improved survival, with clear dose response
-- MTD119 drug candidate granted Orphan Drug Designation by the European Medicines Agency in February 2018
-- Next steps
- Data readout from further pre-clinical and IND enabling toxicology studies, which may lead to an informed decision to proceed to formal clinical development.
- First in-human study planned for 2019, pending supportive data - Potential for orphan designation in other territories
Testimonials
"Combining Midatech's impressive Q-Sphera sustained release technology with the pharmacologically active agent octreotide promises a much-needed product for treating acromegaly and endocrine tumours. MTD201's interchangeability with Octreotide LAR, as well as the opportunity for simpler reconstitution, fewer errors and wastage, and improved patient experience, would be a welcome addition to the limited choice of therapies currently available. Achieving such a unique product equivalent to Octreotide LAR would be advantageous for patients, physicians, and payors."
Professor Shlomo Melmed, Dean of Medical Faculty, Cedars-Sinai Medical Centre, Los Angeles
"DIPG is a devastating childhood brain cancer with virtually no long-term survivors, and for which there are no current therapies other than palliative treatments. Midatech's MTX110 has shown promise as one of the most potent compound against DIPG brain tumour cells in laboratory experiments, and has also been well tolerated in compassionate use treatments to date. It is exciting to be working with the Midatech team on taking MTX110 into formal clinical trials in patients that are about to start, and developing a potentially breakthrough treatment for DIPG."
Professor Sabine Mueller, Paediatric Neuro-Oncologist, Benioff Children's Hospital, University of California San Francisco
FINANCIAL REVIEW
Introduction
Midatech Pharma plc (the "Company") was incorporated as a company on 12 September 2014 and is domiciled in England. The Midatech Group was formed on 31 October 2014 when Midatech Pharma plc acquired the entire issued share capital of Midatech Limited and its wholly owned subsidiaries. The Group was expanded when, on 8 December 2014, the Company acquired the entire issued share capital of UK based Q Chip Limited ("Q Chip"), a pharmaceutical development company. Q Chip was subsequently renamed Midatech Pharma (Wales) Limited ("MPW"). The Company was admitted to AIM on 8 December 2014, raising GBP32.0m before costs in new capital.
On 4 December 2015, the Company acquired the entire issued share capital of U.S. based, DARA BioSciences, Inc. ("DARA"), an oncology supportive care pharmaceutical company. DARA was subsequently renamed Midatech Pharma US, Inc. ("MPUS"). On 4 December 2015, following the DARA acquisition, American Depositary Receipts ("ADRs") with each ADR representing the right to receive two ordinary shares, were admitted to trading on the NASDAQ Stock Market LLC trading platform ("NASDAQ").
The MPUS business brought with it a portfolio of five cancer supportive care products and an established commercial platform in the U.S. market with a field sales organisation. To supplement this acquisition, on 24 December 2015, the Company acquired Zuplenz(R) (ondansetron), a marketed anti-emetic oral soluble film from Galena Biopharma, Inc. (Nasdaq: GALE) for the prevention of chemotherapy-induced nausea and vomiting, radiotherapy-induced nausea and vomiting, and post-operative nausea and vomiting.
On 28 October 2016, the Company announced that at a General Meeting, shareholders had approved the issuance of 15,157,044 new ordinary shares following a Placing to new and existing institutional shareholders and additional Open Offer. This raised proceeds of GBP16.67m before expenses and the new shares were admitted to AIM on 31 October 2016. On 16 October 2017, the Company announced that at a General Meeting, shareholders had approved the issuance of a further 12,314,679 new ordinary shares following a Placing to new and existing institutional shareholders and additional Open Offer. This raised proceeds of GBP6.16m before expenses and the new shares were admitted to AIM on 17 October 2017.
On 2 January 2018, the Company announced that it had entered into a four-year senior secured loan agreement with MidCap Financial ("MidCap") of up to $15m. As at 31 December 2017, an initial tranche of $7m had been received. Drawdown of the remaining $8m is dependent on achieving certain clinical development milestones.
Reclassification of 2015 and 2016 comparative operating costs
Management has reviewed how costs are presented on the income statement, allocated between:
-- Research and development costs; -- Distribution costs, sales and marketing; and -- Administrative costs.
In order to give a clearer and more meaningful picture of activity within the business, certain costs, previously shown within administrative costs have been reclassified to either research and development costs, or distribution costs, sales and marketing. Comparative figures for 2016 and 2015 have been reclassified using the same allocation basis as the 2017 results.
2016 2016 2015 2015
reclassified original reclassified original
GBP'000 GBP'000 GBP'000 GBP'000
Research and development
costs 7,796 6,684 8,710 5,920
Distribution costs,
sales and marketing 12,510 9,523 605 374
Administrative costs 5,123 9,222 4,908 7,929
_______ _______ _______ _______
25,429 25,429 14,223 14,223
_______ _______ _______ _______
Financial analysis
Key performance indicators
2017 2016 Change
Total gross revenues(1) GBP12.08m GBP9.21m +31%
Statutory Revenue GBP6.76m GBP6.38m +6%
US commercial revenue GBP6.65m GBP5.60m +18%
US commercial revenue as
% of Statutory Revenue 98% 88% n/a
R&D costs (2016 reclassified) GBP10.19m GBP7.80m +31%
R&D as % of operating costs(2)
(2016 reclassified) 45% 31% n/a
Loss from operations before
intangible asset impairment
charges(2) (GBP16.08m) (GBP19.17m) -16%
Net cash inflow/(outflow) n/a
for the year (GBP4.15m) GBP0.97m
Average headcount 85 84 +1%
============ ============ ============
1) Total gross revenues represents the full
list price of products shipped to wholesalers
and other customers before product returns,
discounts, rebates and other incentives
based on the sales price plus grant revenue.
2) Total operating costs used to calculate
R&D as a percentage of operating costs is
stated before intangible asset impairment
charge of GBP1.50m (2016: GBP11.41m).
Midatech's KPIs focus on the key areas of sales revenue, R&D spend, operating results and cash management. These measures provide information on the both the commercial operation and also the key R&D development programmes. Additional financial and non-financial KPIs, including further KPIs in respect of the research and development programmes, are being considered and may be adopted in due course.
For the year ended 31 December 2017, Midatech generated consolidated total gross revenues(1) of GBP12.08m (2016: GBP9.21m), an increase of 31% on the prior year and in-line with market expectation. Included in this figure are gross product sales generated by the US commercial business of GBP11.13m (2016: GBP7.47), an increase of 49%. Statutory Revenue for the year also increased, by 6%, to GBP6.76m (2016: GBP6.38m).
As part of the MPW acquisition, Midatech acquired the in-process research and development relating to various product development programmes including Q Octreotide, one of Midatech's lead programmes, and Opsisporin. Opsisporin is a sustained release treatment for uveitis, an inflammatory condition of the eye. Whilst pre-clinical proof of concept studies have been completed for the product, Opsiporin is outside of Midatech's strategic focus and as a result the decision was made not to continue with the programme at this point. The product still has merit and when the Group has the available resources, development may be continued. The absence, however, of an immediate opportunity to commercialise the asset has lead management to conclude that it has become impaired, resulting in a charge to the Income Statement of GBP1.50m.
In 2016, management concluded that, whilst overall performance of the MPUS business had been good, sales of Oravig(R) has been disappointing and, as a result, the value of this element of the intangible assets acquired with the DARA business has become impaired, resulting in a charge of GBP11.41m to the Income Statement. The performance of the other MPUS products, including Zuplenz(R) , enabled us to support the carrying value of goodwill in the MPUS business.
Net cash outflows for the year were GBP4.15m (2016: inflow of GBP0.97m). This reflected the share issue in October 2017 where GBP5.73m was raised after costs and receipt of the first tranche of debt finance from MidCap of GBP5.24m. Stripping out the share issue and debt proceeds, the adjusted outflow of GBP15.11m (2016: GBP14.67m) was in line with the forecast for the year. Cash management continues to be a major focus for the Board and senior management.
Cost of sales
Cost of sales has increased commensurately with product sales to GBP0.93m (2016: GBP0.67m), an increase of 39% and broadly in line with the increase in gross product sales.
Research and development expenditure
Research and development costs increased on the previous year to GBP10.19m (reclassified 2016: GBP7.80m) reflecting ongoing investment in Midatech's R&D programmes. Activities in the year included:
-- Oncology: progress oncology assets toward the clinic, with submission of regulatory filings for MTD201 Q-Octreotide and MTX110 for DIPG, for first-in-human studies to commence 2018; as well as IND enabling programme progress for MTD119 liver cancer;
-- Immunotherapy: established and progressed R&D immunotherapy projects for oncology from experimental proof of concept into formal pre-clinical programme for MTR103 and MTR111/6 brain cancer in adults and children respectively; and
-- Development of in house capacity, capability, processes and systems to support manufacture of portfolio products and technologies at clinical scale.
Distribution costs, sales and marketing
Distribution costs, sales and marketing decreased slightly to GBP9.42m (reclassified 2016: GBP12.51m). This includes amortisation of intangible assets acquired as part of the acquisition of DARA/MPUS resulting in a charge of GBP1.38m (2016: 3.39m). The reduction in amortisation arose as a result of the impairment of Oravig in 2016.
Administrative costs
Midatech's administrative costs decreased significantly on the prior year to GBP3.15m (reclassified 2016: GBP5.12m). The decrease is, in part, reflective of one-off costs incurred in 2016, including GBP1.10m associated with the departure of three former senior executives in the US, as well as reduced Directors' remuneration in 2017.
Impairment Charge
As noted above, this relates to the write down by GBP1.50m of the Opsisporin in-process research and development. In 2016, a charge of GBP11.41m resulted from the write down of the product sales and marketing rights of Oravig.
Staff costs
During the year, the average number of staff employed grew by 1% to 85 (2016: 84), however, the payroll cost fell by 12% to GBP6.60m (2016: GBP7.49m). Share based payment charges increased to GBP520k (2016: GBP203k) and included in the 2016 figures was GBP1.1m of settlement costs relating to former, senior DARA management who left during 2016.
Capital expenditure
During the year, cash expenditure on intangible fixed assets was GBP0.78m (2016: 0.02m).
The total cash expenditure on property plant and equipment in 2017 was GBP0.71m (2016: GBP1.35m), principally reflecting continued investment in Spain in the manufacturing capability of Midatech's sustained release ("SR") platform technology in advance of the Q-Octreotide first-in-human clinical trial programme.
Movement in total assets
Total assets saw a reduction to GBP49.22m at 31 December 2017 (2016: GBP56.69m). This reduction includes the GBP1.50m impairment of the Opsisporin IPRD discussed above. Amortisation of intangible assets (GBP1.58m) was further increased by a foreign exchange loss in USD denominated assets (GBP1.44m), as set out in note 10.
Property plant and equipment decreased by GBP0.24m, with additions of GBP0.71m, largely in respect of the manufacturing facility in Bilbao, noted above, and depreciation of GBP0.98m, as set out in note 9.
Cash and cash equivalents, decreased by GBP4.40m as a result of trading losses, offset by cash raised from the fundraise that completed in October 2017, and the first tranche of the MidCap loan.
Movement in total liabilities
Total liabilities increased to GBP14.55m (2016: GBP10.97m). The largest movement was in borrowings which increased from GBP2.16m in 2016 to GBP6.55m as at 31 December 2017. This reflected the addition of the MidCap debt of GBP5.24m, discussed above. The balance owed relates to soft loans in Midatech Pharma España, which decreased as a result of repayments made during the year.
Other comprehensive income
Other comprehensive income comprises GBP1.23m foreign exchange loss (2016: gain - GBP3.23m) arising on retranslation of Midatech Pharma US operations.
Cash flow
Net cash outflow from operating activities for the year was GBP12.96m (2016: GBP13.09m). There was, however, a net cash inflow from financing activities of GBP10.23m (2016: inflow of GBP15.26m) which, along with the capital expenditure in the year, resulted in a net cash outflow for the year of GBP4.15m (2016: inflow of GBP0.97m). This resulted in the year end cash balance decreasing to GBP13.20m (2016: GBP17.61m).
Capital structure
As noted above, 12,314,679 new ordinary shares were issued on 16 October 2017 to subscribers in a Placing and additional Open Offer. This raised proceeds of GBP6.16m before expenses and the new shares were admitted to AIM on 17 October 2017. In addition, two share issues were made to the Midatech Pharma Share Incentive Plan, an employee share incentive trust; 20,000 on 19 May 2017 and a further 50,000 on 7 November 2017. No other new shares were issued during the year.
As at 31 December 2017 Midatech Pharma plc had in issue 61,084,135 Ordinary Shares of 0.005 pence each and 1,000,001 deferred shared of GBP1.
Consolidated statement of comprehensive income
for the year ended 31 December 2017
Note 2017 2016 2015
GBP'000 GBP'000 GBP'000
Gross sales 3 11,239 8,659 914
Grant revenue 840 547 600
_________ _________ _________
Total gross revenues 12,079 9,206 1,514
---------------------------------------- ----- ---------- ---------- ----------
Revenue 3 6,758 6,376 775
Grant revenue 840 547 600
_________ _________ _________
Total revenue 7,598 6,923 1,375
Cost of sales (926) (667) (70)
_________ _________ _________
Gross profit 6,672 6,256 1,305
Research and development
costs (reclassified) (10,185) (7,796) (8,710)
Distribution costs, sales
and marketing (reclassified) (9,417) (12,510) (605)
Administrative costs (reclassified) (3,148) (5,123) (4,908)
Impairment of intangible
assets 13 (1,500) (11,413) -
_________ _________ _________
Loss from operations before
intangible asset impairment
charges, listing costs and
acquisition expenses (16,078) (19,173) (9,927)
Impairment of intangible
assets (1,500) (11,413) -
Listing and acquisition
expenses - included in administrative
costs - - (2,991)
Loss from operations 4 (17,578) (30,586) (12,918)
Finance income 6 415 1,337 1,691
Finance expense 6 (166) (73) (5)
_________ _________ _________
Loss before tax (17,329) (29,322) (11,232)
Taxation 7 1,265 9,160 1,133
_________ _________ _________
Loss for the year attributable
to the owners of the parent (16,064) (20,162) (10,099)
_________ _________ _________
Other comprehensive income:
Items that will or may be
reclassified subsequently
to profit or loss when specific
conditions are met:
Exchange gains/(losses)
arising on translation of
foreign operations (1,233) 3,228 399
_________ _________ _________
Total other comprehensive
(loss)/income, net of tax (1,233) 3,228 399
_________ _________ _________
Total comprehensive loss
attributable to the owners
of the parent (17,297) (16,934) (9,700)
_________ _________ _________
Loss per share
Basic and diluted loss per
ordinary share - pence 8 (31p) (56p) (36p)
_________ _________ _________
The notes form an integral part of these consolidated financial statements
Consolidated statement of financial position
at 31 December 2017
Company Number 09216368 Note 2017 2016 2015
Assets GBP'000 GBP'000 GBP'000
Non-current assets
Property, plant and equipment 9 2,529 2,766 1,984
Intangible assets 10 27,647 31,172 41,339
Other receivables due in
greater than one year 16 465 448 387
_______ _______ _______
30,641 34,386 43,710
_______ _______ _______
Current assets
Inventories 18 941 817 459
Trade and other receivables 16 3,242 2,439 2,496
Taxation 1,196 1,439 1,201
Cash and cash equivalents 17 13,204 17,608 16,175
_______ _______ _______
18,583 22,303 20,331
_______ _______ _______
Total assets 49,224 56,689 64,041
_______ _______ _______
Liabilities
Non-current liabilities
Borrowings 20 6,185 1,620 1,508
Deferred tax liability 23 - - 6,547
_______ _______ _______
6,185 1,620 8,055
_______ _______ _______
Current liabilities
Trade and other payables 19 8,002 8,407 7,084
Borrowings 20 361 538 442
Derivative financial liability
- equity settled 21 - 400 1,573
_______ _______ _______
8,363 9,345 9,099
_______ _______ _______
Total liabilities 14,548 10,965 17,154
_______ _______ _______
Issued capital and reserves
attributable to owners of
the parent
Share capital 24 1,003 1,002 1,002
Share premium 25 52,939 47,211 31,643
Merger reserve 25 53,003 53,003 52,803
Shares to be issued 25 - - 200
Foreign exchange reserve 25 2,385 3,618 390
Accumulated deficit 25 (74,654) (59,110) (39,151)
_______ _______ _______
Total equity 34,676 45,724 46,887
_______ _______ _______
Total equity and liabilities 49,224 56,689 64,041
_______ _______ _______
The notes form an integral part of these consolidated financial statements
Consolidated statement of cash flows
for the year ended 31 December 2017
Note 2017 2016 2015
GBP'000 GBP'000 GBP'000
Cash flows from operating
activities
Loss for the year (16,064) (20,162) (10,099)
Adjustments for:
Depreciation of property,
plant and equipment 9 983 772 501
Amortisation of intangible
fixed assets 10 1,577 3,583 236
Loss on disposal of fixed 27 - -
assets
Net interest (income)/expense 6 (249) (1,264) (1,686)
Impairment of intangible
assets 13 1,500 11,413 -
Gain on bargain purchase 12 - - (165)
Share based payment expense 5 520 203 170
Taxation 7 (1,265) (9,160) (1,133)
_______ _______ _______
Cash flows from operating
activities before changes
in working capital (12,971) (14,615) (12,176)
Increase in inventories (202) (237) (62)
Increase in trade and other
receivables (968) (242) (1,540)
(Decrease)/Increase in
trade and other payables (267) 358 711
_______ _______ _______
Cash used in operations (14,408) (14,736) (13,067)
Taxes received 1,455 1,650 646
_______ _______ _______
Net cash used in operating
activities (12,953) (13,086) (12,421)
_______ _______ _______
Investing activities
Purchases of property,
plant and equipment 9 (707) (1,347) (922)
Purchase of intangibles 10 (778) (19) (3)
Acquisition of subsidiary,
net of cash acquired 11 - - 1,867
Acquisition of business,
net of cash acquired 12 - - (2,528)
Interest received 15 164 53
_______ _______ _______
Net cash used in investing
activities (1,470) (1,202) (1,533)
Financing activities
Interest paid (111) (74) (5)
Payments to finance lease
creditors (25) (69) (49)
Repayment of borrowings (552) (235) (165)
New bank loan 5,237 65 -
Share issues net of costs 17 5,728 15,568 -
_______ _______ _______
Net cash generated from/(used
in) financing activities 10,277 15,255 (219)
Net (decrease)/increase
in cash and cash equivalents (4,146) 967 (14,173)
Cash and cash equivalents
at beginning of year 17,608 16,175 30,325
Exchange (losses)/gains
on cash and cash equivalents (258) 466 23
_______ _______ _______
Cash and cash equivalents
at end of year 17 13,204 17,608 16,175
_______ _______ _______
The notes form an integral part of these consolidated financial statements
Consolidated statement of changes in equity
for the year ended 31 December 2017
Share Share Merger Foreign Accumulated Total
capital premium reserve exchange deficit Equity
reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2017 1,002 47,211 53,003 3,618 (59,110) 45,724
Loss for the year - - - - (16,064) (16,064)
Foreign exchange translation - - - (1,233) - (1,233)
______ ______ ______ ______ ______ ______
Total comprehensive loss - - - (1,233) (16,064) (17,297)
______ ______ ______ ______ ______ ______
Shares issued on 16 October
2017 - note 17 1 6,157 - - - 6,158
Costs associated with share
issue - note 17 - (429) - - - (429)
Share option charge - - - 520 520
______ ______ ______ ______ ______ ______
Total contribution by and
distributions to owners 1 5,728 - - 520 6,249
______ ______ ______ ______ ______ ______
At 31 December 2017 1,003 52,939 53,003 2,385 (74,654) 34,676
______ ______ ______ ______ ______ ______
Share Share Merger Shares Foreign Accumulated Total
capital premium reserve to be exchange deficit equity
issued reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2016 1,002 31,643 52,803 200 390 (39,151) 46,887
______ ______ ______ ______ ______ ______ ______
Loss for the year - - - - - (20,162) (20,162)
Foreign exchange
translation - - - - 3,228 - 3,228
______ ______ ______ ______ ______ ______ ______
Total comprehensive
loss - - - - 3,228 (20,162) (16,934)
______ ______ ______ ______ ______ ______ ______
Transactions with
owners
Shares issued
on 31 October - - - - -
2016 - note 17 - 16,673 - - - - 16,673
Costs associated
with share issue
- note 17 (1,105) (1,105)
Share option charge - - - - - 203 203
Shares issued
as deferred consideration
for business combination - 200 (200) - - -
______ ______ ______ ______ ______ ______ ______
Total contribution
by and distributions
to owners - 15,568 200 (200) - 203 15,771
______ ______ ______ ______ ______ ______ ______
At 31 December
2016 1,002 47,211 53,003 - 3,618 (59,110) 45,724
______ ______ ______ ______ ______ ______ ______
Share Share Merger Shares Foreign Accumulated Total
capital premium reserve to be exchange deficit equity
issued reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2015 1,001 31,643 37,776 800 (9) (29,222) 41,989
______ ______ ______ ______ ______ ______ ______
Loss for the year - - - - - (10,099) (10,099)
Foreign exchange
translation - - - - 399 - 399
______ ______ ______ ______ ______ ______ ______
Total comprehensive
loss - - - - 399 (10,099) (9,700)
______ ______ ______ ______ ______ ______ ______
Transactions with
owners
Shares issued
on exercise of
share options 1 - - - - - 1
Shares, warrants
and share options
issued as consideration
for a business
combination -
4 December 2015 - - 14,427 - - - 14,427
Share option charge - - - - - 170 170
Shares issued
as deferred consideration
for business combination - - 600 (600) - - -
______ ______ ______ ______ ______ ______ ______
Total contribution
by and distributions
to owners 1 - 15,027 (600) - 170 14,598
______ ______ ______ ______ ______ ______ ______
At 31 December
2015 1,002 31,643 52,803 200 390 (39,151) 46,887
______ ______ ______ ______ ______ ______ ______
The notes form an integral part of these consolidated financial statements.
Notes forming part of the financial statements
for the year ended 31 December 2017
1 Accounting policies
General information
Midatech Pharma plc (the "Company") is a company registered and domiciled in England. The Company was incorporated on 12 September 2014.
The Company is a public limited company, which has been listed on the Alternative Investment Market ("AIM"), which is a submarket of the London Stock Exchange, since 8 December 2014.
In addition, since 4 December 2015 the Company has American Depository Receipts ("ADRs") registered with the US Securities and Exchange Commission ("SEC") and is listed on The NASDAQ Capital Market.
Basis of preparation
The financial information set out above does not constitute the company's statutory accounts for 2017, 2016 or 2015. Statutory accounts for the years ended 31 December 2017, 31 December 2016 and 31 December 2015 have been reported on by the Independent Auditors.
The Independent Auditors' Report on the Annual Report and Financial Statements for the year ended 31 December 2017, 31 December 2016 and 31 December 2015 was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. The Independent Auditors' Report on the Annual Report and Financial Statements for the year ended 31 December 2017 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
We draw attention to Note 1 to the financial statements concerning the group and parent company's ability to continue as a going concern. The matters explained in Note 1 relating to the uncertainty of additional future funding being made available to the group and parent company, indicates the existence of a material uncertainty which may cause significant doubt over the group and parent company's ability to continue as a going concern. These financial statements do not include the adjustments that would result if the group and parent company were unable to continue as a going concern. Our opinion is not modified in respect of this matter.
The Independent Auditors' Report on the Annual Report and Financial Statements for the years ended 31 December 2016 and 31 December 2015 did not draw attention to any matters by way of emphasis.
Statutory accounts for the year ended 31 December 2016 and 31 December 2015 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2017 will be delivered to the Registrar in due course.
The Group was formed on 31 October 2014 when Midatech Pharma plc entered into an agreement to acquire the entire share capital of Midatech Limited and its wholly owned subsidiaries through the issue equivalent of shares in the Company which took place on 13 November 2014.
These financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) and as adopted by the European Union ("adopted IFRSs") and are presented in GBP'000's Sterling.
The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to all the periods presented.
Reclassification of 2016 and 2015 comparative operating costs
As the nature of the operations of the group have changed over the last two years management has reviewed how costs are presented on the income statement, allocated between:
-- Research and development costs; -- Distribution costs, sales and marketing; and -- Administrative costs.
In order to give a clearer and more meaningful picture of activity within the business, certain costs, previously shown within administrative costs have been reclassified as either research and development costs, or distribution costs, sales and marketing. Comparative figures for 2016 and 2015 have been reclassified using the same allocation basis as the 2017 results to provide consistency.
2016 2016 2015 2015
reclassified original reclassified original
GBP'000 GBP'000 GBP'000 GBP'000
Research and development
costs 7,796 6,684 8,710 5,920
Distribution costs,
sales and marketing 12,510 9,523 605 374
Administrative costs 5,123 9,222 4,908 7,929
_______ _______ _______ _______
25,429 25,429 14,223 14,223
_______ _______ _______ _______
Adoption of new and revised standards
A number of new standards, amendments to standards, and interpretations are not effective for 2017, and therefore have not been applied in preparing these financial statements.
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted.
IFRS 9 requires the Group to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-month or lifetime basis. The Group expects to apply the simplified approach and record lifetime expected losses on all trade receivables.
The Group plans to adopt the new standard on the required effective date. The Company expects no significant impact on its operating results or financial position.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.
IFRS 15 Revenue from contracts with customers amends revenue recognition requirements and establishes principles for reporting information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customer. The standard replaces IAS 18 Revenue and IAS 11 Construction contracts and related interpretations.
The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. The Group plans to adopt the new standard on the required effective date.
The Company has performed an assessment of the impact of IFRS 15 and has concluded that:
-- The Group's "Revenue" is largely derived from the sale of pharmaceutical products and services, where control transfers to customers and performance obligations are satisfied at the time of shipment to receipt of the products by the customer or when the services are performed. There is no expectation for IFRS 15 to significantly change the timing or amount of revenue recognised under these arrangements.
-- Grant Revenue is outside the scope of IFRS 15.
The Group will implement the new standard from January 1, 2018 and will apply the modified retrospective method, which requires the recognition of the cumulative effect of initially applying IFRS 15 as at January 1, 2018, to retained earnings and not restate prior years. However, since the results of the Group's impact assessment indicates that IFRS 15 is not expected to significantly change the amount or timing of revenue recognition in 2017 or prior periods, an insignificant cumulative adjustment to increase retained earnings will be made.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees - leases of 'low-value' assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset.
Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the re-measurement of the lease liability as an adjustment to the right-of-use asset.
IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard's transition provisions permit certain reliefs.
During 2017 the Group assessed the potential effect of IFRS 16 on its consolidated financial statements. Refer to note 26 for further information on the Group's operating leases.
The current undiscounted operating lease commitments of GBP848k as of 31 December 2017 and disclosed in Note 26 provide, subject to the provision of the standard, an indicator of the impact of the implementation of IFRS 16 on the Group's consolidated balance sheet.
Upon adoption of the new standard, a portion of the annual operating lease costs, which is currently fully recognised as a functional expense, will be recorded as interest expense. In addition, the portion of the annual lease payments recognised in the cash flow statement as a reduction of the lease liability will be recognised as an outflow from financing activities. Given the leases involved and assuming the current low interest rate environment continues, the Group does not currently expect these effects to be significant.
There are no other IFRS standards or interpretations not currently effective that would be expected to have a material impact on the Group.
Basis for consolidation
The Group financial statements consolidate those of the parent company and all of its subsidiaries. The parent controls a subsidiary if it has power over the investee to significantly direct the activities, exposure, or rights, to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect the amount of the investor's returns. All subsidiaries have a reporting date of 31 December.
All transactions and balances between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Where unrealised losses on intra-Group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a Group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group.
The loss and other comprehensive income of Midatech Pharma US, Inc. (formerly DARA Biosciences, Inc) acquired in December 2015 is recognised from the effective date of acquisition i.e. 4 December 2015. Similarly, the loss and other comprehensive income of Zuplenz(R) , acquired as a business by Midatech Pharma plc., is recognised from 24 December 2015.
The consolidated financial statements consist of the results of the following entities:
Entity Summary description
Midatech Pharma plc Ultimate holding
company
Midatech Limited Trading company
Midatech Pharma (Espana) SL (formerly Trading company
Midatech Biogune SL)
Midatech Andalucia SL Dormant
PharMida AG Dormant
Midatech Pharma (Wales) Limited Trading company
(formerly Q Chip Limited)
Midatech Pharma US, Inc. (formerly Trading company
DARA Biosciences, Inc.) Dormant
Dara Therapeutics, Inc. Trading company
Midatech Pharma Pty
Going concern
The Group and parent company are subject to a number of risks similar to those of other development and early-commercial stage pharmaceutical companies. These risks include, amongst others, generation of revenues from the existing product portfolio and in due course the development portfolio and risks associated with research, development, testing and obtaining related regulatory approvals of its pipeline products. Ultimately, the attainment of profitable operations is dependent on future uncertain events which include obtaining adequate financing to fulfil the Group's commercial and development activities and generating a level of revenue adequate to support the Group's cost structure.
The Group has experienced net losses and significant cash outflows from cash used in operating activities over the past years as it develops its portfolio. As at 31 December 2017 the Group had total equity of GBP34.7m which includes an accumulated deficit of GBP74.7m, it incurred a net loss for the year to 31 December 2017 of GBP16.1m and used cash in operating activities of GBP13.0m for the same period. As at 31 December 2017, the Group had cash and cash equivalents of GBP13.2m.
The future viability of the Group is dependent on its ability to generate cash from operating activities, to raise additional capital to finance its operations and to successfully obtain regulatory approval to allow marketing of the Group's development products. The Group's failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.
The Directors have prepared cash flow forecasts and considered the cash flow requirement for the Group for the next five years. These forecasts show that further financing is likely to be required during the course of the next 12 months, assuming, inter alia, that all development programmes continue as currently planned. This requirement for additional financing represents a material uncertainty that may cast significant doubt upon the Group's and parent company's ability to continue as a going concern, however, the Board is examining a range of non-dilutive, financing options to meet this near-term cash need that, if successful, would enable the Group to deliver on these key value-driving programmes without requiring equity finance in the short-term.
If the Directors conclude that such funding is unlikely to be available within the required timeframe, expenditure, particularly in respect of the development programmes, could be delayed, thereby extending the cash runway beyond the period of twelve months from the date of approval of these financial statements. Therefore, after considering the uncertainties the Directors consider it is appropriate to continue to adopt the going concern basis in preparing these financial statements.
Revenue
The Group's income streams include milestone income from research and development contracts and the sale of goods. Milestone income is recognised as revenue in the accounting period in which the milestones are achieved. Milestones are agreed on a project by project basis and will be evidenced by set deliverables.
Revenue from the sales of goods by Midatech Pharma US, Inc. is recognised when the significant risks and rewards of ownership are transferred to the buyer and it is probable the previously agreed upon payment will be received. These criteria are considered to be met when the goods are delivered to the buyer. Revenue represents the full list price of products shipped to wholesalers and other customers less product returns, discounts, rebates and other incentives based on the sales price.
Sales to wholesalers provide for selling prices that are fixed on the date of sale, although Midatech Pharma US, Inc offers certain discounts to group purchasing organisations and governmental programmes. The wholesalers take title to the product, bear the risk and rewards and have ownership of the inventory. The Group has sufficient experience with their material wholesaler distribution channel to reasonably estimate product returns from its wholesalers while the wholesalers are still holding inventory.
Grant revenue
Where grant income is received, which is not a direct re-imbursement of related costs and at the point at which the conditions have been met for recognition as income, this has been shown within grant revenue.
Government grants and government loans
Where government grants are received as a re-imbursement of directly related costs they are credited to research and development expense in the same period as the expenditure towards which they are intended to contribute.
The Group receives government loans that have a below-market rate of interest. These loans are recognised and measured in accordance with IAS 39. The benefit of the below-market rate of interest is measured as the difference between the initial carrying value of the loan discounted at a market rate of interest and the proceeds received.
The difference is held within deferred revenue as a government grant and is released as a credit to research and development expense in line with the expenditure to which it relates. In a situation where the proceeds were invested in plant and equipment, the deferred revenue is credited to research and development within the income statement in line with the depreciation of the acquired asset.
Business combinations and externally acquired intangible assets
Business combinations are accounted for using the acquisition method at the acquisition date, which is the date at which the Group obtains control over the entity. The cost of an acquisition is measured as the amount of the consideration transferred to the seller, measured at the acquisition date fair value, and the amount of any non-controlling interest in the acquiree. The Group measures goodwill initially at cost at the acquisition date, being:
- the fair value of the consideration transferred to the seller, plus - the amount of any non-controlling interest in the acquiree, plus
- if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree re-measured at the acquisition date, less
- the fair value of the net identifiable assets acquired and assumed liabilities
Acquisition costs incurred are expensed and included in administrative costs. Any contingent consideration to be transferred by the acquirer is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration, whether it is an asset or liability, will be recognised either as a profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it is not re-measured.
An intangible asset, which is an identifiable non-monetary asset without physical substance, is recognised to the extent that it is probable that the expected future economic benefits attributable to the asset will flow to the Group and that its cost can be measured reliably. The asset is deemed to be identifiable when it is separable or when it arises from contractual or other legal rights.
Externally acquired intangible assets other than goodwill are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives where they are in use. The amortisation expense is included within the distribution costs, sales and marketing in the consolidated statement of comprehensive income. Goodwill is stated at cost less any accumulated impairment losses.
The amounts ascribed to intangibles recognised on business combinations are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements below).
In-process research and development (IPRD) programmes acquired in business combinations are recognised as assets even if subsequent expenditure is written off because the criteria specified in the policy for development costs below are not met. IPRD is subject to annual impairment testing until the completion or abandonment of the related project. No further costs are capitalised in respect of this IPRD unless they meet the criteria for research and development capitalisation as set out below.
As per IFRS 3, once the research and development of each defined project is completed, the carrying value of the acquired IPRD is reclassified as a finite-lived asset and amortised over its useful life.
Product and marketing rights acquired in business combinations are recognised as assets and are amortised over their useful life. Under the terms of various licenses, the Group holds the US rights to sell four products approved by the Food and Drug Administration: Zuplenz(R) , Gelclair(R) , Oravig(R) and Soltamox(R) .
The significant intangibles recognised by the Group and their useful economic lives are as follows:
Goodwill - Indefinite life
IPRD - In process, not yet amortising
IT and website costs - 4 years
Product and marketing - Between 2 and 13 years
rights
The useful economic life of IPRD will be determined when the in-process research projects are completed.
Internally generated intangible assets (development costs)
Expenditure on the research phase of an internal project is recognised as an expense in the period in which it is incurred. Development costs incurred on specific projects are capitalised when all the following conditions are satisfied:
-- Completion of the asset is technically feasible so that it will be available for use or sale
-- The Group intends to complete the asset and use or sell it
-- The Group has the ability to use or sell the asset and the asset will generate probable future economic benefits (over and above cost)
-- There are adequate technical, financial and other resources to complete the development and to use or sell the asset, and
-- The expenditure attributable to the asset during its development can be measured reliably.
Judgement is applied when deciding whether the recognition criteria are met. Judgements are based on the information available. In addition, all internal activities related to the research and development of new projects are continuously monitored by the Directors. The Directors consider that the criteria to capitalise development expenditure are not met for a product prior to that product receiving regulatory approval in at least one country.
Development expenditure not satisfying the above criteria, and expenditure on the research phase of internal projects are included in research and development costs recognised in the Consolidated Statement of Comprehensive Income as incurred. No projects have yet reached the point of capitalisation.
Impairment of non-financial assets
Assets that have an indefinite useful life, for example goodwill, or intangible assets not ready for use, such as IPRD, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. An impairment charge of GBP1.5m was recognised in 2017 against the IPRD of the Midatech Pharma (Wales) Ltd cash generating unit. An impairment charge of GBP11.4m was recognised in 2016 against the product rights of Oravig, a product of Midatech Pharma US
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The Group at 31 December 2017 had two cash generating units (2016: Two, 2015: Two), see note 13. Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of impairment at each reporting date.
Impairment charges are included in profit or loss, except, where applicable, to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed.
Patents and trademarks
The costs incurred in establishing patents and trademarks are either expensed in accordance with the corresponding treatment of the development expenditure for the product to which they relate or capitalised if the development expenditure to which they relate has reached the point of capitalisation as an intangible asset.
Joint arrangements
The Group is a party to a joint arrangement when there is a contractual arrangement that confers joint control over the relevant activities of the arrangement to the Group and at least one other party. Joint control is assessed under the same principles as control over subsidiaries.
The Group classifies its interests in joint arrangements as either:
-- Joint ventures: where the Group has rights to only the net assets of the joint arrangement.
-- Joint operations: where the Group has both the rights to assets and obligations for the liabilities of the joint arrangement.
In assessing the classification of interests in joint arrangements, the Group considers:
-- The structure of the joint arrangement -- The legal form of joint arrangements structured through a separate vehicle -- The contractual terms of the joint arrangement agreement -- Any other facts and circumstances (including any other contractual arrangements).
The Group accounts for its interests in joint ventures using the equity method. The equity accounted joint venture is highly immaterial with no profit and loss impact during 2017 (2016: Nil, 2015: Nil).
Any premium paid for an investment in a joint venture above the fair value of the Group's share of the identifiable assets, liabilities and contingent liabilities acquired is capitalised and included in the carrying amount of the investment in joint venture. Where there is objective evidence that the investment in a joint venture has been impaired the carrying amount of the investment is tested for impairment in the same way as other non-financial assets.
Amounts received under collaborative joint agreements, representing contributions to the Group's research and development programmes, are recognised as a credit against research and development expense in the period over which the related costs are incurred. All costs related to these collaborative agreements are recorded as research and development expenditure.
The Group accounts for its interests in joint operations by recognising its share of assets, liabilities, revenues and expenses in accordance with its contractually conferred rights and obligations.
Foreign currency
Transactions entered into by subsidiaries entities in a currency other than the currency of the primary economic environment, in which they operate, are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in profit or loss.
The presentational currency of the Group is Pounds Sterling, and the reporting currency is also Pounds Sterling. Foreign subsidiaries use the local currencies of the country where they operate. On consolidation, the results of overseas operations are translated into Pounds Sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve.
Exchange differences recognised in the profit or loss of Group entities on the translation of long-term monetary items forming part of the Group's net investment in the overseas operation concerned are reclassified to other comprehensive income and accumulated in the foreign exchange reserve on consolidation.
On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or loss on disposal.
Financial assets
The Group does not have any financial assets which it would classify as fair value through profit or loss, available for sale or held to maturity. Therefore, all financial assets are classed as loans and receivables as defined below.
Loans and receivables
These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.
Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable.
For trade receivables, which are reported net; such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the consolidated statement of comprehensive income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.
The Group's loans and receivables comprise trade and other receivables and cash and cash equivalents in the consolidated statement of financial position.
Cash and cash equivalents include cash in hand, deposits held at call with original maturities of three months or less.
Financial liabilities
The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired.
Fair value through profit and loss ("FVTPL")
The Group assumed fully vested warrants and share options on the acquisition of DARA Biosciences, Inc. The number of ordinary shares to be issued when exercised is fixed, however the exercise prices are denominated in US Dollars being different to the functional currency of the parent company. Therefore, the warrants and share options are classified as equity settled derivative financial liabilities through the profit and loss account. The financial liabilities were valued using the Black-Scholes option pricing model. Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporated any interest paid on the financial liability and is included in the 'other gains and losses' line item in the income statement. Fair value is determined in the manner described in note 22.
Other financial liabilities include the following items:
-- Borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated statement of financial position. Interest expense in this context includes initial transaction costs and premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.
-- Government loans received on favourable terms below market rate are discounted at a market rate of interest. The difference between the present value of the loan and the proceeds is held as a government grant within deferred revenue and is released to research and development expenditure in line with when the asset or expenditure is recognised in the income statement.
-- Trade payables and other short-term monetary liabilities are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.
Share capital
Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Group has two classes of share in existence:
-- Ordinary shares of GBP0.00005 each are classified as equity instruments; -- Deferred shares of GBP1 each are classified as equity instruments.
Retirement benefits: defined contribution schemes
Contributions to defined contribution pension schemes are charged to the consolidated statement of comprehensive income in the year to which they relate.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
Share-based payments
The Group operates a number of equity-settled, share-based compensation plans, under which the entity receives services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted:
-- including any market performance conditions (including the share price);
-- excluding the impact of any service and non-market performance vesting conditions (for example, remaining an employee of the entity over a specified time period); and
-- including the impact of any non-vesting conditions (for example, the requirement for employees to save).
Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. Where vesting conditions are accelerated on the occurrence of a specified event, such as a change in control or initial public offering, such remaining unvested charge is accelerated to the income statement.
In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between service commencement period and grant date.
At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium.
Leased assets
Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a "finance lease"), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the consolidated statement of comprehensive income over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.
1 Accounting policies (continued)
Leased assets (continued)
Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an "operating lease"), the total rentals payable under the lease are charged to the consolidated statement of comprehensive income on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis.
Deferred taxation
Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the consolidated statement of financial position differs from its tax base, except for differences arising on:
-- the initial recognition of goodwill;
-- the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and
-- investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future.
Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised.
The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax assets or liabilities are recovered or settled.
Property, plant and equipment
Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs.
Depreciation is provided on all items of property, plant and equipment so as to write off their carrying value over their expected useful economic lives. It is provided at the following rates:
Fixtures and - 25% per annum straight line
fittings - 10% per annum straight line
Leasehold improvements
Computer equipment - 25% per annum straight line
Laboratory equipment - 15% - 25% per annum straight line
Inventories
Inventories are stated at the lower of cost or net realisable value. Net realisable value is the market value. In evaluating whether inventories are stated at the lower of cost or net realisable value, management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time required to sell such inventory, remaining shelf life, and current and expected market conditions, including levels of competition.
If net realisable value is lower than the carrying amount a write down provision is recognised for the amount by which the carrying value exceeds its net realisable value.
Inventory is valued at the lower of cost or market value using the FIFO method. Inventory is charged to the income statement as cost of sales as it is sold.
2 Critical accounting estimates and judgements
The preparation of these consolidated financial statements requires the Group to make estimates, assumptions and judgments that can have a significant impact on the reported amounts of assets and liabilities, revenue and expenses and related disclosure of contingent assets and liabilities, at the respective dates of our financial statements. The Group bases its estimates, assumptions and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management evaluates estimates, assumptions and judgments on a regular basis and makes changes accordingly, and discusses critical accounting estimates with the board of Directors.
The following are considered to be critical accounting policies because they are important to the portrayal of the financial condition or results of operations of the Group and they require critical management estimates and judgments about matters that are uncertain.
Business combinations
The Directors determine and allocate the purchase price of an acquired business to the assets acquired and liabilities assumed as of the business combination date. The purchase price allocation process requires the use of significant estimates and assumptions, including the estimated fair value of the acquired intangible assets.
While the Directors use their best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the date of acquisition, our estimates and assumptions are inherently uncertain and subject to refinement. Examples of critical estimates in valuing the intangible assets we have acquired or may acquire in the future include but are not limited to:
-- future expected cash flows from in-process research and development; -- the fair value of the property, plant and equipment; and -- discount rates.
Judgement has also been applied in the distinction of an asset purchase and business combination with regard to the Zuplenz(R) acquisition. Judgement was applied in assessing the inputs, processes and outputs relevant to the acquisition to arrive at the conclusion that the treatment should be a business combination.
The carrying value of acquired product and marketing rights as at 31 December 2017 was GBP4.1m (note 10).
Impairment of goodwill and intangible assets not yet ready for use
Goodwill and intangibles not yet ready for use are tested for impairment at the cash generating unit level on an annual basis at the year end and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a cash generating unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Application of the goodwill impairment test requires judgment, including the identification of cash generating units, assignment of assets and liabilities to such units, assignment of goodwill to such units and determination of the fair value of a unit and for intangible assets not yet ready for use, the fair value of the asset. The fair value of each cash generating unit or asset is estimated using the income approach, on a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the business, estimation of the useful life over which cash flows will occur and determination of our weighted-average cost of capital.
The carrying value of goodwill was GBP13.4 million and intangibles not yet ready for use was GBP10.1 million as at 31 December 2017 (note 10).
The estimates used to calculate the fair value of a cash generating unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each such unit. Based on the analysis performed, there was no impairment of goodwill in the year ended 31 December 2017 or in 2016, however there was an impairment charge of GBP1.5m against the IPRD of Midatech Pharma (Wales) Ltd cash generating unit. (2016: GBP11.4m against the Midatech Pharma US product rights). See note 13.
Share-based payments
The Group accounts for share-based payment transactions for employees in accordance with IFRS 2 Share-based Payment, which requires the measurement of the cost of employee services received in exchange for the options on our ordinary shares, based on the fair value of the award on the grant date.
The Directors selected the Black-Scholes-Merton option pricing model as the most appropriate method for determining the estimated fair value of our share-based awards without market conditions. For performance-based options that include vesting conditions relating to the market performance of our ordinary shares, a Monte Carlo pricing model was used in order to reflect the valuation impact of price hurdles that have to be met as conditions to vesting.
The resulting cost of an equity incentive award is recognised as expense over the requisite service period of the award, which is usually the vesting period. Compensation expense is recognised over the vesting period using the straight-line method and classified in the consolidated statements of comprehensive income.
The assumptions used for estimating fair value for share-based payment transactions are disclosed in note 28 to our consolidated financial statements and are estimated as follows:
-- Volatility is estimated based on the average annualized volatility of a number of publicly traded peer companies in the biotech sector;
-- The estimated life of the option is estimated to be until the first exercise period, which is typically the month after the option vests; and
-- The dividend return is estimated by reference to our historical dividend payments. Currently, this is estimated to be zero as no dividend has been paid in the prior periods.
Income Taxes
Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised based upon the likely timing and the level of future taxable profits together with future tax planning strategies.
In 2017, there were approximately GBP38.4m of gross unutilised tax losses carried forward (2016: GBP27.0m 2015: GBP23.3m) No deferred tax asset has been provided in respect of these losses as there was insufficient evidence to support their recoverability in future periods.
Intangible asset recognition
Research and development costs are charged to expense as incurred and are typically made up of salaries and benefits, clinical and preclinical activities, drug development and manufacturing costs, and third-party service fees, including for clinical research organizations and investigative sites. Costs for certain development activities, such as clinical trials, are periodically recognised based on an evaluation of the progress to completion of specific tasks using data such as patient enrolment, clinical site activations, or information provided by vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued expenses.
3 Segment Information
Gross sales
Gross sales of GBP11.24m in the year ended 31 December 2017 (2016: GBP8.66m, 2015: GBP0.91m) represents the full list price of products shipped to wholesalers and other customers before product returns, discounts, rebates and other incentives based on the sales price.
Revenue
Geographical analysis of revenue by destination of customer
2017 2016 2015
GBP'000 GBP'000 GBP'000
United Kingdom 79 491 -
Turkey - - 73
Rest of Europe 70 35 25
United States 6,609 5,850 677
_______ _______ _______
6,758 6,376 775
_______ _______ _______
In 2017, the Group had three customers, all in the Commercial segment, that each accounted for at least 10% of total revenue (2016: three customers, 2015: one customer in Pipeline R&D):
2017 2016 2015
Customer A (Pipeline R&D) - - 11%
Customer B (Commercial) 20% 20% -
Customer C (Commercial) 17% 15% -
Customer D (Commercial) 13% 10% -
The Group contains two reportable operating segments as follows:
-- Pipeline Research and Development: The Pipeline Research and Development ("Pipeline R&D") segment seeks to develop products using the Group's nanomedicine and sustained release technology platforms.
-- Commercial: The Commercial segment distributes and sells the Group's commercial products. Midatech Pharma US promotes the Group's commercial, cancer supportive care products in the US market, in which the Group has exclusive licenses to Soltamox, Oravig and Zuplenz(R) , an exclusive license to distribute, promote and market Gelclair, and a marketing agreement to co-promote two other products: Ferralet 90 and Aquoral. As and when new products are introduced the Commercial segment will include revenues from the marketing of these commercial products.
The accounting policies of the reportable segments are consistent with the Group's accounting policies described in note 1. Segment results represent the result of each segment without the allocation of head office expenses, interest expense, interest income and tax.
No measures of segment assets and segment liabilities are reported to the Group's Board of Directors in order to assess performance and allocate resources. There is no intersegment activity and all revenue is generated from external customers.
Both the UK and Spanish entities meet the aggregation criteria and have therefore been presented as a single reportable segment under Pipeline R&D. The research and development activities involve the discovery and development of pharmaceutical products in the field of nanomedicine and sustained release technology. The US operating company is engaged in the sale and marketing of cancer supportive care products and is reported under the Commercial segment.
Segmented results for the year ended 31 December 2017
Pipeline Commercial Consolidated
R&D
GBP'000 GBP'000 GBP'000
Gross sales 108 11,131 11,239
Grant revenue 840 - 840
_______ _______ _______
Total gross revenues 948 11,131 12,079
-------------------------- --------- ----------- -------------
Revenue 108 6,650 6,758
Grant revenue 840 - 840
_______ _______ _______
Total revenue 948 6,650 7,598
Cost of sales - (926) (926)
Research and development
costs (9,830) (355) (10,185)
Distribution costs,
sales and marketing (744) (7,096) (7,840)
Administrative
costs (1,685) (480) (2,165)
Depreciation (974) (9) (983)
Amortisation (193) (1,384) (1,577)
Impairment (1,500) - (1,500)
_______ _______ _______
Loss from operations (13,978) (3,600) (17,578)
_______ _______
Finance income 415
Finance expense (166)
_______
Loss before tax (17,329)
Taxation 1,265
_______
Loss for the year (16,064)
_______
Segmented results for the year ended 31 December 2016
Pipeline Commercial Consolidated
R&D
GBP'000 GBP'000 GBP'000
Gross sales 776 7,883 8,659
Grant revenue 547 - 547
_______ _______ _______
Total gross revenues 1,323 7,883 9,206
-------------------------- --------- ----------- -------------
Revenue 776 5,600 6,376
Grant revenue 547 - 547
_______ _______ _______
Total revenue 1,323 5,600 6,923
Cost of sales (9) (658) (667)
Research and development
costs (reclassified) (7,786) (10) (7,796)
Distribution costs,
sales and marketing
(reclassified) (396) (8,531) (8,927)
Administrative
costs (reclassified) (2,279) (2,072) (4,351)
Depreciation (762) (10) (772)
Amortisation (193) (3,390) (3,583)
Impairment - (11,413) (11,413)
_______ _______ _______
Loss from operations (10,102) (20,484) (30,586)
_______ _______
Finance income 1,337
Finance expense (73)
_______
Loss before tax (29,322)
Taxation 9,160
_______
Loss for the year (20,162)
_______
Segmented results for the year ended 31 December 2015
Pipeline Commercial Unallocated Consolidated
R&D Costs(1)
GBP'000 GBP'000 GBP'000 GBP'000
Gross sales 273 641 - 914
Grant revenue 600 - - 600
_______ _______ _______ _______
Total gross revenues 873 641 - 1,514
-------------------------- --------- ----------- ------------ -------------
Revenue 273 502 - 775
Grant revenue 600 - - 600
_______ _______ _______ _______
Total revenue 873 502 - 1,375
Cost of sales - (70) - (70)
Research and development
costs (reclassified) (8,601) (109) - (8,710)
Distribution costs,
sales and marketing
(reclassified) - (369) (369)
Administrative costs
(reclassified) (1,151) (265) (2,991) (4,407)
Depreciation (500) (1) - (501)
Amortisation (5) (231) - (236)
_______ _______ _______ _______
Loss from operations (9,384) (543) (2,991) (12,918)
_______ _______ _______
Finance income 1,691
Finance expense (5)
_______
Loss before tax (11,232)
Taxation 1,133
_______
Loss for the year (10,099)
_______
(1) There were no unallocated costs in 2017 or 2016. Unallocated costs in 2015 represent fees associated with the acquisitions of Midatech Pharma US, Inc. and Zuplenz(R) in 2015.
Non-current assets by location of assets
2017 2016 2015
GBP'000 GBP'000 GBP'000
Spain 2,154 2,125 1,433
United Kingdom 15,331 16,489 14,019
United States 13,156 15,772 28,258
_______ _______ _______
30,641 34,386 43,710
_______ _______ _______
All material additions to non-current assets in 2017, 2016 and 2015 were in the Pipeline R&D segment.
4 Loss from operations
2017 2016 2015
Loss from operations is GBP'000 GBP'000 GBP'000
stated after charging/(crediting):
Changes in inventories of
finished goods and work
in progress 202 256 62
Write down of inventory - 287 -
to net realisable value
Depreciation of property,
plant and equipment 983 772 501
Amortisation of intangible
assets - product and marketing
rights 1,577 3,583 236
Impairment of intangible
assets 1,500 11,413 -
Fees payable to the Company's
auditor for the audit of
the parent Company 110 100 100
Fees payable to the Company's
subsidiary auditors for
the audits of the subsidiary
accounts 140 139 115
Fees payable to the Company's
auditor for:
* Corporate finance services - 438
* Tax advisory - 7
* Other services 100 72 36
Operating lease expense:
* Property 277 385 246
* Plant and machinery - 194 86
Foreign exchange(gain)/
loss (39) 31 (23)
Acquisition costs (in addition
to fees payable to the Company's
auditor) - - 2,553
Loss on disposal of property, 27 - -
plant and equipment
Gain on bargain purchase - - (165)
Share based payment 520 203 170
_______ _______ _______
Acquisition costs relate to professional fees incurred on the acquisition of Midatech Pharma US, Inc. and Zuplenz(R) in 2015 and Midatech Pharma (Wales) Limited in 2014.
Amortisation of product and marketing rights are included with distribution costs, sales and marketing expenses.
5 Staff costs
2017 2016 2015
GBP'000 GBP'000 GBP'000
Staff costs (including directors)
comprise:
Wages and salaries 5,278 6,314 3,731
Defined contribution pension
cost (note 27) 158 206 183
Social security contributions
and similar taxes 643 769 431
Share based payment 520 203 170
_______ _______ _______
6,599 7,492 4,515
_______ _______ _______
Employee numbers
The average number of staff employed by the Group during the financial year amounted to:
2017 2016 2015
reclassified reclassified
Research and development 62 57 45
General and administration 17 19 22
Sales and marketing 6 8 7
_______ _______ _______
85 84 74
_______ _______ _______
Key management personnel compensation
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, including the directors of the Company listed on page 33, and the Chief Operating Officer.
2017 2016 2015
GBP'000 GBP'000 GBP'000
Wages and salaries 811 1,054 850
Defined contribution pension
cost 68 59 59
Payments made to third parties 142 142 223
Social security contributions
and similar taxes 97 152 88
Benefits in kind 3 2 7
Share based payment 388 184 170
_______ _______ _______
1,509 1,593 1,397
_______ _______ _______
Emoluments disclosed above include the following amounts in respect of the highest paid Director. Directors' emoluments are disclosed on page 27.
2017 2016 2015
GBP'000 GBP'000 GBP'000
Salary 299 448 347
Total pension and other
post-employment benefit
costs 10 28 24
Benefits in kind 1 1 6
_______ _______ _______
310 477 377
_______ _______ _______
None of the Directors have exercised share options during the year (2016: Nil, 2015: Nil).
During the year 2 Directors (2016: 2) participated in a defined contribution pension scheme.
6 Finance income and expense
2017 2016 2015
Finance income GBP'000 GBP'000 GBP'000
Interest received on bank
deposits 15 164 53
Gain on equity settled derivative
financial liability 400 1,173 1,638
______ ______ ______
Total finance income 415 1,337 1,691
______ ______ ______
The gain on the equity settled derivative financial liability in 2017 has arisen due to the reduction in the share price and the lapsing of warrants and options as it did in 2016.
2017 2016 2015
Finance expense GBP'000 GBP'000 GBP'000
Bank loans 18 16 2
Other loans 91 57 3
Arrangement Fees 57 - -
______ ______ ______
Total finance expense 166 73 5
______ ______ ______
7 Taxation
2017 2016 2015
GBP'000 GBP'000 GBP'000
Current tax credit
Current tax credited to
the income statement 1,253 1,936 1,002
Taxation payable in respect - (25) -
of foreign subsidiary
______ ______ _______
1,253 1,911 1,002
Deferred tax credit
Reversal of temporary differences
(Note 23) 12 7,249 131
______ ______ _______
Total tax credit 1,265 9,160 1,133
______ ______ ______
The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to losses for the year are as follows:
2017 2016 2015
GBP'000 GBP'000 GBP'000
Loss before tax (17,329) (29,322) (11,232)
Expected tax credit based
on the standard rate of
United Kingdom corporation
tax at the domestic rate
of 19.25% (2016: 20.25%,
2015:20.25%) (3,336) (5,864) (2,274)
Expenses not deductible
for tax purposes 412 1,022 185
Adjustments to brought forward
values - - (8)
Additional deduction for
R&D expenditure - 4 (789)
Surrender of tax losses
for R&D tax refund (1,196) (1,503) 406
Reversal of deferred tax - (3,421) -
on impairment
Unrelieved tax losses and
other deductions arising
in the period (156) (166) (78)
Foreign exchange differences (84) 712 -
Deferred tax not recognised 3,095 491 1,425
Adjustment in respect of - (435) -
prior years
______ ______ ______
Total tax credited to the
income statement (1,265) (9,160) (1,133)
______ ______ ______
The taxation credit arises on the enhanced research and development tax credits accrued for the respective periods.
8 Loss per share
2017 2016 2015
Numerator GBP'000 GBP'000 GBP'000
______ ______ ______
Loss used in basic EPS and
diluted EPS (16,064) (20,162) (10,099)
_______ _______ ________
Denominator
Weighted average number
of ordinary shares used
in basic EPS 51,317,320 36,072,752 28,229,814
______ ______ ______
Basic and diluted loss per
share - pence (31p) (56p) (36p)
______ ______ ______
The Group has made a loss in the current and previous years presented, and therefore the options and warrants are anti-dilutive. As a result, diluted earnings per share is the same for all of the periods presented.
9 Property, plant and equipment
Fixtures Leasehold Computer Laboratory
and fittings improve-ments equipment equipment Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2015 1,202 880 195 583 2,860
Additions 183 283 173 385 1,024
Acquired through
acquisition of
subsidiary - - - 16 16
Exchange differences (66) (51) (14) (1) (132)
_______ _______ _______ _______ _______
At 31 December
2015 1,319 1,112 354 983 3,768
_______ _______ _______ _______ _______
Additions 2 715 43 609 1,369
Disposal - - (1) - (1)
Transfer (1,125) - (122) 1,247 -
Exchange differences 32 172 7 211 422
_______ _______ _______ _______ _______
At 31 December
2016 228 1,999 281 3,050 5,558
_______ _______ _______ _______ _______
Additions 18 41 57 591 707
Disposal - - - (41) (41)
Exchange differences 6 72 4 69 151
_______ _______ _______ _______ _______
At 31 December
2017 252 2,112 342 3,669 6,375
_______ _______ _______ _______ _______
Fixtures Leasehold Computer Laboratory
and fittings improve-ments equipment equipment Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Accumulated depreciation
At 1 January 2015 479 479 140 246 1,344
Charge for the
year 3 282 48 168 501
Exchange differences (24) (28) (8) (1) (61)
_______ _______ _______ _______ _______
At 31 December
2015 458 733 180 413 1,784
_______ _______ _______ _______ _______
Charge for the
year 41 134 54 543 772
Transfer (369) (96) (118) 583 -
Exchange differences 19 101 6 110 236
_______ _______ _______ _______ _______
At 31 December
2016 149 872 122 1,649 2,792
_______ _______ _______ _______ _______
Charge for the
year 43 330 68 542 983
Disposals - - - (14) (14)
Exchange differences 4 36 2 43 85
_______ _______ _______ _______ _______
At 31 December
2017 196 1,238 192 2,220 3,846
_______ _______ _______ _______ _______
Net book value
At 31 December
2017 56 874 150 1,449 2,529
At 31 December
2016 79 1,127 159 1,401 2,766
At 31 December
2015 861 379 174 570 1,984
At 1 January 2015 723 401 55 337 1,516
_______ _______ _______ _______ _______
Included within the total net book value of tangible fixed assets is GBP63k (2016: GBP33k, 2015: GBP266k) in respect of assets held under finance leases and similar hire purchase contracts. The depreciation charge for the year on these assets was GBP62k (2016: GBP22k, 2015: GBP26k). These assets were held as security in respect of their finance lease obligations.
No other assets were held as security other than those on finance lease.
10 Intangible
assets
Product
In-process and marketing
research rights IT/Website
and Goodwill costs Total
development
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Cost
At 1 January 2015 12,600 - 2,291 12 14,903
Additions - - - 3 3
Acquired in business
combinations - 17,989 9,952 - 27,941
Foreign exchange - 332 213 - 545
_______ _______ _______ _______ _______
At 31 December
2015 12,600 18,321 12,456 15 43,392
_______ _______ _______ _______ _______
Additions - - - 19 19
Foreign exchange - 3,160 2,032 - 5,192
Disposals - - - (8) (8)
_______ _______ _______ _______ _______
At 31 December
2016 12,600 21,481 14,488 26 48,595
_______ _______ _______ _______ _______
Additions 778 - - - 778
Foreign exchange - (1,625) (1,044) 1 (2,668)
_______ _______ _______ _______ _______
At 31 December
2017 13,378 19,856 13,444 27 46,705
_______ _______ _______ _______ _______
In-process Product
and
research marketing IT/Website
and
development rights Goodwill Costs Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Accumulated
amortisation
At 1 January
2015 1,800 - - 9 1,809
Amortisation
charge for the
year - 235 - 1 236
Foreign exchange - 8 - - 8
_______ _______ _______ _______ _______
At 31 December
2015 1,800 243 - 10 2,053
_______ _______ _______ _______ _______
Amortisation
charge for the
year - 3,578 - 5 3,583
Impairment - 11,413 - - 11,413
Foreign exchange - 374 - - 374
_______ _______ _______ _______ _______
At 31 December
2016 1,800 15,608 - 15 17,423
_______ _______ _______ _______ _______
Amortisation
charge for the
year - 1,574 - 3 1,577
Impairment 1,500 - - - 1,500
Foreign exchange - (1,443) - 1 (1,442)
_______ _______ _______ _______ _______
At 31 December
2017 3,300 15,739 - 19 19,058
_______ _______ _______ _______ _______
Net book value
At 31 December
2017 10,078 4,117 13,444 8 27,647
At 31 December
2016 10,800 5,873 14,488 11 31,172
At 31 December
2015 10,800 18,078 12,456 5 41,339
At 1 January
2015 10,800 - 2,291 3 13,094
_______ _______ _______ _______ _______
The individual intangible assets, excluding goodwill, which are material to the financial statements are:
Carrying amount Remaining amortisation
period
2017 2016 2015 2017 2016 2015
GBP'000 GBP'000 GBP'000 (years) (years) (years)
Midatech Pharma
(Wales) Limited n/a in n/a n/a
acquired IPRD 9,300 10,800 10,800 process in process in process
Midatech Pharma
US, Inc., product Between Between Between
and marketing 1 and 1 and 2 and
rights 1,995 3,557 15,570 3 4 5
Zuplenz(R)
product and
marketing rights 2,122 2,316 2,508 11 12 13
MTX110 acquired 778 - - n/a in - -
IPRD process
_______ _______ _______
14,195 16,673 28,878
_______ _______ _______
11 Acquisition of Midatech Pharma US, Inc.
On 4 December 2015, the Group acquired 100% of the voting equity of DARA BioSciences, Inc. whose principal activity is the sale and marketing of a portfolio of cancer supportive care pharmaceutical products. At completion of that transaction DARA BioSciences, Inc. was merged into a wholly owned subsidiary of Midatech Pharma PLC and the name of the merged entity was changed to Midatech Pharma US, Inc. The principal reason for this acquisition was to acquire commercial infrastructure and capability in the US market.
The revenue included in the consolidated statement of comprehensive income between 4 December 2015 and 31 December 2015 contributed by Midatech Pharma US, Inc was GBP502k. Midatech Pharma US, Inc contributed a net loss of GBP238k over the same period. If the acquisition had occurred at 1 January 2015 group revenue would have been GBP3.67m and the group loss for the period would have been GBP19.34m.
Acquisition related costs of GBP2.77m were incurred in relation to this acquisition and are included within (administrative expenses) within the consolidated statement of comprehensive income for the period.
The main factors leading to the recognition of goodwill are the presence of certain intangible assets, such as the assembled workforce of the acquired entity, its established commercial infrastructure and the expected synergies of the enlarged Group which do not qualify for separate recognition.
In addition to the consideration outlined below, additional cash consideration may have become payable (up to a maximum of GBP3.85m/$5.7m) if specified sales milestones had been achieved for the years ended 31 December 2016 and 2017, however, these milestones were not met.
The goodwill and intangible assets recognised will not attract tax deductions.
Fair value
GBP'000
Identifiable intangible assets:
Product and marketing rights 15,477
Property, plant and equipment 16
Receivables and other debtors 515
Stock 152
Payables and other liabilities (4,150)
Deferred tax (6,191)
Cash 2,289
_______
Total net assets 8,108
_______
Equity instruments (5,422,028 ordinary
shares) 14,427
Deferred Equity instruments
* Share options* 1,056
2,155
422
* Warrants*
* Preference share redemption**
_______
Total consideration 18,060
_______
Goodwill on acquisition 9,952
_______
*The share options and the warrants were valued using the Black Scholes model.
** The preference share redemption was valued on a cash basis
The net cash inflow in 2015 in respect of the acquisition of the subsidiary comprised:
GBP'000
Cash paid on completion - preferred share
redemption (422)
Net cash acquired 2,289
______
1,867
______
Assumption of DARA BioSciences, Inc. share options and warrants
At the time of completion of the merger with DARA BioSciences, Inc. there were a number of outstanding and unexercised options and warrants over common stock in DARA. Under the terms of the merger these options and warrants became exercisable for a number of Midatech ordinary shares equal to the product of (A) the number of shares of DARA common stock that were issuable upon exercise of the stock option or warrant immediately prior to the merger, multiplied by (B) a factor of 0.272, that being the Exchange Ratio defined in the merger agreement, rounded down to the nearest whole number of Midatech ordinary shares.
The per share exercise price for each Midatech ordinary share issuable upon exercise of each stock option or warrant will be equal to (C) the exercise price per share of DARA common stock at which the DARA stock option or warrant was exercisable divided by (D) the Exchange Ratio of 0.272, rounded up to the nearest whole cent. All other terms, notably including expiration dates, remained materially the same.
As at 31 December 2017 there were DARA options outstanding over 134,670 Midatech ordinary shares (2016: 300,728, 2015: 721,000) with a weighted average exercise price of $6.69 per share (2016: $7.19, 2015: $7.62), within a range of $2.54 to $644.12 (2016: $2.54 to $770.59, 2015: $2.54 to $770.59), and a weighted average remaining contractual life of 6.7 years (2016: 7.7 years, 2015: 8.5 years). The risk-free rate ranged from 0.00% to 1.08% (2016: 0.00% to 1.14%, 2015: 0.63% to 1.81%), volatility of 42.5% (2016: 60% to 77%, 2015: 59% to 79%) and the expected life from 0.3 to 7.8 years (2016: 0.8 to 8.8 years, 2015: 1.9 to 8.6 years). The exercise of all options would raise additional cash of $0.90m (2016: $2.16m, 2015: $5.50m).
Also at 31 December 2017 there were DARA warrants outstanding over 2,528,455 Midatech ordinary shares (2016: 3,017,773, 2015: 3,034,437) with a weighted average exercise price of $7.45 per share (2016: $9.44, 2015: $9.67), within a range of $3.05 to $24.08 (2016: $3.06 to $27.58, 2015: $3.06 to $164.71), and a weighted average remaining contractual life of 1.4 years (2016: 2.1 years, 2015: 3.1 years). The risk-free rate ranged from 0.00% to 0.71% (2016: 0.00% to 0.71%, 2015: 0.44% to 1.63%), volatility of 42.5% (2016: 60% to 66%, 2015: 59% to 79%) and the expected life from 0.1 to 4.9 years (2016: 0.1 to 5.9 years, 2015: 0.1 to 7.0 years). The exercise of all warrants would raise additional cash of $18.84m (2016: $28.48m, 2015: $29.33m).
The share options and warrants were valued using the Black Scholes model for the purpose of calculating the consideration payable for the DARA business. These options and warrants are treated as an equity settled derivative, held as a fair value through profit and loss instrument, see note 21.
12 Acquisition of Zuplenz(R)
On 24 December 2015, the Group acquired US sales and marketing rights to the product Zuplenz(R), an FDA-approved, marketed anti-emetic oral soluble film used in adult patients for the prevention of highly and moderately emetogenic chemotherapy-induced nausea and vomiting, radiotherapy-induced nausea and vomiting and post-operative nausea and vomiting. This acquisition was deemed to be a business combination following a review of the inputs, processes and potential for a market participant to generate outputs using the assets and agreements acquired.
The goodwill recognised will not attract a tax deduction.
Fair
value
GBP'000
Identifiable intangible assets:
Product and marketing rights 2,512
Stock 231
______
Total net assets (2,743)
______
Cash consideration 2,528
Contingent consideration* 50
______
Total consideration 2,578
______
Gain from bargain purchase on acquisition (165)
______
* The contingent consideration relates to various milestone payments which are dependent on the quarterly sales achieved in calendar years 2016 and 2017 and annual sales from 2018 to 2022 exceeding specified sales targets. The maximum amount payable was $26.0m however, the 2016 and 2017 sales targets were not achieved and management does not consider it likely that the 2018 to 2022 sales targets will be achieved either.
No revenue or costs were contributed by Zuplenz(R) in 2015. Acquisition related costs of GBP218k were incurred in relation to this acquisition and are included within administrative expenses within the consolidated statement of comprehensive income for 2015.
The gain from the bargain purchase of GBP165k was included within administrative costs in 2015 in the consolidated statement of comprehensive income. It arose due to the seller of Zuplenz(R) seeking to conclude the transaction as quickly as possible.
We are unable to quantity the impact on the 2015 group revenue and group loss had the acquisition occurred on 1 January 2015 due to the seller of the product not providing separable accounting records.
The net cash outflow in the year in respect
of the business acquisition comprised:
GBP'000
Cash paid on completion 2,528
______
13 Impairment testing
Midatech Pharma (Wales) Ltd
Details of goodwill and IPRD allocated to the acquired cash generating unit and the valuation basis are as follows:
Indefinite lived
IPRD carrying Goodwill carrying Valuation
amount amount Basis
Name 2017 2016 2015 2017 2016 2015
----------------- -------- -------- ------- -------- -------- ------- ----------
GBP'000 GBP'000 GBP000 GBP'000 GBP'000 GBP000
CGU - Midatech
Pharma (Wales) Value
Ltd 9,300 10,800 10,800 2,291 2,291 2,291 in use
The assets of the Midatech Pharma Wales Ltd ("MPW") CGU were valued as at 31 December 2017 and 31 December 2016 and were found to support the IPRD and goodwill carrying amounts set out above. The IPRD was valued using 13-14 year (2016: 14-15 year, 2015: 15-16 years), risk adjusted cash flow forecasts, in line with patent life, that have been approved by the Board. A period longer than 5 years is appropriate on the basis that the investment is long term and the development and commercialisation process is typically in excess of 5 years. Beyond the period from product launch and initial market penetration, a long-term growth rate of 5% was used.
In 2017 an impairment charge of GBP1.5m was recorded in the MPW CGU as a result of the impairment of the Opsisporin IPRD, primarily due to a strategic review concluding that the product is outside of Midatech's strategic focus and as a result the decision was made not to continue with the programme at this point. At the same time the carrying value of a component of IPRD was reduced from GBP1.5m to nil. The resulting charge was recorded in research and development expenditure within the consolidated statement of income.
The key assumptions used in the valuation model examining the MPW Ltd cash generating unit include the following:
Assumptions 2017 2016 2015 ------------------------ ------- ------ ---------- Pre-tax discount rate 17.9% 18.1% 17.7-19.5% Cumulative probability 46% to 46% to of success of projects 81% 81% 69%
The discount rate is an estimated market-based weighted average cost of capital for the MPW business, determined at the date of acquisition. Cumulative probability of success of projects is the product of the probability of success of each remaining major phase of development for each individual IPRD component. These phase probabilities were determined by management with reference to the risks associated with each remaining development stage.
Sensitivity analysis
If any one of the following changes were made to the above key assumptions, applied to all projects, the carrying value and recoverable amount would be equal.
Assumptions 2017 2016 2015 ------------------------ ----------- --------- --------- Pre-tax discount rate increase increase increase for all projects to 21.0% to 26.4% to 23.9% Cumulative probability of success of projects 57% 53% 44%
Midatech Pharma US, Inc.
Details of goodwill and intangibles allocated to the acquired cash generating unit and the valuation basis are as follows:
Definite lived Indefinite lived
Product and marketing Goodwill carrying Valuation
rights carrying amount Basis
amount
Name 2017 2016 2015 2017 2016 2015
---------------- -------- -------- -------- -------- -------- -------- ----------
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
CGU - Midatech
Pharma US, Value
Inc 1,995 3,557 15,477 11,152 12,197 10,165 in use
The change in the goodwill carrying value as at 31 December 2017 is due to the movement in the Sterling and US Dollar exchange rate used to translate the underlying US Dollar value of goodwill, 2017: $1.349, (2016: $1.233).
Following the acquisition of Zuplenz(R) on 24 December 2015, the Group has considered Zuplenz(R) to be an asset of the MPUS cash generating unit as from 1 January 2016. The Zuplenz(R) product is wholly integrated within the MPUS portfolio of products and as such all related cash flows have been included with the value in use calculations of the CGU.
An impairment charge of GBP11.4m in relation to product and marketing rights and a related GBP4.6m deferred tax credit was recorded in MPUS as at 31 December 2016. This arose as a result of the underperformance of Oravig in comparison to forecast sales at the time of the acquisition. The carrying value of the product rights, was reduced from GBP11.4m to nil. The resulting impairment charge is shown separately within the consolidated statement of comprehensive income.
The remaining assets of the MPUS CGU, including Zuplenz(R) , were valued as at 31 December 2017 and 31 December 2016 and were found to support the product and marketing rights and goodwill carrying amounts set out above. The product and marketing rights were valued using 10-year cash flow forecasts, that have been approved by the Board. A period longer than 5 years is appropriate on the basis that the product patents afford a certain amount of protection from competitors thereby providing assurance that market share can be preserved throughout the period of patent life. A long-term growth rate of 3% was used for all assets except Zuplenz where 5% was used.
As at 31 December 2015, the assets of the CGU were not identified as being materially different to the fair values determined at the acquisition date on 4 December 2015.
The key assumptions used in the model examining the Midatech Pharma US, Inc. cash generating unit include the following:
Assumptions 2017 2016 ---------------------- ------- ----- Pre-tax discount rate 19.7% 24.7% Overall CGU 10-year growth rate 26.4% 10.6%
The increase in the overall growth rate reflects the addition of the Group's development products, Q Octreotide and MTX110 into the MPUS portfolio once they have been approved and launched.
The discount rate is an estimated market-based weighted average cost of capital for the MPUS business, determined at the date of acquisition. The overall CGU 10-year growth rate is a composite of individual product forecasts, each with particular forecast growth rates over the next 5-years followed by a further 5-year period utilising a 3% long-term growth rate, or 5% for Zuplenz.
Sensitivity analysis
If any one of the following changes were made to the above key assumptions, applied to all projects, the carrying value and recoverable amount would be equal.
Assumptions 2017 2016
---------------------- ----------- ---------
Pre-tax discount rate increase increase
to 53.7% to 25.2%
Overall CGU 10-year
growth rate 5.0% 10.5%
The sensitivity analysis assumes that Q Octreotide and MTX110 are not added into the MPUS portfolio and the resulting 2017 growth rate of 5%, required for the carrying value and recoverable amount to be equal, is derived exclusively from the current product portfolio.
The value in use calculations used to value the acquired intangibles and appraise the remaining carrying value of the intangibles at 31 December 2015 were materially the same. This is because of the impairment test date and acquisition date being only 27 days apart. Any increase in the discount rate or decrease in the probability of success of projects stated above would result in an impairment.
14 Subsidiaries
The subsidiaries of Midatech Pharma plc, all of which are 100% owned, either directly or through subsidiaries where indicated, and have been included in these financial statements in accordance with the details set out in the basis of preparation and basis of consolidation note 1, are as follows:
Registered Nature
of
Name Office Business Notes
Midatech Limited 65 Innovation Drive, Trading
Milton Park, Milton, company
Abingdon, Oxfordshire,
OX14 4RQ
Midatech Pharma Parque Tecnológico Trading (a)
(Espana) SL de Vizcaya, Edificio company
800 Planta 2, Derio,
48160, Vizcaya, Spain
PharMida AG c/o Kellerhals, Hirschgässlein Dormant (a)
11, 4051 Basel, Switzerland (b)
Midatech Pharma Oddfellows House, 19 Trading
(Wales) Limited Newport Road, Cardiff, company
CF24 0AA
Midatech Pharma 8601 Six Forks Road, Trading (c)
US, Inc. Suite 160, Raleigh, company
North Carolina 27615,
USA
Dara Therapeutics, 8601 Six Forks Road, Dormant (d)
Inc. Suite 160, Raleigh,
North Carolina 27615,
USA
Midatech Pharma c/o Griffith Hack Consulting, Trading (e)
PTY 300 Queen Street, Brisbane, company
QLD 4000, Australia
Notes:
(a) Wholly owned subsidiary of Midatech Limited (b) PharMida AG became dormant in January 2016.
(c) DARA Bio Sciences, Inc. was acquired on 4 December 2015 through a merger with a specially incorporated subsidiary of Midatech Pharma plc. This merger subsidiary was renamed Midatech Pharma US, Inc. on 4 December 2015.
(d) Wholly owned subsidiary of Midatech Pharma US, Inc.
(e) Midatech Pharma PTY was incorporated on 16 February 2015.
15 Joint arrangements
Country of
Name incorporation Nature of business Type of arrangement
Syntara USA Dormant Joint venture
LLC
MidaSol Cayman Islands Research and development Joint operation
Therapeutics partner
GP
The Group has a 50% (2016: 50%; 2015: 50%) interest in two joint arrangements: Syntara LLC and MidaSol Therapeutics. The primary activity of these joint arrangements was to provide the partners with collaborative research and development on drug delivery systems in the market, which is in line with the Group's strategy to develop a safe and effective drug delivery system.
Syntara LLC is a dormant joint venture where the Group has joint control over the separate legal entity. The Group equity accounts for its interests in this arrangement; the results are immaterial to the financial statements.
MidaSol Therapeutics is a separate legal entity however no costs or revenues pass through it. The Group and its collaborative partner incur costs in respect of research and development and periodically agree on a contribution from either side to ensure that both parties have incurred 50% of the total costs. Contributions from their research partner are netted against the costs to which they relate within research and development and the arrangement is accounted for as a joint operation. MidaSol operations effectively ceased during 2015.
2017 2016 2015
GBP'000 GBP'000 GBP'000
Research and development
spend on MidaSol Therapeutics - - 776
Year-end receivable due
from joint operation partner - - 219
16 Trade and other receivables
2017 2016 2015
GBP'000 GBP'000 GBP'000
Trade receivables 2,232 1,428 985
Prepayments 627 586 685
Other receivables 848 873 1,213
_______ _______ _______
Total trade and other receivables 3,707 2,887 2,883
Less: non-current portion
(rental deposit and on bond) (465) (448) (387)
_______ _______ _______
Current portion 3,242 2,439 2,496
_______ _______ _______
Trade and other receivables do not contain any impaired assets. The Group does not hold any collateral as security and the maximum exposure to credit risk at the Consolidated Statement of Financial Position date is the fair value of each class of receivable.
Book values approximate to fair value at 31 December 2017, 2016 and 2015.
17 Cash and cash equivalents and cash
flow supporting notes
Cash and cash equivalents for purposes of the consolidated statement of cash flows comprises:
2017 2016 2015
GBP'000 GBP'000 GBP'000
Cash at bank available on
demand 13,204 17,608 16,175
_______ _______ _______
There were no significant non-cash transactions during the year.
During the year, cash inflows arose from an equity financing transaction, included within financing activities on the face of the cash flow statement.
2017 2016 2015
GBP'000 GBP'000 GBP'000
Funds raised on Public Offering 6,157 16,673 -
Costs of raising funds on
Public Offering (429) (1,105) -
_______ _______ _______
5,728 15,568 -
_______ _______ _______
The following changes in liabilities arose as a result of financing activities during the year:
Non-current Current Total
liabilities, liabilities,
borrowings borrowings
GBP'000 GBP'000 GBP'000
At 1 January 2017 - 23 23
Cash Flows 5,249 (12) 5,237
Foreign Exchange (42) - (42)
_______ _______ _______
At 31 December 2017 5,207 11 5,218
_______ _______ _______
18 Inventories
2017 2016 2015
GBP'000 GBP'000 GBP'000
Work in progress - - 230
Finished goods 941 817 229
_______ _______ _______
Total inventories 941 817 459
_______ _______ _______
A reserve is maintained against inventory that is not expected to be sold before its sell by date. The resulting charge to the comprehensive statement of income for the year was GBP151k (2016: GBP287k, 2015: Nil).
19 Trade and other payables
2017 2016 2015
Current GBP'000 GBP'000 GBP'000
Trade payables 2,271 3,268 2,285
Other payables 1,141 1,166 35
Accruals 3,090 2,003 3,101
_______ _______ ________
Total financial liabilities,
excluding loans and borrowings,
classified as financial
liabilities measured at
amortised cost 6,502 6,437 5,421
Tax and social security 359 670 183
Deferred revenue 1,141 1,300 1,480
_______ _______ _______
Total trade and other payables 8,002 8,407 7,084
_______ _______ _______
Book values approximate to fair value at 31 December 2017, 2016 and 2015.
All current trade and other payables are payable within 3 months of the period end date shown above.
Government grants
The Group received development grant funding from the European Union under the Horizon 2020 "Nanofacturing" project, a European Union funded programme to develop a scalable manufacturing platform for the production of nanopharmaceutical products. Midatech is participating in this programme, along with seven other entities, through two Group companies, Midatech Pharma España ("MPE"), which is acting as project coordinator, and Midatech Limited ("MTL"). The project commenced in February 2015 and is scheduled to complete in January 2019. GBP840k (2016: GBP547k) of revenue has been recognised during the year in relation to this project and GBP1.11m (2016: GBP1.24m) of the deferred revenue balance relates to funds received but not yet recognised.
Government grants/loans in Spain
Five tranches of government loans have been received by Midatech Pharma Espana SL (formerly Midatech Biogune SL) for the finance of research, technical innovation and the construction of their laboratory. The loans are term loans which carry an interest rate below the market rate, and are repayable over periods through to 2022. The loans carry default interest rates in the event of scheduled repayments not being met. On initial recognition, the loans are discounted at a market rate of interest with the credit being classified as a grant within deferred revenue. The deferred grant revenue is released to the consolidated statement of comprehensive income within research and development costs in the period to which the expenditure is recognised.
The debt element of the government loans is designated within note 20 as borrowings, the gross contractual repayment of the loans is disclosed in note 22.
20 Borrowings
2017 2016 2015
GBP'000 GBP'000 GBP'000
Current
Bank loans 11 23 9
Finance lease 39 31 70
Government and research
loans 311 484 363
______ ______ ______
Total 361 538 442
_______ _______ _______
Non-current
Bank loans 5,207 - 20
Finance lease 29 52 68
Government and research
loans 949 1,568 1,420
______ ______ ______
Total 6,185 1,620 1,508
_______ _______ _______
Book values approximate to fair value at 31 December 2017, 2016 and 2015.
Obligations under finance leases are secured by a fixed charge over the fixed assets to which they relate.
The Group had $8m of undrawn committed borrowing facilities at year end.
Midcap Loan Facility
In December 2017, Midatech Pharma entered into a secured loan agreement with Midcap Financial Trust (MidCap). The total facility is for $15m to be drawn down in three separate tranches. Interest is charged on the outstanding balance of the loan at an annual rate of LIBOR plus 7.5% subject to a LIBOR floor of 1.25%. MidCap was granted 247,881 warrants to purchase shares which was equal to 2% of the amount funded divided by the Exercise Price of GBP0.42. The Exercise Price was calculated as the average closing price for the 30-day period prior to the date of grant. The loan is secured against the assets of the group.
The first tranche of $7m was drawn down on 28 December 2017 and is disclosed under bank loans.
21 Derivative financial liability - current
2017 2016 2015
GBP'000 GBP'000 GBP'000
Equity settled derivative
financial liability - 400 1,573
_______ _______ _______
At 1 January/on acquisition
- 5 December 2015 400 1,573 3,211
Gain recognised in finance
income within the consolidated
statement of comprehensive
income (400) (1,173) (1,638)
_______ _______ ______
At 31 December - 400 1,573
_______ _______ _______
Equity settled derivative financial liability is a liability that is not to be settled for cash. The Group assumed fully vested warrants and share options on the acquisition of DARA Biosciences, Inc. The number of ordinary shares to be issued when exercised is fixed, however the exercise prices are denominated in US Dollars being different to the functional currency of the parent company. Therefore, the warrants and share options are classified as equity settled derivative financial liabilities through the profit and loss account. The financial liabilities were valued using the Black-Scholes option pricing model. Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporated any interest paid on the financial liability and is included in the 'other gains and losses' line item in the income statement. Fair value is determined in the manner described in note 22. A key input in the valuation of the instrument is the Company share price. The share price of the Company reduced from GBP2.65 at the date of acquisition of DARA Biosciences, Inc. to GBP1.74 at 31 December 2015, resulting in a gain of GBP1.64m on re-measurement, which was credited to finance income in 2015.
At 31 December 2016, some 398,315 options and 16,664 warrants had lapsed, as described in note 11. In addition, the share price had fallen to GBP1.18, which resulted in a gain of GBP1.17m on re-measurement, which was credited to finance income in 2016.
At 31 December 2017 a further 166,058 options and 489,318 warrants had lapsed and the share price had fallen to GBP0.36 which results in a gain of GBP0.40m on re-measurement which was credited to finance income during 2017.
22 Financial instruments - risk management
The Group is exposed through its operations to the following financial risks:
-- Credit risk -- Foreign exchange risk -- Liquidity risk
In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them. The Board does not believe that its risk exposure to financial instruments, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note has changed in the past year.
Principal financial instruments
The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows:
-- Trade and other receivables -- Cash and cash equivalents -- Trade and other payables -- Accruals -- Loans and borrowings -- Derivative financial liability
A summary of the financial instruments held by category is provided below:
Financial assets - loans and receivables
2017 2016 2015
GBP'000 GBP'000 GBP'000
Cash and cash equivalents 13,204 17,608 16,175
Trade receivables 2,232 1,428 985
Other receivables 848 873 1,213
_______ _______ _______
Total financial
assets 16,284 19,909 18,373
_______ _______ _______
Financial liabilities - amortised cost
2017 2016 2015
GBP'000 GBP'000 GBP'000
Trade payables 2,271 3,268 2,285
Other payables 1,141 1,166 35
Accruals 3,090 2,003 3,101
Borrowings 6,546 2,158 1,950
_______ _______ ______
Total financial liabilities
- amortised cost 13,048 8,595 7,371
_______ _______ _______
Financial liabilities - fair value through profit and loss - current
2017 2016 2015
GBP'000 GBP'000 GBP'000
- 400 1,573
_______ _______ _______
Equity settled derivative financial liability
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group's risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Group's Management.
The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. Further details regarding these policies are set out below:
Fair value hierarchy
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
-- Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities;
-- Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and
-- Level 3: techniques which use inputs that have a significant effect on the recorded fair value that are not based on observable market data.
The fair value of the Group's derivative financial liability is measured at fair value on a recurring basis.
The following table gives information about how the fair value of this financial liability is determined, additional disclosure is given in note 11:
1)
1)
Financial Fair Fair Valuation Significant Relationship
liabilities value value technique unobservable of unobservable
as at hierarchy (s) and input(s) inputs to
31/12/2017 key input(s) fair value
Equity - Level Black Volatility rate The higher
settled 3 Scholes of 42.5%determined the volatility
financial option using historical the higher
derivative pricing volatility of the fair
liability model comparable companies. value.
Expected life The shorter
between a range the expected
of 0.1 and 8.6 life the
years determined lower the
using the remaining fair value.
life of the
share options.
Risk-free rate The higher
between a range the risk-free
of 0.0% and rate the
1.14% determined higher the
using the expected fair value.
life assumptions.
Given that the fair value of the equity settled financial derivative liability is nil, it is not sensitive to changes in volatility or expected life. In 2016, if the above unobservable volatility input to the valuation model had been 10% higher while all other variables were held constant, the carrying amount of shares would have increased by GBP94k. If the above unobservable expected life input to the valuation model had been 1 year shorter while all other variables were held constant, the carrying amount of shares would have decreased by GBP133k.
Changing the unobservable risk free rate input to the valuation model by 10% higher while all other variables were held constant, would not impact the carrying amount of shares (2016: increase by GBP2k).
There were no transfers between Level 1 and 2 in the period.
The financial liability measured at fair value on Level 3 fair value measurement represents consideration relating to a business combination.
Credit risk
Credit risk is the risk of financial loss to the Group if a development partner or a counterparty to a financial instrument fails to meet its contractual obligations. The Group is mainly exposed to credit risk from amounts due from collaborative partners which is deemed to be low.
Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. For banks and financial institutions, only independently rated parties with high credit status are accepted.
The Group does not enter into derivatives to manage credit risk.
Quantitative disclosures of the credit risk exposure in relation to financial assets are set out in note 16. This includes details regarding trade and other receivables, which are neither past due nor impaired.
The total exposure to credit risk of the Group is equal to the total value of the financial assets held at each year end as noted above.
Cash in bank
The Group is continually reviewing the credit risk associated with holding money on deposit in banks and seeks to mitigate this risk by holding deposits with banks with high credit status.
Foreign exchange risk
Foreign exchange risk arises because the Group has a material operation located in Bilbao, Spain, and operations in the US whose functional currencies are not the same as the functional currency of the Group. The Group's net assets arising from such overseas operations are exposed to currency risk resulting in gains or losses on retranslation into sterling. Given the levels of materiality, the Group does not hedge its net investments in overseas operations as the cost of doing so is disproportionate to the exposure.
Foreign exchange risk also arises when individual Group entities enter into transactions denominated in a currency other than their functional currency; the Group's transactions outside the UK to the US, Europe and Australia drive foreign exchange movements where suppliers invoice in currency other than sterling. These transactions are not hedged because the cost of doing so is disproportionate to the risk.
The table below shows analysis of the Pounds Sterling equivalent of year-end cash and cash equivalent balances by currency:
2017 2016 2015
GBP'000 GBP'000 GBP'000
Cash and cash equivalents:
Pounds Sterling 6,116 10,229 14,494
US Dollar 5,362 2,186 819
Euro 1,632 5,143 862
Other 94 50 -
_______ _______ _______
Total 13,204 17,608 16,175
_______ _______ _______
The table below shows the foreign currency exposure that give rise to net currency gains and losses recognised in the consolidated statement of comprehensive income. Such exposures comprise the net monetary assets and monetary liabilities of the Group that are not denominated in the functional currency of the relevant Group entity. As at 31 December 2017, these exposures were as follows:
2017 2016 2015
GBP'000 GBP'000 GBP'000
Net Foreign Currency Assets/(Liabilities):
US Dollar 4,459 (206) (1,691)
Euro (362) 2,655 77
Other 95 58 (8)
_______ _______ _______
Total 4,192 2,507 (1,622)
_______ _______ _______
Foreign currency sensitivity analysis
The most significant currencies in which the Group transacts, other than Pounds Sterling, are the US Dollar and the Euro. The Group also trades in other currencies in small amounts as necessary.
The following table details the Group's sensitivity to a 10% change in year-end exchange rates, which the Group feels is the maximum likely change in rate based upon recent currency movements, in the key foreign currency exchange rates against Pounds Sterling:
Year ended 31 December 2017 US Dollar Euro Other
GBP'000 GBP'000 GBP'000
Loss before tax 307 (89) -
Total equity 307 (89) -
Year ended 31 December 2016 US Dollar Euro Other
GBP'000 GBP'000 GBP'000
Loss before tax 521 (73) (55)
Total equity 521 (73) (55)
In the year ended 31 December 2015, this foreign currency exposure risk was not considered material. In management's opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year-end exposure does not reflect the exposure during the year.
Liquidity risk
Liquidity risk arises from the Group's management of working capital. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. It is the Group's aim to settle balances as they become due.
In Q4 2017, as disclosed in Note 20, Midatech entered into a secured loan agreement with MidCap to reduce its short to medium term funding risk. This loan is secured against all assets of the Group.
The Group's current financial position is such that the Board does not consider there to be a short-term liquidity risk however the Board will continue to monitor long term cash projections in light of the development plan and will consider raising funds as required to fund long term development projects. Development expenditure can be curtailed as necessary to preserve liquidity.
The following table sets out the contractual maturities (representing undiscounted contractual cash-flows) of financial liabilities:
Between Between Between
3 and 1 and 2 and
Up to 3 12 2 5 Over
2017 months months years years 5 years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Trade and other 6,502 - - - -
payables
Bank loans 120 359 2,201 3,926 -
Finance leases 16 25 30 - -
Government research
loans 43 268 467 545 47
______ ______ ______ ______ ______
Total 6,681 649 2,698 4,471 47
______ ______ ______ ______ ______
Between Between Between
3 and 1 and 2 and
Up to 3 12 2 5 Over
2016 months months years years 5 years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Trade and other 6,437 - - - -
payables
Bank loans 3 8 11 4 -
Finance leases 7 26 30 33 -
Government research
loans - 449 269 761 393
______ ______ ______ ______ ______
Total 6,447 483 310 798 393
______ ______ ______ ______ ______
Between Between Between
3 and 1 and 2 and
Up to 3 12 2 5 Over
2015 months months years years 5 years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Trade and other 5,421 - - - -
payables
Bank loans 2 7 9 13 -
Finance leases 7 71 27 56 -
Government research
loans 36 352 195 644 755
______ ______ ______ ______ ______
Total 5,466 430 231 713 755
______ ______ ______ ______ ______
More details with regard to the line items above are included in the respective notes:
-- Trade and other payables - note 19 -- Loans and borrowings - note 20
Capital risk management
The Group monitors capital which comprises all components of equity (i.e. share capital, share premium, foreign exchange reserve and accumulated deficit).
The Group's objectives when maintaining capital are:
-- to safeguard the entity's ability to continue as a going concern; and -- to have sufficient resource to take development projects forward towards commercialisation.
The Group continues to incur substantial operating expenses. Until the Group generates positive net cash inflows from the commercialisation of its products it remains dependent upon additional funding through the injection of equity capital and government funding. The Group may not be able to generate positive net cash inflows in the future or to attract such additional required funding at all, or on suitable terms. In such circumstances the development programmes may be delayed or cancelled and business operations cut back.
The Group seeks to reduce this risk by keeping a tight control on expenditure, avoiding long-term supplier contracts (other than clinical trials), prioritising development spend on products closest to potential revenue generation, obtaining government grants (where applicable), maintaining a focused portfolio of products under development and keeping shareholders informed of progress.
There have been no changes to the Group's objectives, policies and processes for managing capital and what the Group manages as capital, unless otherwise stated in this note, since the past year.
23 Deferred tax
Deferred tax is calculated in full on temporary differences under the liability method using tax rates applicable in the tax jurisdictions where the tax asset or liability would arise.
The movement on the deferred tax account is as shown below:
2017 2016 2015
GBP'000 GBP'000 GBP'000
Liability at 1 January - 6,547 354
Arising on business combination - - 6,191
Credited to income on impairment - (5,509) -
and amortisation of intangibles
Credited to income statement - (1,740) (131)
Foreign exchange gain - 702 133
_______ _______ _______
Liability at 31 December - - 6,547
_______ _______ _______
The movement on the deferred tax account in 2017 is Nil as the net credit arising on the amortisation of intangible assets and other timing differences has been matched by a reduction in the deferred tax asset recognised on the losses offsetting the liability remaining.
A deferred tax liability has arisen due to deferred tax on intangible assets acquired in 2015.
An intangible asset was impaired in the financial statements for the year ended 31 December 2016 by GBP11.4m which resulted in a GBP4.6m tax credit being recognised in the income statement.
Unused tax losses carried forward, subject to agreement with local tax authorities, were as follows:
Gross Unrecognised
losses deferred
tax asset
GBP'000 GBP'000
31 December 2015 23,286 4,191
31 December 2016 26,956 5,049
31 December 2017 38,377 6,639
With the exception of the GBP2.6m (2016: GBP3.7m: 2015: GBP1.6m) deferred tax asset which qualifies for offset against the deferred tax liabilities arising on the acquisitions of Midatech Pharma (Wales) Limited and Midatech Pharma US, the remaining potential deferred tax asset of GBP9.5m (2016: GBP8.1m) has not been provided in these accounts due to uncertainty as to the whether the asset would be recovered.
Details of the deferred tax liability are as follows:
2017 Asset Liability Net
GBP'000 GBP'000 GBP'000
Business Combinations 2,599 (2,599) -
_______ _______ _______
2016 Asset Liability Net
GBP'000 GBP'000 GBP'000
Business Combinations 3,668 (3,668) -
_______ _______ _______
2015 Asset Liability Net
GBP'000 GBP'000 GBP'000
Business Combinations 1,625 (8,172) (6,547)
_______ _______ _______
24 Share capital
2017 2017 2016 2016 2015 2015
Authorised, allotted and Number GBP Number GBP Number GBP
fully paid - classified as
equity
At 1 January
Ordinary shares of GBP0.00005
each 61,084,135 3,054 48,699,456 2,435 33,467,504 1,673
Deferred shares of GBP1 each 1,000,001 1,000,001 1,000,001 1,000,001 1,000,001 1,000,001
__________ __________ __________
Total 1,003,055 1,002,436 1,001,674
__________ __________ __________
In accordance with the Articles of Association for the Company adopted on 13 November 2014, the share capital of the Company consists of an unlimited number of ordinary shares of nominal value 0.005 pence each. Ordinary and Deferred shares were recorded as equity.
Rights attaching to the shares following the incorporation of Midatech Pharma plc
Shares classified as equity
The holders of ordinary shares in the capital of the Company have the following rights:
(a) to receive notice of, to attend and to vote at all general meetings of the Company, in which case shareholders shall have one vote for each share of which he is the holder.
(b) to receive such dividend as is declared by the Board on each share held.
The holders of Deferred Shares in the capital of the Company:
(a) shall not be entitled to receive notice of or to attend or speak at any general meeting of the Company or to vote on any resolution to be proposed at any general meeting of the Company;
(b) shall not be entitled to receive any dividend or other distribution of out of the profits of the Company.
In the event of a distribution of assets, the Deferred shareholders shall receive the nominal amount paid up on such share after the holder of each ordinary share shall have received (in cash or specie) the amount paid up or credited as paid up on such ordinary share together with an additional payment of GBP100 per share. The Company has the authority to purchase the Deferred Shares and may require the holder of the Deferred Shares to sell them for a price not exceeding 1p for all the Deferred Shares.
Ordinary Deferred Share Total
Shares Shares Price consideration
Number Number GBP GBP'000
2015
As at 1 January
2015 27,794,258 1,000,001 32,000
Exercise of employee share
24 April 2015 options 16,500 - 0.00005 -
25 September Exercise of employee share
2015 options 10,000 - 0.00005 -
4 December Share issue on acquisition
2015 of DARA BioSciences, Inc. 5,422,028 - 2.63 14,240
23 December Deferred consideration re:
2015 acquisition of Q Chip Limited 224,718 - 2.67 600
_________ _________ _________
As at 31 December
2015 33,467,504 1,000,001 46,840
_________ _________ _________
2016
Deferred consideration re:
1 July 2016 acquisition of Q Chip Limited 74,908 - 2.67 200
31 October Placing and Open Offer (costs
2016 shown in note 17) 15,157,044 - 1.10 16,673
_________ _________ _________
As at 31 December
2016 48,699,456 1,000,001 63,713
_________ _________ _________
2017
Share issue to SIPP trustee
19 May 2017 (see note 28) 20,000 - 0.00005 1
16 October Placing and Open Offer (shown
2017 in note 17) 12,314,679 - 0.5 6,157
7 November Share issue to SIPP trustee
2017 (see note 28) 50,000 - 0.00005 3
_________ _________ _________
As at 31 December
2017 61,084,135 1,000,001 69,874
_________ _________ _________
25 Reserves
The following describes the nature and purpose of each reserve within equity:
Reserve Description and purpose
Share premium Amount subscribed for share
capital in excess of nominal
value.
Merger reserve Represents the difference between
the fair value and nominal value
of shares issued on the acquisition
of subsidiary companies where
the Company has elected to take
advantage of merger relief.
Shares to be issued Shares for which consideration
has been received but which
are not yet issued and which
form part of consideration in
a business combination.
Foreign exchange Gains/losses arising on retranslating
reserve the net assets of overseas operations
into sterling.
Accumulated deficit All other net gains and losses
and transactions with owners
(e.g. dividends) not recognised
elsewhere.
26 Leases
The Group had commitments under non-cancellable operating leases as set out below:
Land and
buildings Other
2017 GBP'000 GBP'000
Expiring In one year or less 449 8
Expiring Between one and five years 359 32
________ ________
808 40
________ ________
2016 GBP'000 GBP'000
Expiring In one year or less 371 7
Expiring Between one and five years 449 28
________ ________
820 35
________ ________
Land and
buildings Other
2015 GBP'000 GBP'000
Expiring In one year or less 313 1
Expiring Between one and five years 410 2
________ ________
723 3
________ ________
27 Retirement benefits
The Group operates a defined contribution pension scheme for the benefit of its employees. The assets of the scheme are administered by trustees in funds independent from those of the Group.
28 Share-based Payments
Share Options
The Group has issued options over ordinary shares under the 2014 Midatech Pharma plc Enterprise Management Incentive Scheme, the Midatech Pharma plc 2016 U.S. Option Plan, which is a sub-plan of the approved UK plan, and unapproved share options awarded to non-UK or non-US staff. In addition, certain share options originally issued over shares in Midatech Ltd under the Midatech Limited 2008 unapproved share option scheme or Midatech Limited 2013 approved Enterprise Incentive scheme were reissued in 2015 over shares in Midatech Pharma plc under the 2014 Midatech Pharma plc Enterprise Management Incentive Scheme. Exercise of an option is subject to continued employment.
Details of all share options granted under the Schemes are set out below:
Date of grant At 1 January Granted Exercised Forfeited At 31 Exercise
2017 in 2017 in 2017 in 2017 December Price
2017
31 December
2008 26,122 - - - 26,122 GBP1.425
31 December
2008 3,000 - - - 3,000 GBP3.985
1 April 2010 25,110 - - - 25,110 GBP4.00
20 August 2010 41,766 - - 41,766 GBP4.19
13 September
2011 3,000 - - - 3,000 GBP4.19
20 April 2012 35,796 - - - 35,796 GBP4.19
9 May 2014 200,000 - - - 200,000 GBP0.075
30 June 2014 880,000 - - - 880,000 GBP0.075
11 July 2014 3,000 - - 1,000 2,000 GBP0.075
31 October
2016 50,000 - - - 50,000 GBP1.710
31 October
2016 607,600 - - - 607,600 GBP2.680
14 December
2016 8,000 - - - 8,000 GBP1.550
14 December
2016 10,000 - - - 10,000 GBP1.700
14 December
2016 3,000 - - 3,000 - GBP1.710
14 December
2016 3,000 - - 3,000 - GBP1.730
14 December
2016 3,000 - - 3,000 - GBP1.740
14 December
2016 40,000 - - - 40,000 GBP1.870
14 December
2016 40,000 - - - 40,000 GBP1.880
15 December
2016 197,000 - - 95,000 102,000 GBP1.210
19 December
2016 1,110,000 - - 5,750 1,104,250 GBP1.210
15 December
2017 - 1,351,250 - - 1,351,250 GBP0.46
_______ _______ _______ _______ _______
3,289,394 1,351,250 - (110,750) 4,529,894
_______ _______ _______ _______ _______
Options exercisable at 31 December
2017 1,000,469
Weighted average exercise price GBP1.003
of outstanding options at 31
December 2017
Weighted average exercise price n/a
of options exercised in 2017
Weighted average exercise price GBP1.242
of options forfeited in 2017
Weighted average exercise price GBP0.46
of options granted in 2017
Weighted average remaining 8.3 years
contractual life of outstanding
options at 31 December 2017
28 Share-based payment (continued)
Date of grant At 1 January Granted Exercised Forfeited At 31 Exercise
2016 in 2016 in 2016 in 2016 December Price
2016
31 December
2008 26,122 - - - 26,122 GBP1.425
31 December
2008 15,500 - - (12,500) 3,000 GBP3.985
1 April 2010 25,110 - - - 25,110 GBP4.00
20 August 2010 41,766 - - 41,766 GBP4.19
13 September
2011 3,000 - - - 3,000 GBP4.19
20 April 2012 35,796 - - - 35,796 GBP4.19
9 May 2014 200,000 - - - 200,000 GBP0.075
30 June 2014 880,000 - - - 880,000 GBP0.075
11 July 2014 5,000 - - (2,000) 3,000 GBP0.075
31 October
2016 - 50,000 - - 50,000 GBP1.710
31 October
2016 - 607,600 - - 607,600 GBP2.680
14 December
2016 - 8,000 - - 8,000 GBP1.550
14 December
2016 - 10,000 - - 10,000 GBP1.700
14 December
2016 - 3,000 - - 3,000 GBP1.710
14 December
2016 - 3,000 - - 3,000 GBP1.730
14 December
2016 - 3,000 - - 3,000 GBP1.740
14 December
2016 - 40,000 - - 40,000 GBP1.870
14 December
2016 - 40,000 - - 40,000 GBP1.880
15 December
2016 - 197,000 - - 197,000 GBP1.210
19 December
2016 1,110,000 - - 1,110,000 GBP1.210
_______ _______ _______ _______ _______
1,232,294 2,071,600 - (14,500) 3,289,394
_______ _______ _______ _______ _______
Options exercisable at 31 December 2016 468,194
Weighted average exercise price of outstanding GBP1.234
options at 31 December 2016
Weighted average exercise price of options n/a
exercised in 2016
Weighted average exercise price of options GBP3.446
forfeited in 2016
Weighted average exercise price of options GBP1.685
granted in 2016
Weighted average remaining contractual 8.6 years
life of outstanding options at 31 December
2016
Date of At 1 January Granted Exercised Forfeited At Exercise
grant 2015 in 2015 in 2015 in 2015 31 Price
December
2015
31 December
2008 26,122 - - - 26,122 GBP1.425
31 December
2008 15,500 - - - 15,500 GBP3.985
1 April
2010 25,110 - - - 25,110 GBP4.00
20 August
2010 59,666 - - (17,900) 41,766 GBP4.19
13 September
2011 3,000 - - - 3,000 GBP4.19
20 April
2012 35,796 - - - 35,796 GBP4.19
3 April
2014 26,500 - (26,500) - - GBP0.075
9 May 2014 200,000 - - - 200,000 GBP0.075
30 June
2014 880,000 - - - 880,000 GBP0.075
11 July
2014 11,000 - - (6,000) 5,000 GBP0.075
_______ _______ _______ _______ _______
1,282,694 - (26,500) (23,900) 1,232,294
_______ _______ _______ _______ _______
Options exercisable at 31
December 2015 366,044
Weighted average exercise GBP0.502
price of outstanding options
at 31 December 2015
Weighted average exercise GBP0.075
price of options exercised
in 2015
Weighted average exercise GBP4.193
price of options forfeited
in 2015
Weighted average exercise n/a
price of options granted
in 2015
Weighted average remaining contractual 7.8
life of outstanding options years
at 31 December 2015
All of the 1,351,250 options granted during 2017, contain the following conditions:
-- 25% (i.e. 337,812 options) become eligible to vest on the first anniversary of the relevant date of grant; and
-- A further 6.25% (i.e. 84,453 options) vest every 3 months following the first anniversary of the date of grant such that by the fourth anniversary all 1,351,250 options shall have be eligible for vesting.
-- All vesting is subject to the 20-VWAP share price reaching GBP1 at any time during the life of the option.
Of the 2,071,600 options granted during 2016, 1,981,600 options contain the following conditions:
-- 25% (i.e. 495,400 options) vest on the first anniversary of the relevant date of grant; and
-- A further 6.25% (i.e. 123,850 options) vest every 3 months following the first anniversary of the date of grant such that by the fourth anniversary all 1,981,600 options shall have vested.
-- 607,600 of these options related to 2015 but the acquisition of DARA BioSciences and other activities during that year meant that there was insufficient time during Open periods to make the awards until 2016. However, the effective date of grant and hence basis for vesting was in 2015. As a result, 151,900 of these options had vested by 31 December 2016.
The remaining 90,000 options granted during 2016 contained the following conditions:
-- Vesting was conditional on the same time-based vesting criteria noted above and also on the Midatech Pharma US, Inc. business achieving a revenue target for the year ended 31 December 2017. This target was not met and the options have therefore lapsed.
Otherwise the main vesting condition of all share options is that the Director or employee remain employed with the Group as at the date of exercise or continues to provide consultancy services as at the date of exercise.
The following information is relevant in the determination of the fair value of options granted during the year 2017 under the equity share based remuneration schemes operated by the Group.
2017
Number of options 1,351,250
Option pricing models
used Monte-Carlo
Share price GBP0.41*
Exercise price of
options issued in
year GBP0.46
Contractual life 10 years
Expected life 5 years
Volatility 42.5%**
Expected dividend
yield 0%
Risk free rate 0.73%
* The share price used in the determination of the fair value of the options granted in 2017 was the share price on the date of grant.
** Volatility was calculated with reference to the historic share price volatility of comparable companies measured over a five-year period.
The following information is relevant in the determination of the fair value of options granted during the year 2016 under the equity share based remuneration schemes operated by the Group.
2016
Number of options 2,071,600
Option pricing models
used Black Scholes
Share price GBP1.143-GBP1.19*
Exercise price of
options issued in
year GBP1.21-GBP2.68
Contractual life 10 years
Expected life 5 years
Volatility 40%**
Expected dividend
yield 0%
Risk free rate 0.63%-0.74%
* The share price used in the determination of the fair value of the options granted in 2016 was the average of the opening and closing share prices on the date of grant.
** Volatility was calculated with reference to the historic share price volatility of comparable companies measured over a five-year period.
All other share options relate to the Midatech Limited 2008 unapproved share option scheme.
Share Incentive Plan
In April 2017 the Group set up the Midatech Pharma Share Incentive Plan (MPSIP). Under the MPSIP, Group employees and directors can acquire ordinary shares in the Company via a salary sacrifice arrangement. Midatech grants matching shares for every share bought. In order to retain these shares, scheme participants must remain employed by the Group for three years from the date of acquisition. All shares purchased by the MPSIP are held by an Employee Benefit Trust that is not under the control of Midatech. Shares must be left in the plan for 5 years to qualify for full income tax and NIC relief.
29 Capital commitments
The Group had no capital commitments at 31 December 2017, 31 December 2016 and 31 December 2015.
30 Related party transactions
Details of Directors' remuneration are given on page 27 and in note 5.
Transactions with Monosol RX, LLC
The Directors considered Monosol RX, LLC ("Monosol") to be a related party by virtue of the fact that Monosol was a shareholder of the Company and a collaborative partner in the MidaSol Therapeutics joint operation.
During the prior period, due to cessation of activities within the MidaSol joint operation no monies were receivable from Monosol (2016: nil, 2015: GBP317K) for research services. Amounts receivable in prior years were credited to research and development expenditure. The year-end receivable due from Monosol was nil (2016: nil, 2015: GBP219K). As a result of the cessation of activities, Monosol ceased to be a related party on 2 May 2016.Monosol is also the licensor of the Company's Zuplenz(R) product. In this capacity, the Group incurred royalty costs up to the date at which it ceased to be a related party in 2016 of GBP187.7k, payable to Monosol (2015: nil). The 2016 year-end payable to Monosol was GBP48.7k (2015: nil).
Transactions with Preci-Health
The Directors consider Preci-Health SA ("Preci-Health) to be a related party by virtue of the fact that there is a common director with the Company.
During the year, GBP44.4k was invoiced to Preci-Health for research services, and credited to revenue. This was paid by Preci-Health during the year. There were no transactions with Preci-Health in earlier periods.
The Group has not made any allowances for bad or doubtful debts in respect of related party debtors nor has any guarantee been given or received during 2017, 2016 or 2015 regarding related party transactions.
31 Contingent liabilities
The Group had no contingent liabilities at 31 December 2017, 31 December 2016 and 31 December 2015.
32 Ultimate controlling party
The Directors do not consider that there is an ultimate controlling party.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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(END) Dow Jones Newswires
April 23, 2018 02:00 ET (06:00 GMT)
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