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Surgical Innovations Group Plc LSE:SUN London Ordinary Share GB0004016704 ORD 1P
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Surgical Innovations Group PLC Final Results

31/03/2020 7:00am

UK Regulatory (RNS & others)


Surgical Innovations (LSE:SUN)
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TIDMSUN

RNS Number : 1366I

Surgical Innovations Group PLC

31 March 2020

Surgical Innovations Group plc

("SI" or the "Group")

Final Results

Audited results for the year ended 31 December 2019

and update on the effects of Covid-19 pandemic

Surgical Innovations Group plc (AIM: SUN), the designer, manufacturer and distributor of innovative medical technology for minimally invasive surgery, reports financial results for the year ended 31 December 2019 in line with expectations and provides an update on the effects of the Covid-19 pandemic.

Revenues in the second half of the year were up by approximately 10% compared with the first half, and gross margins, adjusted pre-tax profits and cash conversion were within target range. In October 2019, the Group repaid GBP1.0m of its term loan early, and the net cash* balance at the year-end was GBP0.47m (2018: GBP0.38m).

Financial Highlights:

   --    Revenues of GBP10.73m (2018: GBP10.97m) 
   --    Gross margin within target range at 40.4% (2018: 42.6%) 
   --    Impairment of goodwill (GBP1.63m) and intangible development costs (GBP0.63m) 

-- Adjusted** PBT of GBP0.38m (2018: GBP1.43m), reported loss before taxation GBP2.60m (2018: PBT of GBP0.52m)

   --    Adjusted** EPS of 0.05p (2018: 0.21p), reported EPS of negative 0.33p (2018: positive 0.09p) 
   --    Cash conversion of adjusted operating profit of 127% (2018: 118%) 
   --    Closing net cash* of GBP0.47m (2018: GBP0.38m) 

* Net cash comprises cash and cash equivalents of GBP1.28m less bank indebtedness of GBP0.81m.

** Adjusted operating margin, PBT & EPS stated before deduction of exceptional costs, impairment of intangibles & amortisation relating to acquisition, and share based payment costs.

Effects of Covid-19 pandemic

The Board anticipate significant short-term reductions in revenues in the current year as a result of the Covid-19 pandemic, as elective surgery in the UK and several other territories has been, or is expected to be, suspended. The Group has diverse geographical dispersion of markets, and has been assured of support from a number of key customers to maintain activity during this downturn.

Management have taken decisive action to protect the welfare of employees, whilst continuing to meet the needs of our customers in the UK and overseas. Production activity has been condensed to match visible demand, and appropriate measures taken to reduce operating costs and manage immediate cash flows. We will continue to take all steps possible in these challenging circumstances, and ensure that all support mechanisms available to our company from outside agencies are accessed, in order to preserve value and capability, and ameliorate the impact on the business, its workforce and our customers and partners.

Our bankers have moved extremely quickly in providing short-term relief from capital repayments and covenant compliance, and stand willing to support our immediate liquidity. In addition, we have received expressions of support from selected institutional shareholders.

Accordingly, the Directors have concluded that it continues to be appropriate to prepare the Annual Report and Accounts on a going concern basis, whilst acknowledging the material uncertainty that now exists and has been explained in this announcement and the annual report and accounts.

Chairman of SI, Nigel Rogers, said:

"Our product ranges are becoming increasingly recognised as a key part of a sustainable approach to surgery, and this offers significant medium term growth potential. Our business has net cash and is operationally sound. We have strong partnerships with the NHS, our major distributors, OEM customers and key vendors, based on mutual co-operation and shared success.

"Accordingly, the Board remain confident that, following an inevitable period of serious disruption requiring careful navigation, there continues to be strong recovery and growth drivers within our market, indicating that the medium to long term outlook is positive."

A copy of this announcement, the investor presentation of these results and the Annual Report and Accounts are all being made available shortly on the Group's website: https://www.sigroupplc.com/

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014.

For further information please contact:

 
  Surgical Innovations Group plc                               www.sigroupplc.com 
  Nigel Rogers, Chairman                                       Tel: 0113 230 7597 
  David Marsh, CEO 
 
  N+1 Singer (NOMAD & Broker)                                  Tel: 020 7496 3000 
  Aubrey Powell (Corporate Finance) 
  Rachel Hayes (Corporate Broking) 
 
  Walbrook PR (Financial PR & Investor    Tel: 020 7933 8780 or si@walbrookpr.com 
   Relations) 
  Paul McManus                                                 Mob: 07980 541 893 
  Lianne Cawthorne                                             Mob: 07584 391 303 
 

Notes for editors:

About Surgical Innovations Group plc

Strategy

The Group specialises in the design, manufacture, sale and distribution of innovative, high quality medical products, primarily for use in minimally invasive surgery. Our product and business development is guided and supported by a key group of nationally and internationally renowned surgeons across the spectrum of minimally invasive surgical activity.

We design and manufacture and source our branded port access systems, surgical instruments and retraction devices which are sold directly in the UK home market through our subsidiary, Elemental Healthcare, and exported widely through a global network of trusted distribution partners. Many of our products in this field are based on a "resposable" concept, in which the products are part re-usable, part disposable, offering a high quality and environmentally responsible solution at a cost that is competitive against fully disposable alternatives.

Elemental also has exclusive UK distribution for a select group of specialist products employed in laparoscopy, bariatric and metabolic surgery, hernia repair and breast reconstruction.

In addition, we design and develop medical devices for carefully selected OEM partners, and have also collaborated with a major UK industrial partner to provide precision engineering solutions to complex problems outside the medical arena.

We aim for our brands to be recognised and respected by healthcare professionals in all major geographical markets in which we operate and provide by development, partnership or acquisition a broad portfolio of cost effective, procedure specific surgical instruments and implantable devices that offer reliable solutions to genuine clinical needs in the operating theatre environment.

Operations and management

The Group currently employs approximately 100 people across two sites in the UK. Product design, engineering and manufacturing are carried out at the SI site in Yorkshire. Commercial activities including marketing, UK distribution and international sales and marketing are based at Elemental Healthcare in Berkshire.

Further information

Further details of the Group's businesses are available on websites:

www.sigroupplc.com

www.surginno.com , and

www.elementalhealthcare.co.uk

Investors and others can register to receive regular updates by email at si@walbrookpr.com

Surgical Innovations Group plc

Strategic Report

For the year ended 31 December 2019

Chairman's Statement

I am pleased to report improved results in the second half of what turned out to be a more challenging year than we had anticipated. Management were faced with some difficult conditions and uncertainties, mostly in relation to planning for Brexit, building up the regulatory resource to meet an ever increasing burden, and a continuation of funding and resource constraints in the NHS. Much has been achieved towards building strong foundations for a return to growth, and we believe that the environmental and economic credentials of many of our products are winning acceptance to a degree not previously experienced.

The results for the year were in line with the Board's expectations, and since the year end we have continued to be cash generative. In the final quarter of 2019, the Group concluded agreements to extend important contractual relationships, including the manufacture of the Fix-8 device for Advanced Medical Solutions plc until June 2024, and the exclusive UK distribution of the Dexter robot for Distalmotion SA until October 2022.

Subsequent to the year-end, we currently face unprecedented uncertainty as a consequence of the Covid-19 pandemic and its effects on elective surgery, and are planning for the short-term disruption to our business to be severe. We have a highly capable management team and a committed workforce, who are quickly adjusting to these extraordinary challenges, and dealing with problems promptly and effectively as they arise. In addition, our key trading partners, bankers and selected institutional shareholders are already providing indications of support, and the Board believes that Government measures already announced will make a significant difference in alleviating the worst effects of the sudden downturn.

Financial Overview

Revenue for the second half of the year was 10% higher than the first half, and the total for the full year reduced marginally to GBP10.73m (2018: GBP10.97m).

Market conditions continued to be challenging in the UK for much of the year, with NHS waiting lists for elective surgery increasing in both quantum and duration. Sales in Asia Pacific showed a decline, although this was largely due to unusually high revenues in 2018 relating to changes in route to market. This weakness was partly offset by growth in USA and Rest of World regions. European sales fell slightly, although to a lesser extent than expected given delays in the availability of fully disposable products due to continuing regulatory bottlenecks.

Gross margin for the year held within target range at 40.4% (2018: 42.6%), although a controlled de-stocking exercise commenced in the final quarter of the year following the reduced risk of a no-deal Brexit. This affected the overall result by around 2% as a consequence of reduced factory output. Other income in 2018 related to compensation for the early termination of a distribution contract and was non-recurring.

Operating expenses, excluding depreciation and amortisation, impairment of intangibles, exceptional costs and share based payments, increased by approximately GBP0.35m, resulting in Adjusted EBITDA* of GBP1.45m (2018: GBP2.36m), and Adjusted PBT* of GBP0.38m (2018: GBP1.43m).

Exceptional items relate to payments made to a former Director in relation to termination, and abortive acquisition costs totalling GBP0.18m (2018: nil).

Transition to IFRS 16 has been applied using the "modified retrospective" transition approach. As a result the comparative information is not on a like-for-like basis in respect of the treatment of leases. The adoption of IFRS 16 leads to an increase in cost of GBP0.04m for the year to 31 December 2019, reflecting depreciation and interest charges of GBP0.28m being GBP0.04m higher than the lease expenses which would have been recorded prior to the adoption of the new standard. At EBITDA level, the adoption of IFRS 16 gives a benefit of GBP0.25m being the elimination of the rental charges.

Cash conversion was good, leading to net cash at the year-end of GBP0.47m (2018: GBP0.38m).

*Reconciliation of adjusted KPI measures included in the Operating and Financial Review below.

Brexit Planning

During the year, the business executed contingency arrangements to de-risk in the event that the UK exited the EU on 29 March 2019 without reaching an appropriate withdrawal agreement, only to repeat the exercise in October.

The additional working capital investment incurred in inventory was largely unwound by the end of the year. There continues to be some uncertainty regarding the conduct of trade with EU member states following the end of the transitional period, although there is a reasonable expectation that medical devices will be traded with minimal regulatory divergence or delays.

Coronavirus

The speed and extent to which the Covid-19 pandemic has taken hold in Europe and North America greatly exceeds what might have been expected earlier this month. Whilst there is no evidence at present of any significant delays or other disruption to the supply chain for components or distribution products into the UK, we must anticipate that these are likely to become problematic, and we are working closely with our key vendors to optimise deliveries based on latest forecasts. Management are continuing to monitor security of supply of critical items very closely.

The anticipated effect of more widespread coronavirus infection in key end user markets is now becoming more apparent, as hospitals rightly free up capacity to cope with seriously ill patients. These necessary actions will inevitably lead to delays and cancelation of routine surgical procedures such as those announced in the NHS over the last week. Management have devised a series of mitigating actions, designed to preserve cash resources, maintain delivery of essential products to our customers and distributors, and protect our workforce from the health risks and economic impact. We will continue to take all steps possible in these challenging circumstances, and ensure that all support mechanisms available to our company from outside agencies are accessed, in order to preserve value and capability, and ameliorate the impact on business, its partners and customers, and our workforce.

Further commentary to the these uncertainties are set out in the section entitled 'Principal risks and uncertainties' in the Operating and Financial review.

Environmental and economic considerations

Despite the current climate outlined above, senior management, procurement and clinicians within our customer base are becoming increasingly aware that our resposable product ranges (which are part re-usable, part disposable) offer a dramatic reduction in clinical waste, are cost effective when compared with expensive fully disposable alternatives, and have a very low impact on the environment. The NHS has actively encouraged suppliers to join a national campaign to turn the tide on plastic waste. Our resposable product ranges were recently showcased at the NHS Sustainability Campaign roadshow in Manchester, where recognition was acknowledged of their suitability as a key part of the 'For a Greener NHS' agenda. We firmly believe that such initiatives will become more widespread once normality is restored, and will present a major opportunity to significantly increase our market share in the UK and internationally. There has been a similar reaction to the compelling business case surrounding both sustainability and economy through distribution partners in some of our key markets, notably the US and Japan, where evaluations and planning for market roll out are underway, albeit the launch timing of which is uncertain due to the pandemic.

Acquisition activity

Management have rightly maintained primary focus on optimising the commercial and operational aspects of current business streams over acquisition activity during the year. Although a select number of targets have been evaluated and not progressed, we will continue to seek businesses which offer complementary opportunities to accelerate the rate of growth of the Group's activities, either through new products and/or geographies. Understandably, however, we do not expect any significant activity to be likely in coming months.

People

Following changes in Board structure last year, there have been a number of key appointments to the senior management team, each of whom have made a significant contribution to the strengthening of the business. On behalf of the Board, I recognise that the success of the Group relies upon the dedication and professionalism of all of our people, and applaud their enduring commitment. Current events are testing their resilience beyond a level seen before, and the Board is both proud and grateful for the progress being made in such adversity.

Going Concern and funding

Prior to the substantial impact of Covid-19 on the entire business community, the Directors had carried out an evaluation of financial forecasts, sensitised to reflect a rational judgement of the level of inherent risk. This exercise concluded that adequate financial resources were available to ensure that the Company could meet its obligations for a twelve month period with reasonable certainty. It has subsequently become clear that there will need to be reliance upon outside agencies including the UK Government, Yorkshire Bank and possibly others, to ensure that these conditions continue to apply.

This fundamental uncertainty will be common, in varying degrees, to almost all businesses in every sector. It is premature to be able to determine with precision the level of support that may ultimately be required, as events are moving rapidly. Our bankers have moved extremely quickly in providing short-term relief from capital repayments and covenant compliance, and stand willing to support our immediate liquidity requirements. These actions are an important precursor to enabling access to funding through the Coronavirus Business Interruption Loan Scheme in coming weeks. Furthermore, the announcements by the Chancellor of the Exchequer on 20 March 2020 relating to various forms of government assistance will provide substantial help. In addition, we have received expressions of support from some of our key trading partners and institutional shareholders.

Accordingly, the directors conclude that it continues to be appropriate to prepare the Annual Report and Accounts on a going concern basis, whilst acknowledging the material uncertainty that now exists and has been explained in this statement and further described in the principal risks and uncertainties, the directors report and in the financial statements disclosure note 21.

Current trading and outlook

UK revenues in the current year to date have started to show signs of a slowdown in elective surgery within the NHS, although other key markets are not yet showing any similar effects. This will undoubtedly accelerate rapidly as the impact of the pandemic is fully recognised, and we are preparing to respond to these unprecedented conditions.

Our product ranges are becoming increasingly recognised as a key part of a sustainable approach to surgery, and this offers significant medium term growth potential. Our business is unleveraged and operationally sound. We have strong partnerships with our major distributors, OEM customers and key vendors, based upon mutual cooperation and shared success.

Accordingly, the Board remain confident that, following an inevitable period of serious disruption requiring careful navigation, there continues to be strong recovery and growth drivers within our business, indicating that the medium to long term outlook is positive.

Nigel Rogers

Chairman

31 March 2020

Operating and Financial Review

Key Performance Indicators

The Group considers the key performance indicators of the business to be:

 
                                                        2019        2018      Target Measure 
  Underlying Revenue      Adjusted for the effect 
   Growth                      of acquisition          -2.2%       12.0%           >8% 
                        --------------------------  ----------  ----------  ---------------- 
  Gross Profit Margin      Gross profit / revenue      40.4%       42.6%           >40% 
                        --------------------------  ----------  ----------  ---------------- 
  Adjusted Operating         Adjusted operating 
   Margin                     profit / revenue          5.0%       13.9%           >12% 
                        --------------------------  ----------  ----------  ---------------- 
                            Cash generated from 
                            operations / adjusted 
  Cash conversion             operating profit          127%        118%           >85% 
                        --------------------------  ----------  ----------  ---------------- 
  Net Cash/(Net Debt)          Cash less debt         GBP0.47m    GBP0.38m         N/A 
                        --------------------------  ----------  ----------  ---------------- 
 

Reconciliation of adjusted KPI/ measures

 
                                       EBITDA*     Operating Profit    Profit before 
                                                                          taxation 
  As reported                          GBP1.08m       GBP(2.44)m        GBP(2.60)m 
                                     ----------  ------------------  --------------- 
  Amortisation of intangible              -            GBP0.35m          GBP0.35m 
   acquisition costs 
                                     ----------  ------------------  --------------- 
  Impairment of product development       -            GBP0.63m          GBP0.63m 
   intangibles 
                                     ----------  ------------------  --------------- 
  Impairment of Goodwill                  -            GBP1.63m          GBP1.63m 
                                     ----------  ------------------  --------------- 
  Share based payments                 GBP0.19m        GBP0.19m          GBP0.19m 
                                     ----------  ------------------  --------------- 
  Exceptional items                    GBP0.18m        GBP0.18m          GBP0.18m 
                                     ----------  ------------------  --------------- 
  Adjusted Measure                     GBP1.45m        GBP0.54m          GBP0.38m 
                                     ----------  ------------------  --------------- 
 
 
  Earnings Per Share                            EPS 
  Basic EPS                                   (0.33)p 
                                           ------------ 
  Loss attributable to shareholders          (GBP2.62m) 
                                           ------------ 
  Add: Share based payments                   GBP0.19m 
                                           ------------ 
  Add: Amortisation of intangible             GBP0.35m 
   acquisition costs 
                                           ------------ 
  Add: Exceptionals                           GBP0.18m 
                                           ------------ 
  Add: Impairment of product development      GBP0.63m 
   intangibles 
                                           ------------ 
  Add: Impairment of Goodwill                 GBP1.63m 
                                           ------------ 
  Adjusted profit attributable to             GBP0.36m 
   shareholders 
                                           ------------ 
  Adjusted EPS                                 0.05p 
                                           ------------ 
 

*EBITDA is defined as earnings before interest, taxation, depreciation and amortisation (including impairment). EBITDA is calculated as operating profit of GBP(2.44)m adding back depreciation GBP0.62m, amortisation GBP0.64m and impairment GBP2.25m.

Use of adjusted measures

Adjusted KPIs are used by the Group to understand underlying performance and exclude items which distort comparability, as well as being consistent with broker forecasts and measures. The method of adjustment is consistently applied but may not be comparable with those used by other companies.

Adjusted measures do not take precedence over the IFRS measures. The company has elected to apply IFRS16 using the modified retrospective approach. The accounts are not restated and IFRS figures and Adjusted profit measures are not comparable to the prior year. At EBITDA level, the adoption of IFRS 16 gives a benefit of GBP0.25m being the elimination of the rental charges.

Revenue and margins

Revenues reduced by 2% to GBP10.73m (2018: GBP10.97m). Gross margins remained within target range at 40.4% of revenue (2018: 42.6%) with the slight reduction attributable to reduced factory activity in the final two months of the year to facilitate modest de-stocking.

 
   GBPm            2019     2018                            % change 
 SIBrand           5.84     6.09                                - 4% 
                =======  =======  ================================== 
 Distribution      3.10     3.04                                 +2% 
                =======  =======  ================================== 
 O E M             1.79     1.84                                - 3% 
                =======  =======  ================================== 
 Total            10.73    10.97                                - 2% 
                =======  =======  ================================== 
 

Revenues from the sale of Surgical Innovations Brand products reduced by 4% during the year overall. Market conditions showed no significant improvement in the UK, however there is clear evidence of political will to provide more favourable long term funding for health and social care in coming years. Sales in Continental Europe steadied after declining in the prior year, as distributors began to make headway introducing YelloPort Elite , our next generation Resposable(R) port access system for use in minimally invasive surgery (MIS), to replace fully disposable competitor products.

SI Brand sales in the US grew by 9%, mostly as a result of significant gains in market share for surgical scissors. YelloPort Elite will launch fully in the US market in the current year following FDA approval last year.

SI Brand revenues from the APAC region showed a reduction, although this was largely a consequence of timing differences resulting from structural changes to our distribution arrangements. Strong growth is anticipated in the current year, led by Japan. SI brand sales in the Rest of the World was up by 17%. SI brand is experiencing strong growth in South Africa where a new distributor was appointed at the end of 2019 and is anticipated in the Middle East where three new distributors have been appointed.

OEM revenues showed a small reduction in the year, with both precision engineering (non-medical) and medical virtually unchanged. We anticipate growth in medical OEM sales in the current year, but at this early stage have no visibility of further precision engineering revenues.

Distribution sales grew by 2% year on year which reflected a continuation of constrained activity levels in the NHS, especially for elective procedures. We are expecting an improvement in the hospital bed situation over the course of 2020 which will allow more elective operations as a consequence of increased funding. The drive for a more sustainable healthcare system, encapsulated in the Greener NHS agenda, is very beneficial for the range of distribution products and the Group is engaged at the highest levels of the NHS in encouraging the adoption of its Resposable(R) distribution products.

Adjusted EBITDA

The adjusted EBITDA is a measure of the business performance. The Group uses this as a proxy for understanding the underlying performance of the Group. This measure also excludes the items that distort comparability including the charge for share based payments as this is a non-cash expense normally excluded from market forecasts.

Adjusted EBITDA decreased to GBP1.45m (2018: GBP2.36m), mainly as a result of additional operating overheads to strengthen the operational capabilities of the business, and particularly to meet the regulatory demands of transition from the EU Medical Device Directive to Medical Device Regulation 2017/745. The reported operating result was a loss of (GBP2.44m) (2018: profit of GBP0.62m), with an adjusted operating profit of GBP0.54m (2018: GBP1.53m), before deduction of exceptional costs, amortisation relating to acquisition, impairment of intangible assets and share based payments, and an adjusted operating margin of 5.0% (2018: 13.9%).

Capital expenditure on tangible assets continued to reflect a policy of required replacement only during the year at GBP0.20m (2018: GBP0.09m) set against a depreciation charge of GBP0.42m (2018: GBP0.48m). Whilst there are no major capex plans currently in place, several improvements to the manufacturing facilities were implemented in Leeds in 2019 and further modest expenditure is expected this year.

Interest on bank and finance lease obligations for 2019 resulted in net interest payable of GBP0.16m (2018: GBP0.11m). During the year the company repaid GBP0.30m of bank indebtedness in accordance with the original repayment schedule, and also prepaid a further GBP1.0m on the 31 October not due until July 2022.

Following an impairment review of the goodwill arising on the acquisition of Elemental Healthcare, an impairment charge of GBP1.63m was recongnised in the period. The trading environment in the UK market has become more challenging during 2019, due to both a progressive tightening of NHS funding for elective surgery as well as the extended time taken to rebuild the distribution sales of Cellis branded products. A number of the latter were due for imminent launch, which has been delayed. Accordingly, the Directors have adopted a cautious approach to forecasting future net inflows for this cash generating unit.

Subsequent to the year end, the potential effects of the Covid-19 outbreak and consequential impact on the availability of NHS resources may have a further and more significant impact on the Directors' view of short to medium term cash flows. This has not yet been quantified, as there is insufficient data on which to base such a judgement. Nevertheless, it is recognised by the Directors that further impairment is likely to be necessary in 2020, therefore a non-adjusting post balance sheet event has been recognised. The financial effect of this adjustment cannot be estimated.

Development expenditure was tested for impairment and given the resource contraints, complexity of developing a device and regulatory challenges, particually in relation to the Medical Devices Regulation (MDR) transition, an impairment of GBP0.63m (2018:nil) has been recognised.

The Group recorded a corporation tax credit of GBP0.001m (2018: credit of GBP0.03m) and a deferred tax charge of GBP0.02m (2018: credit GBP0.18m). The tax credit represents an enhanced Research and Development claim in respect of 2017, electing to exchange tax losses for cash refunds. The tax charge on Elemental Healthcare has been relieved through Group losses. Overall the Group continues to hold substantial tax losses on which it holds a cautious view, and consequently the Group has chosen not to recognise those losses fully. During the year the Group submitted an enhanced Research and Development claim in respect of 2018. This claim has been offset against taxable profits during 2018.

Trade receivables were lower at the year end than 2018, reflected by a timing difference relating to changes in route to market in the f inal months of the prior year. Inventories were higher at GBP2.9m compared to GBP2.0m in 2018. Stock holdings increased during 2019 to ensure safety stocks supported incremental customer requirements; however, as revenue expectations subsequently decreased, stock holdings were affected. A controlled de-stocking exercise commenced in the final quarter of the year and will continue throughout 2020. Trade creditors decreased only slightly over the same period, which reflected the Group's continued approach towards managing working capital.

The Group generated cash from operations of GBP0.59m (2018: GBP1.65m) at a conversion rate of adjusted operating profit at 128% (2018: 118%) primarily as a result of the working capital movements described above. The Group closed the year with net cash balances of GBP0.47m compared with opening net cash of GBP0.38m.

Transition to IFRS16

The adoption of this new Standard has resulted in the Group recognising a right-of-use asset and related liability in connection with all former operating leases with the exception of those identified as low-value or having a remaining lease term of less than 12 months from the date of initial application.

The new standard has been applied using the "modified retrospective" transition approach. There is no adjustment to the opening balance of retained earnings for the current period however reclassifications arising from the new standard have been recognised in the opening balances as at 1 January 2019. Prior periods have not been restated, as permitted under the specific transitional provisions in the standard.

Prior to the adoption of IFRS 16 rental payments were charged to the income statement on a straight-line basis, under IFRS 16 rental charges in the income statement are replaced with depreciation on the right-of-use asset and interest charges on the lease liability. The adoption of IFRS 16 therefore gives rise to a net cost of GBP0.04m in the twelve months to 31 December 2019, reflecting depreciation and interest charges of GBP0.28m being GBP0.04m higher than the net rental charges which would have been incurred prior to the adoption of the new standard. At EBITDA level, the adoption of IFRS 16 gives a benefit of GBP0.25m being the elimination of the rental charges.

Amount due from associate

In 2020, an agreement , subject to contract, will allow all the costs incurred via the amount due from associate, Illuminno Ltd GBP0.17m (2018: GBP0.08m) to be re-imbursed to the Group and once legally binding, the costs in Illuminno Ltd will be transferred on the balance sheet as intangible product development costs.

Principal risks and uncertainties

The management of the business and the nature of the Group's strategy are subject to a number of risks which the Directors seek to mitigate wherever possible. The principal risks are set out below.

 
 Issue                           Indication of risk on       Risk and description          M iti gating actions 
                                 prior year 
 Funding risk                    Remains the same            The Group currently has a     Liquidity and covenant 
                                                             mixture of borrowings         compliance is monitored 
                                                             comprising a GBP0.8m loan     carefully across varying 
                                                             and a GBP0.5m rolling         time horizons to facilitate 
                                                             credit facility. The Group    short term management and 
                                                             remains dependent upon the    also strategic planning. 
                                                             support of these funders      This monitoring enables the 
                                                             and there is                  management 
                                                             a risk that failure, in       team to consider and to 
                                                             particular to meet            take appropriate actions 
                                                             covenants attaching to the    within suitable time 
                                                             rolling credit facility,      frames. 
                                                             could have severe financial 
                                                             consequences for the Group.   In March 2020, the funder 
                                                                                           agreed to convert the 
                                                                                           existing loan with a three 
                                                                                           year committed 
                                                                                           Revolving Credit Facility 
                                                                                           ("RCF") with additional 
                                                                                           headroom, a facility limit 
                                                                                           of GBP1m, and 
                                                                                           less stringent covenants 
                                                                                           than the current 
                                                                                           facilities. This agreement 
                                                                                           was made with credit 
                                                                                           approval and full knowledge 
                                                                                           of the considerable 
                                                                                           challenge presented by 
                                                                                           Covid-19. In the event, 
                                                                                           the company decided not to 
                                                                                           proceed with this change, 
                                                                                           and instead agreed with the 
                                                                                           funder to 
                                                                                           accept a temporary waiver 
                                                                                           of all covenants at 31 
                                                                                           March 2020, and relief from 
                                                                                           the capital repayment 
                                                                                           of GBP75,000 due in March 
                                                                                           2020. 
 
                                                                                           The funder has indicated 
                                                                                           that they are not aware 
 
                                                                                           of any reason why the offer 
                                                                                           to convert to RCF at a 
                                                                                           later date would not be 
                                                                                           made available, 
                                                                                           but that fresh credit 
                                                                                           approval would be required. 
                                                                                           Furthermore, the funder has 
                                                                                           confirmed that 
                                                                                           they are supportive of 
                                                                                           acting as a conduit to 
                                                                                           channel additional 
                                                                                           liquidity to the company 
                                                                                           under the auspices of the 
                                                                                           Coronavirus Business 
                                                                                           Interruption Loan Scheme 
                                                                                           which the company 
                                                                                           considers may offer 
                                                                                           advantages over the 
                                                                                           proposed move to the RCF. 
 
                                                                                           Finally, the company has 
                                                                                           received an unsolicited 
                                                                                           indication of support from 
                                                                                           a substantial 
                                                                                           institutional shareholder, 
                                                                                           although this is not 
                                                                                           binding at this early 
                                                                                           stage, and no proposal 
                                                                                           has been formulated. 
                              ============================  ============================  ============================ 
 Covid-19 and business           Increased                   The recent escalation in      All government guidance has 
 interruption                                                the spread of Covid-19 in     been monitored closely and 
                                                             the UK poses a threat to      followed immediately by 
                                                             the continuation              advisory notices 
                                                             of business operations if     to all employees, and 
                                                             there is a widespread         provision of the 
                                                             infection in any of our       appropriate guidance and 
                                                             facilities or amongst         cleaning materials to 
                                                             the workforce.                minimise 
                                                                                           any effect. 
 
                                                                                           Where staff members or 
                                                                                           their close contacts have 
                                                                                           presented with symptoms 
                                                                                           they have been asked 
                                                                                           to self-isolate away from 
                                                                                           company premises and inform 
                                                                                           us quickly of any contact 
                                                                                           with other 
                                                                                           employees which may be 
                                                                                           cause for concern. 
 
                                                                                           Recent government 
                                                                                           information also provides 
                                                                                           for relief from a 
                                                                                           substantial portion of the 
                                                                                           wage 
                                                                                           costs of any staff members 
                                                                                           on sick leave, in 
                                                                                           self-isolation, or 
                                                                                           furloughed due to a 
                                                                                           diminution 
                                                                                           in their current workload 
                                                                                           as a consequence of 
                                                                                           Covid-19. 
 
                                                                                           Management have devised a 
                                                                                           series of mitigating 
                                                                                           actions, designed to 
                                                                                           preserve cash resources 
                                                                                           and maintain delivery of 
                                                                                           essential products to our 
                                                                                           customers and distributors. 
                              ============================  ============================  ============================ 
 C ustomer concentration         Remains the same            The Group exports to over     The majority of 
                                                             thirty countries and          distributors, including the 
                                                             distributors around the       most significant, are well 
                                                             world, but certain            established and their 
                                                             distributors are material     relationship with the Group 
                                                             to the financial              spans many years. Credit 
                                                             performance and position of   levels and cash collection 
                                                             the Group. As disclosed       is closely 
                                                             in note 2 to the financial    monitored by management, 
                                                             statements, one customer      and issues are quickly 
                                                             accounted for 11.4% of        elevated both within the 
                                                             revenue in 2019               Group and with the 
                                                             and the loss, failure or      distributor. 
                                                             actions of this customer 
                                                             could have a severe impact 
                                                             on the Group. 
                              ============================  ============================  ============================ 
 Fore i gn ex change risk        Remains the same            The Group's functional        The Group monitors currency 
                                                             currency is UK Sterling;      exposures on an on-going 
                                                             however, it makes             basis and enters into 
                                                             significant purchases in      forward currency 
                                                             Euros and US Dollars.         arrangements where 
                                                                                           considered appropriate to 
                                                             The US Dollars are            mitigate the risk of 
                                                             mitigated by US Dollar        material adverse movements 
                                                             sales by creating a natural   in exchange rates impacting 
                                                             hedge. The Group              upon the business. Euro and 
                                                             transferred                   US Dollar cash balances are 
                                                             their Euro customers onto a   monitored 
                                                             Euro based pricing            regularly and spot rate 
                                                             structure in 2018 to          sales into sterling are 
                                                             mitigate risk by again,       conducted when significant 
                                                             creating a natural hedge.     currency deposits 
                                                                                           have accumulated. The 
                                                                                           accounting policy for 
                                                                                           foreign exchange is 
                                                                                           disclosed in accountancy 
                                                                                           policy 
                                                                                           1d. 
                              ============================  ============================  ============================ 
     Regulatory approval         Remains the same            As an international           The Group has a dedicated 
                                                             business, a significant       Quality department which 
                                                             proportion of the Group's     assists product development 
                                                             products require              teams with 
                                                             registration                  support as required to 
                                                             from national or federal      minimise the risk of 
                                                             regulatory bodies prior to    regulatory approval not 
                                                             being offered for sale. The   being obtained on new 
                                                             majority of                   products and ensures that 
                                                             our major product lines       the Group operates 
                                                             have FDA approval in the US   processes and procedures 
                                                             and we are therefore          necessary to maintain 
                                                             subject to their              relevant regulatory 
                                                             audit and inspection of our   approvals. 
                                                             manufacturing facilities. 
                                                                                           Whilst there is no 
                                                             There is no guarantee that    guarantee that this will be 
                                                             any product developed by      sufficient, the Group has 
                                                             the Group will obtain and     invested in people 
                                                             maintain national             with the appropriate 
                                                             registration or that the      experience and skills in 
                                                             Group will always pass        this area which mitigates 
                                                             regulatory audit of its       this risk significantly. 
                                                             manufacturing processes. 
                                                             Failure to do so could have 
                                                             severe consequences upon 
                                                             the Group's ability to sell 
                                                             products 
                                                             in the relevant country. 
                              ============================  ============================  ============================ 
           Brexit                Reduced                     The Group exports to a        The Group has successfully 
                                                             number of different           reassigned all of the 
                                                             countries with sales to       Company's product 
                                                             Europe accounting for 11.9%   certifications from BSI 
                                                             of 2019 revenue. As well as   Notified Body 0086 (UK) to 
                                                             exporting, the Group          BSI Netherlands Notified 
                                                             imports goods both for        Body 2797, in order to 
                                                             re-sale through               mitigate any risk 
                                                             Distribution                  to regulatory clearance 
                                                             revenue, as well as some      both in the EU and in the 
                                                             raw materials used in         UK. 
                                                             manufacturing. 
                                                                                           Any risk to a delay in 
                                                             Although the UK has now       supply chain has also been 
                                                             exited the EU, the current    mitigated by the successful 
                                                             trade rules remain in place   application 
                                                             until the                     of Approved Economic 
                                                             end of the transition         Operator Status, which we 
                                                             period on 1 January 2021.     received in March 2019. 
                                                             Dependent on the 
                                                             arrangements made between     In addition to the above, a 
                                                             the UK and EU following       contingency plan has been 
                                                             this period, this could       implemented to increase 
                                                             pose risks of delayed         inventory levels 
                                                             customs clearance which       to ensure any delays caused 
                                                             could in turn have a          by increased customs 
                                                             negative impact on the        clearance will not impact 
                                                             Group's supply chain.         the Group's supply 
                                                                                           chain. 
                              ============================  ============================  ============================ 
 

Key: Risk levels on prior year

 
  Increased           Risk increased on prior year 
  Remains the same    Existing risk remains at the same 
                       level from prior year 
                    ----------------------------------- 
  Reduced             Risk has reduced from prior year 
                    ----------------------------------- 
 

G oing con c ern

The Directors have prepared forecasts for the period to March 2021. Prior to the substantial impact of Covid-19 on the entire business community, the directors had carried out an evaluation of financial forecasts, sensitised to reflect a rational judgement of the level of inherent risk. This exercise concluded that adequate financial resources were available to ensure that the Company could meets its obligations for a twelve month period with reasonable certainty. It has subsequently become clear that there will need to be reliance upon outside agencies including the UK Government, Yorkshire Bank and possibly others, to ensure that these conditions continue to apply.

As at period end, the Group had access to banking facilities, which comprised a committed GBP0.5m revolving credit facility. Hire purchase agreements are utilised where required. The revolving credit facility of GBP0.5m may be used towards meeting the Group's general working capital and other commitments. It is subject to compliance with financial covenants which measure the ratio of cashflow to debt service and EBITDA. In March 2020, the funder agreed to convert the existing loan facility into a three year committed Revolving Credit Facility ("RCF") with additional headroom,a facility limit of GBP1m, and less stringent covenants than the current facilities. This agreement was made with credit approval and full knowledge of the considerable challenge presented by Covid-19. In the event, the company decided not to proceed with this change, and instead agreed with the funder to accept a temporary waiver of all covenants at 31 March 2020, and relief from the capital repayment of GBP75,000 due in March 2020.

The funder has indicated that, while they are not aware of any reason why the offer to convert all debt to RCF at a later date would not be made available, a fresh credit approval would be required. Furthermore, the funder has confirmed that they are supportive of acting as a conduit to channel additional liquidity to the company under the auspices of the Coronavirus Business Interruption Loan Scheme, which the company considers may offer advantages over the lender-proposed move to the RCF.

Finally, the company has received an unsolicited indication of funding support from a substantial institutional shareholder, although this is not binding at this early stage, and no proposal has been formulated.

Fundamental uncertainty will be common in varying degrees to almost all businesses in every sector at the present time. It is premature to be able to determine with precision the level of support that may ultimately be required as events are moving rapidly. Our bankers have moved extremely quickly in providing short-term relief from capital repayments and covenant compliance, and stand willing to support our immediate liquidity requirements. These actions are an important precursor to enabling access to funding through the Coronavirus Business Interruption Loan Scheme in coming weeks. Furthermore, the announcements by the Chancellor of the Exchequer on 20 March 2020 relating to various forms of government assistance will provide substantial help. In addition, we have received expressions of support from some of our key trading partners and institutional shareholders.

Based on the forecasts, the Board has a reasonable expectation that the Company and the Group have adequate resources and support to continue in operational existence for the foreseeable future, considered to be at least 12 months for the date of approval from the financial statements, whilst acknowledging that there are material uncertainties that do exist in preparing these financial statements.

David Marsh

Chief Executive Officer

31 March 2020

Con solidated statem ent of comprehensi ve income

fo r they ear en ded 31 Dece m ber 2 0 19

 
                                                                            20 19            20 18 
                                                          Notes            GBP '0           GBP '0 
                                                                               00               00 
------------------------------------------------------  -------  ----------------  --------------- 
  Rev enue                                                    2            10,733           10,969 
  Cost of s a les                                                         (6,400)          (6,297) 
======================================================  =======  ================  =============== 
  G ross profit                                                             4,333            4,672 
  O ther ope r ati ng e x pens es                                         (6,817)          (4,327) 
  Other Income                                                                  -              275 
  A djusted EBITDA                                                          1,446            2,364 
  Amorti sa t ion of i nta n gi b le assets                   4             (642)          (1,141) 
  Impairment of intangible assets                             4           (2,253)              (2) 
  Depre c iati on of ta n gi b le a s s e ts                                (618)            (481) 
  E x cep ti o nal ite ms                                                   (184)                - 
  Share based payments                                                      (188)            (120) 
------------------------------------------------------  -------  ----------------  --------------- 
  O perating (loss) / profit                                              (2,439)              620 
  Fina n ce c o sts                                                         (162)            (105) 
  Fina n ce in c o me                                                           5                - 
======================================================  =======  ================  =============== 
  (Loss) / Profit b efore ta xation                                       (2,596)              515 
  T a x a tion (charge) / credit                                             (23)              210 
======================================================  =======  ================  =============== 
  (Loss) / Profit a nd total comprehensive 
   Income                                                                 (2,619)              725 
======================================================  =======  ================  =============== 
 
    (Loss) / Earnings per share, total and continuing 
  Bas ic                                                      3           (0.33p)            0.09p 
  Diluted                                                     3           (0.33p)            0.09p 
 
  Adjusted earnings per share                                 3             0.05p            0.21p 
------------------------------------------------------  -------  ----------------  --------------- 
 
 

The Consolidated statement of comprehensive income above relates to continuing operations.

Adjusted EBITDA is defined as earnings before interest, taxation, depreciation, amortisation, impairment, share based payments and exceptional items.

Profit and total comprehensive income relate wholly to the owners of the parent Company.

Con solidated statem ent of changes in equ i ty

fo r the y ear en ded 31 Dece m ber 2 0 19

 
                                              Share                Share    Capital     Merger    Retained 
                                            capital              premium    reserve    reserve    earnings      Total 
                                            GBP'000              GBP'000    GBP'000    GBP'000     GBP'000    GBP'000 
-----------------------------------  --------------  -------------------  ---------  ---------  ----------  --------- 
  Balance as at 1 January 2018                7,826                5,831        329      1,250     (1,658)     13,578 
  Employee sharebased payment                     -                    -          -          -         120        120 
  Total - transactions with owners                -                    -          -          -         120        120 
  Profit and total comprehensive 
   income for the period                          -                    -          -          -         725        725 
-----------------------------------  --------------  -------------------  ---------  ---------  ----------  --------- 
  Balance as at 31 December 2018              7,826                5,831        329      1,250       (813)     14,423 
  Employee sharebased payment                     -                    -          -          -         188        188 
  Issue of share capital                        127                   73          -          -           -        200 
  Total - transactions with owners              127                   73          -          -         188        388 
  Loss and total comprehensive 
   income for the period                          -                    -          -          -     (2,619)    (2,619) 
-----------------------------------  --------------  -------------------  ---------  ---------  ----------  --------- 
  Balance as at 31 December 2019              7,953                5,904        329      1,250     (3,244)     12,192 
-----------------------------------  --------------  -------------------  ---------  ---------  ----------  --------- 
 
 

Con solidated balance sheet

A t 31 Dece m b er 20 19

 
 
                                                           20 19            2018 
 
                                            Notes         GBP '0          GBP '0 
                                                              00              00 
========================================  =======  =============  ============== 
  A sse ts 
  Non-current a ssets 
  Property, p l ant and eq u ip m ent                        718             934 
  Right of use assets                                      1,241               - 
  Intan g ib le a ss ets                      4            7,613          10,191 
  Deferred tax asset                                           -              91 
                                                           9,572          11,216 
========================================  =======  =============  ============== 
  Curr ent asse ts 
  In v entori es                                           2,925           2,083 
  T rade and other rec e i v abl es                        2,359           2,961 
  Amount due from associate                                  173              79 
  Cashat b a nk a nd in h and                              1,282           2,491 
========================================  =======  =============  ============== 
                                                           6,739           7,614 
========================================  =======  =============  ============== 
  Totala ssets                                            16,311          18,830 
========================================  =======  =============  ============== 
  Equity and liabiliti es 
  Equity attributable to equity holders 
   of the p arent compa ny 
  Sharecap ital                                            7,953           7,826 
  Share p r em i um a c co u nt                            5,904           5,831 
  Capital re s erve                                          329             329 
  Merger reserve                                           1,250           1,250 
  Retain ed e arni n gs                                  (3,244)           (813) 
========================================  =======  =============  ============== 
  Total e qui ty                                          12,192          14,423 
========================================  =======  =============  ============== 
  Non-current l i abiliti es 
  Borro w ings                                5              515           1,820 
  Deferred tax liabi l iti es                                 31              98 
  Dilapidation provision                                     165             165 
  Lease liability                             7            1,086               - 
========================================  =======  =============  ============== 
                                                           1,797           2,083 
========================================  =======  =============  ============== 
  Curr ent liabi lities 
  T rade and other pa y ab l es               6            1,518           1,556 
  Accru als                                                  317             481 
   Borrowings                                 5              297             287 
  Lease liability                             7              190               - 
========================================  =======  =============  ============== 
                                                           2,322           2,324 
========================================  =======  =============  ============== 
  Total li abiliti es                                      4,119           4,407 
========================================  =======  =============  ============== 
  Total e qui ty and liabili ties                         16,311          18,830 
----------------------------------------  -------  -------------  -------------- 
 

T h e acc o m p an y ing a c co u nti ng pol i c i es a nd n otes fo rm p art of the f in a nc i al sta t em e nts.

T h e consolidated financial statements were approved by the Board of Directors on 30 March 2020 and were signed on its behalf by Nigel Rogers and David Marsh

Con solidated cashf l ow statement

fo r the y ear en ded 31 Dece m ber 2 0 19

 
                                                           2019       2018 
                                               Notes    GBP'000    GBP'000 
-------------------------------------------  -------  ---------  --------- 
  Cashflo ws from operating a ctivities 
  Profit after tax for the year                         (2,619)        725 
  Adju stm e nts for: 
  Taxation                                                   23      (210) 
  Finance income                                            (5)          - 
  Finance costs                                             162         89 
  Depre c iati on of pro perty, p l ant 
   and e qu i pm e nt                                       415        481 
  Amorti sa t ion and impairment of i 
   nta n gi b le a s s ets                       4        2,895      1,143 
  Depreciation ROU assets                        7          203 
  Share-b a s ed pa ym ent cha r ge                         188        120 
  Gain on disposal of fixed assets                            1          6 
  Foreign exchange                                         (56)         48 
   (Increase)/decrease ini n v entories                   (842)        384 
  Decre a se/(increase) in trade and other 
   rec e i v abl es                                         508    (1,027) 
  (Decre a se)/increase in pa y a bles                    (203)         48 
-------------------------------------------  -------  ---------  --------- 
  Cash generat ed from operations                           670      1,807 
  T a x a tion paid                                           1       (68) 
  Interest received                                           5 
  Intere st p aid                                          (82)       (89) 
-------------------------------------------  -------  ---------  --------- 
  Net cash g enerated from ope r ating 
   activities                                               594      1,650 
-------------------------------------------  -------  ---------  --------- 
 
  Pa y men ts to ac q uire pro p erty, 
   plant and eq u i p ment                                (199)       (88) 
  Acqu i si t ion of i n t a n gi b le 
   a s s e ts                                    4        (317)      (398) 
  Net cash used in investment activities                  (516)      (486) 
-------------------------------------------  -------  ---------  --------- 
 
  Repayment of bank loan                         5      (1,300)      (318) 
  Net proceeds from issue of share capital                  201          - 
  Lease liabilities                              7        (244) 
  Repa y ment of o bl i ga t io ns u nd 
   er fi n an ce l e as es                                    -       (16) 
-------------------------------------------  -------  ---------  --------- 
  Net cash used in fin anc ing a ctivities              (1,343)      (334) 
-------------------------------------------  -------  ---------  --------- 
  Net (decrease)/increase in cash and 
   cash equivalents                                     (1,265)        830 
  Cash a nd ca sh e q ui v al e nts at 
   begi n ni ng of y ear                                  2,491      1,709 
  Effective exchange rate fluctuations 
   on cash held                                              56       (48) 
-------------------------------------------  -------  ---------  --------- 
  Cash and cash equivalents at end of 
   year                                                   1,282      2,491 
===========================================  =======  =========  ========= 
 

Notes to the consolidated f inancial statem ents

1 . Group a c counting policies under IFRS

(a) Basis of prep aration

Surgical Innovations Group PLC (the "Company") is a public AIM listed company incorporated, domiciled and registered in England in the UK. The registered number is 02298163 and the registered address is Clayton Wood House, 6 Clayton Wood Bank, Leeds, LS16 6QZ.

These financial statements have been prepared on the basis of the International Financial Reporting Standards (IFRS) accounting policies set out below. The financial statements have been prepared in accordance with IFRS as adopted for use by the European Union, including IFRIC interpretations, and in line with those provisions of the Companies Act 2006 applicable to companies reporting under IFRS. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The financial statements have been prepared under the historical cost convention, are presented in Sterling and are rounded to the nearest thousand.

The financial information set out in this preliminary announcement does not constitute the Company's Consolidated Financial Statements for the financial years ended 31 December 2019 or 31 December 2018 but are derived from those Financial Statements. Statutory Financial Statements for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the company's AGM. The auditors, BDO LLP, have reported on those financial statements. Their report for 2018 was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under Section 498(2) or (3) of the Companies Act 2006 in respect of the financial statements for 2018.

The report of the auditor for the year ended 31 December 2019 was:

   --    unqualified; 

-- did include a reference to a matter (Covid-19) to which the auditor drew attention by way of a Material uncertainty related to Going Concern without qualifying their report; and,

   --    did not contain a statement under section 498(2) or (3) of the Companies Act 2006. 

The Statutory accounts will be available on the Company's website at www.sigroupplc.com with effect from 31 March 2020 and will be posted to selected shareholders at the end of April. Shareholders wishing to request a copy can contact the Company's registered office.

Going concern

The Directors have considered the available cash resources of the Group and its current forecasts and has a reasonable expectation that the Group have adequate resources and support to continue in operational existence for the foreseeable future, considered to be at least 12 months for the date of approval from the financial statements, whilst acknowledging that there are material uncertainties that do exist in preparing these financial statements.Further details of the Directors' assessment are provided in the Chairman's Statement, the Operating and Financial Review and Directors' report. The Directors draw attention to this extensive disclosure which indicates the current uncertainty in respect of the Covid-19 global pandemic. This event or condition indicates that a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a Going Concern.

New standards and amendments to standards adopted in the year

During the year the Group adopted the following standard effective from the 1 January 2019. The Group has applied this standard in the preparation of the financial statements, and has not adopted any new or amended standards early:

IFRS 16 'Leases' The standard is effective for periods beginning on or after 1 January 2019 and is EU endorsed.

Leases has been adopted by the Group for the financial year starting on 1 January 2019 (see note 7). The new standard has been applied using the "modified retrospective" transition approach.

The Group has material operating lease commitment as set out in note 7 and therefore the adoption of the standard is has a material impact on the Financial Statements of the Group.

There is no adjustment to the opening balance of retained earnings for the current period however reclassifications arising from the new standard have been recognised in the opening balances as at 1 January 2019. Prior periods have not been restated, as permitted under the specific transitional provisions in the standard. Accordingly the Group is not required to present a third statement of financial position as at that date.

Other new amended standards and interpretations issued by the IASB that apply to the financial statements do not impact the group as they are either not relevant to the group's activities or require accounting which is consistent with the group's current accounting policies.

A number of new standards and amendments to standards and interpretations have been issued but are not yet effective and in some cases have not yet been adopted by the EU. The Directors do not expect that the adoption of these standards will have a material impact on the financial statements of the Group in future periods.

2 . Segm ental r eporting

Inform ati on re ported to the Board, as Chief Operating Decision Makers, a nd for the purp o se of a s s es s ing perfo r ma n ce and m a k i ng in v e stm ent d e c is i o ns is organised into t hree ope r ati ngs eg m en t s.

T h e Group's ope r ati ng s e g m e nts u nder IFRS 8 a re as f o llo w s:

 
  SIBrand         -    the re sea r ch, de v el o pm e nt, m anufa ctu re 
                        a nd d i stri buti on of SI bran d ed mi n im a lly 
                        in v a si ve de v ic es 
  O E M           -    The re sea r ch, de v el o pm e nt, m anufa ctu re 
                        a nd d i stri buti on of min i m a lly in v a si ve 
                        de v i ces for third party med i c al de v i ce co 
                        m pa n ies th r ough eith er o wn la b el or c o - 
                        b r andi ng. This now incorporates Precision Engineering, 
                        the re sea r c h,de v el o pm e nt, m anufa ctu re 
                        a nd s ale of m in i m al ly in v asi ve t ec h no 
                        l ogy pro d uc ts for precision engineering applications 
 
  Distribution    -    Distribution of specialist medical products sold through 
                        Elemental Healthcare Ltd 
 

T h e me a sure of profit or l o ss f or e a ch re porta ble se g m e nt is gro ss m argin l e ss amortization of pro du ct de v e l o p ment c o sts. Asse ts a nd w orki ng c api t al a re mo n itored on a Group b a s i s, w ith no s e para te d i s c l o sure of as s et by s eg m ent ma de in the man a ge m ent a c cou nts, and h ence no se p arate a s set d i sc lo sure is pro v id ed he r e. T he f o l l o w ing se g me ntal anal ys is h as been prod u ced to p r o v ide a re c on c il i ation betw e en t he i nfo r mati on used by the chief operating d e c i si on m a k er w ithin t he b u si n e ss a nd t he info r mati on as it is pre se nted u nder IFRS.

 
                                              S I Br    Distribution        OEM       T o ta 
    Y e a r e n d ed 31 De ce m ber 20          a nd         GBP'000     GBP '0           l* 
    19                                        GBP '0                         00     GBP'0 00 
                                                  00 
=======================================  ===========  ==============  =========  =========== 
  Rev enue                                     5,840           3,101      1,792       10,733 
=======================================  ===========  ==============  =========  =========== 
  Result 
  Segment re sult                              1,510           (792)        720        1,438 
  Unall o ca t ed e x pens es                                                        (3,977) 
=======================================  ===========  ==============  =========  =========== 
  (Loss) from operations                                                             (2,439) 
  Fina n ce in c o me                                                                      5 
  Fina n ce c o sts                                                                    (162) 
=======================================  ===========  ==============  =========  =========== 
  (Loss) b efore ta xation                                                           (2,596) 
  T a x charge                                                                            23 
=======================================  ===========  ==============  =========  =========== 
  (Loss) for the y ear                                                               (2,619) 
---------------------------------------  -----------  --------------  ---------  ----------- 
  *There were no revenues transactions between the segments during the 
   year 
 
   Inc l uded w ithin t he s eg m ent/o perati ng re s u lts are t he 
   f o llo w i ng s ign ifi c ant no n - c a sh i t e m s: 
                                               S IBr    Distribution        OEM       T o ta 
    Y e a r e n d ed 31 De ce m ber 20          a nd          GBP '0     GBP '0            l 
    19                                        GBP '0              00         00       GBP '0 
                                                  00                                      00 
=======================================  ===========  ==============  =========  =========== 
  Amorti sa t ion of i nta n gi b le a 
   s s ets                                       291             351          -          642 
  Impairment of i nta n gi b le a s s 
   ets                                           628           1,625                   2,253 
  Additions to intangibles                       317               -          -          317 
  Additions to tangibles                         189              10          -          199 
=======================================  ===========  ==============  =========  =========== 
 

Unall o ca t ed e x pens es f or 2 0 19 i n clu de s a l es a nd m ark eti ng c os ts (GBP 293,0 0 0), r es e arch and de v elo p me nt c o s ts (GBP922,000), centr al o v e r hea ds (GBP1,004, 00 0), Direct (Elemental Healthcare) sales & marketing overheads (GBP1,427,000), share based payments (GBP188,000), exceptionals (GBP184,000), less Right Of Use (GBP41,000).

 
                                               S IBr    Distribution        OEM     T o ta 
    Y e a r e n d ed 31 De ce m ber 2018        a nd         GBP'000     GBP '0         l* 
                                              GBP '0                         00     GBP '0 
                                                  00                                    00 
=========================================  =========  ==============  =========  ========= 
  Rev enue                                     6,088           3,037      1,844     10,969 
=========================================  =========  ==============  =========  ========= 
  Result 
  Segment re sult                              1,733           1,059        737      3,529 
  Unall o ca t ed e x pens es                                                      (2,909) 
=========================================  =========  ==============  =========  ========= 
  Profit from operations                                                               620 
  Fina n ce in c o me                                                                    - 
  Fina n ce c o sts                                                                  (105) 
=========================================  =========  ==============  =========  ========= 
  Profit b efore ta xation                                                             515 
  T a x credit                                                                         210 
=========================================  =========  ==============  =========  ========= 
  Profit for the y ear                                                                 725 
=========================================  =========  ==============  =========  ========= 
 

* There were no revenues transactions between the segments during the year

 
 
    Inc l uded w ithin t he s eg m ent re 
    s u lts are t he f o llo w i ng i t 
    e m s: 
                                                S IBr    Distribution        OEM     T o ta 
    Y e a re n d ed31De ce m ber2018             a nd          GBP '0     GBP '0          l 
                                               GBP '0              00         00     GBP '0 
                                                   00                                    00 
==========================================  =========  ==============  =========  ========= 
  Amorti sa t ion of i nta n gi b le a 
   s s ets                                        230             788        125      1,143 
  Additions to intangibles                        398               -          -        398 
  Additions to tangibles                           65              23          -         88 
==========================================  =========  ==============  =========  ========= 
 

Unall o ca t ed e x pens es f or 2 0 18 i n clu de s a l es a nd m ark eti ng c os ts (GBP 260,0 0 0), r es e arch and de v elo p me nt c o s ts (GBP618,000), centr al o v e r hea ds (GBP908, 00 0), Direct (Elemental Healthcare) sales & marketing overheads (GBP1,278,000), share based payments (GBP120,000) less Other Income (GBP275,000).

Disaggregation of revenue

The Group has disaggregated revenues in the following table:

 
  Y e a r e n d ed 31 De ce m ber       S IBr    Distribution        OEM     T o ta 
   20 19                                 a nd          GBP '0     GBP '0          l 
                                       GBP '0              00         00     GBP '0 
                                           00                                    00 
==================================  =========  ==============  =========  ========= 
  United Kingdom                        1,613           3,101      1,497      6,211 
  Europe                                1,283               -          -      1,283 
  US                                    1,852               -        295      2,147 
  Rest of World                           636               -          -        636 
  APAC                                    456               -          -        456 
----------------------------------  ---------  --------------  ---------  --------- 
                                        5,840           3,101      1,792     10,733 
==================================  =========  ==============  =========  ========= 
 
 
  Y e a r e n d ed 31 De ce m ber       S IBr    Distribution        OEM     T o ta 
   20 18                                 a nd          GBP '0     GBP '0          l 
                                       GBP '0              00         00     GBP '0 
                                           00                                    00 
==================================  =========  ==============  =========  ========= 
  United Kingdom                        1,692           3,037      1,426      6,155 
  Europe                                1,347               -          -      1,347 
  US                                    1,704               -        418      2,122 
  Rest of World                           560               -          -        560 
  APAC                                    785               -          -        785 
----------------------------------  ---------  --------------  ---------  --------- 
                                        6,088           3,037      1,844     10,969 
==================================  =========  ==============  =========  ========= 
 

Rev enues are a ll o ca t ed g eog r aph i ca l ly on t he b a s is of w here re v enu es w ere re c ei v ed f rom a nd not from the ul t i m ate f i n al des t ina t ion of u se. During 2019 GBP1,226,0 00 (11.4%) of t he Group's re v e n ue d epe n ded on one distributor in the SI Bra nd se g ment (2018: GBP1,177,000 (10.7%)).

Sales of goods were GBP10,374,000 (2018: GBP10,325,000) and sales relating to services in the UK were GBP359,000, (2018: GBP644,000).

3 . Earnin gs per ordina ryshare

Basic e arnings per ordinary share

T h e ca l cul ati on of ba s ic earn i n gs p er ord inary s hare for t he y ear e n ded 31 De ce m ber 20 19 w as based up on the (loss)/profit att r i b utab le to ord inary s hare h ol d ers of ( GBP2,619 ,000) (2018: GBP725,000) a nd a w eig hted a v erage n u mb er of ordi n ary s hares outs t an d ing f or t he y ear e nd e`d 31 De ce m ber 2 0 19 of 789,845,629 ( 20 18: 782 ,566,177).

Diluted e arnings per ordi n a ry share

T h e ca l cul ati on of di l uted earni ngs per o r din ary sha re for t he y ear end ed 31 Dec e m ber 2 019 w as ba s ed u pon t he (loss)/profit attri b uta b le to ord inary s hare h olde rs of ( GBP 2,619,000) (2018: GBP725,000) a nd a w eighted a v erage n u mber of ordin ary sha r es o utstan d ing f or the y ear end ed 31 De c em b er 2019 of 891,313,476 (2018: 829,578,416). The anti dilutive effect of unexcercised shares options has not been taken into account and therefore the diluted earnings per share is equal to the basic earnings per share.

Adjusted e arnings per ordi n a ry share

T h e ca l cul ati on of adjusted earni ngs per o r din ary sha re for t he y ear end ed 31 Dec e m ber 2 019 w as ba s ed u pon t he adjusted profit attri b uta b le to ord inary s hare h olde rs (profit before exceptional and amortisations and impairment costs relating to the acquisition of Elemental Heathcare, impairment of capitalised development costs and share based payments) of GBP355,000 (2018: GBP1,633,000) a nd a w eighted a v erage n u mber of ordin ary sha r es o utstan d ing f or the y ear end ed 31 De c em b er 2019 of 789,845,629 (2018:782,566,177).

 
 
    No. of sh a r es used in calc ulat i on of e ar 
    nings p er o r dina ry s h a re ('0 00 s) 
                                                             20 19              2018 
                                                            No. of     No. of Shares 
                                                            Shares 
=====================================================  ===========  ================ 
  Bas ic ea r ni n gs p er s hare                          789,846           782,566 
  Diluti ve eff e ct of une x erc i sed s hare o pti 
   o ns                                                  (101,467)            47,012 
=====================================================  ===========  ================ 
  Diluted ea r nin gs p er s hare                          891,313           829,578 
=====================================================  ===========  ================ 
 

4. Intangible assets

 
                             Capitalised             Single use                             Exclusive 
                             development                product          Goodwill            Supplier            Total 
                                   costs              knowledge                            Agreements 
                                                       transfer 
                                 GBP'000                GBP,000           GBP'000             GBP'000          GBP'000 
  Cost 
  At 1 J anuary 2 018             12,701                    225             8,180               1,799           22,905 
  Additi ons                         398                      -                 -                   -              398 
  At 1 J anuary2 019              13,099                    225             8,180               1,799           23,303 
  Additi ons                         317                      -                 -                   -              317 
  A t 31 December 2 0 19          13,416                    225             8,180               1,799           23,620 
========================  ==============  =====================  ================  ==================  =============== 
  A cc umulated a mortis 
   ation 
  At 1 J anuary 2 018           (11,471)                      -                 -               (498)         (11,969) 
  Charge f or t he y ear           (353)                      -                 -               (788)          (1,141) 
  Impairment provision               (2)                      -                 -                   -              (2) 
  At 1 J anuary 2 019           (11,826)                      -                 -             (1,286)         (13,112) 
  Charge f or t he y ear           (291)                      -                 -               (351)            (642) 
  Imp a irm e nt p r o v 
   is i on                         (403)                  (225)           (1,625)                   -          (2,253) 
========================  ==============  =====================  ================  ==================  =============== 
  A t 31 December 2 0 19        (12,520)                  (225)           (1,625)             (1,637)         (16,007) 
========================  ==============  =====================  ================  ==================  =============== 
  Carr ying amount 
  A t 31 December 2 0 19             896                      -             6,555                 162            7,613 
========================  ==============  =====================  ================  ==================  =============== 
  At 31 De ce m ber 2 
   018                             1,273                    225             8,180                 513           10,191 
========================  ==============  =====================  ================  ==================  =============== 
  At 1 January 2018                1,230                    225             8,180               1,301           10,936 
========================  ==============  =====================  ================  ==================  =============== 
 

Goodwill and intangibles are allocated to the cash generating unit (CGU) that is expected to benefit from the use of the asset.

Capitalised development costs

Capitalised development costs represent expenditure incurred in developing new products that fulfil the requirements met for capitalisation as set out in paragraph 57 of IAS38. These costs are amortised over the future commercial life of the product, commencing on the sale of the first commercial item, up to a maximum product life cycle of ten years, and taking account of expected market conditions and penetration.

An impairment review is carried out annually, due to the complexity of a device and regulatory challenges, particularly in relation to the Medical Device Regulation, transition an impairment of GBP0.24m has been recognised.

Single use product knowledge transfer

Single use product knowledge transfer relates to the acquisition and of the single use laparoscopic instrumentation products of Surgical Dynamics Ltd in 2016. Additional expenditure of GBP168,000 in relation to this has been included in Capitalised development costs.

An impairment review is carried out annually, due to the constraints on funding the project was a low priority during 2019.With further expenditure on hold a subsequent review was taken and concluded that, with the continued pressure on resources and no likelihood of making significant progress without the required investment, the project has been closed. The impairment for this project combining the Single Use product knowledge transfer and additional expenditure on capitalised development is GBP0.40m.

Goodwill

The Group tests goodwill at each reporting date for impairment and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The recoverable amount of a cash generating unit (CGU) is determined based on value in use calculations. These calculations use post-tax cash flow projections based on five year financial budgets approved by management. Cash flows beyond the five year period are extrapolated using estimated long term growth rates.

An impairment review is carried out annually for goodwill. Goodwill arose on the acquisition of Elemental Healthcare Limited in 2017 and is related to both the Distribution and SI Brand segments of the Group. Elemental Healthcare Limited is considered to be a separate CGU of the Group whose recoverable amount has been calculated on a value in use basis by reference to discounted future cash flows over a five year period plus a terminal value. Principal assumptions underlying this calculation are the growth rate into perpetuity of 2% (2018: 1.5%) and a pre-tax discount rate of 15% (2018: 15%) applied to anticipated cash flows. In addition the value in use calculation assumes a gross profit margin of 40.6% (2018:48.8%) using past experience of sales made and future sales that were expected at the reporting date based on anticipated market conditions.

The trading environment in the UK market became more challenging during 2019, due to a progressive tightening of NHS funding for elective surgery, and the extended time taken to rebuild the distribution sales of Cellis branded products, including those due for imminent launch which have been delayed. Accordingly, the directors have adopted a cautious approach to forecasting future net inflows for this CGU.

On this basis, the recoverable amount of the cash-generating unit does not exceed its carrying value and in view of this excess, the Directors consider the impairment calculation to be unduly sensitive to changes to the above assumptions, and are of the opinion that a provision for impairment is required of GBP1.63m.

Subsequent to the year end, the potential effects of the Covid-19 outbreak and consequential impact on the availability of NHS resources, may have a further and more significant impact on the directors view of short to medium term cash flows. This has not been quantified, and there is not yet sufficient experience to make such a judgement. Nevertheless, it is recognised by the dir ectors that further impairment is likely to be necessary in the following year, therefore a non-adjusting post balance sheet event has been recognised (note 8 .

In the longer term, the directors remain confident that: (1) Elemental Healthcare has a robust role as a key vendor to the NHS for a range of elective procedures; (2) gains in market share are likely as a result of the environmental and cost advantages of key products; and (3) a growing backlog of elective procedures will be adequately funded and carried out once the current challenges in the NHS have been overcome. Whilst it will not be appropriate in future to re-instate goodwill that has been impaired as a result of current market conditions, the directors continue to place significant value on the business and operations of Elemental as an integral part of the group strategy.

 
 
 
  5. Borrowings                  2019       20 18 
  Bank Loan                   GBP'000    GBP '000 
==========================  =========  ========== 
  Current liabilities             297         287 
  Non-current liabilities         515       1,820 
==========================  =========  ========== 
  Lease liabilities 
==========================  =========  ========== 
  Current liabilities             190           - 
                            =========  ========== 
  Non-current liabilities       1,086           - 
==========================  =========  ========== 
                                2,088       2,107 
==========================  =========  ========== 
 

Bank loan

The sterling bank loan provided by Yorkshire Bank on 1 August 2017 for a five year term was split into two loan agreements A and B. Loan A of GBP1.5m is subject to quarterly payments of GBP0.075m which commenced on 31 October 2017, totaling repayments GBP0.3m per annum at an interest rate of LIBOR plus 3% per annum. Loan B of GBP1m is interest only at a rate of LIBOR plus 3.5% per annum with a repayment in full by the termination date of 31 July 2022. On 31 December 2019 the remaining balance of the term loans was GBP0.812m. The bank has made available a Revolving Credit Facility (RCF) of up to GBP0.5m for working capital and other purposes.

The RCF and loan agreements are subject to compliance with financial covenants which measure cash flow to debt service and EBITDA, interest cover and leverage.If the RCF is drawndown the rate of interest applicable to each loan for its interest period will be LIBOR plus 2.8% per annum and itwill be secured by a floating charge over the assets of the Group. At 31 December 2019, no amount was drawndown (2018: GBPnil).

During 2019 the Board elected to repay GBP1.0m of term Loan B in advance of the due date, from available cash resources.

 
  Changes in liabilities arising      Non-current        Current       Obligations      Total 
   from financing activities            loans and      loans and     under finance 
                                       borrowings     borrowings            leases 
  At 1 January 2019                         1,820            287                 -      2,107 
                                    -------------  -------------  ----------------  --------- 
  Cash flows                              (1,000)          (300)                 -    (1,300) 
                                    -------------  -------------  ----------------  --------- 
  Transfer between non-current 
   and current                              (300)            300                 -          - 
                                    -------------  -------------  ----------------  --------- 
  Interest accruing in the period             (5)             10                 -          5 
                                    -------------  -------------  ----------------  --------- 
  At 31 December 2019                         515            297                 -        812 
                                    -------------  -------------  ----------------  --------- 
 

In March 2020, the funder agreed to convert the existing loan with a three year committed Revolving Credit Facility ("RCF") with additional headroom ,a facility limit of GBP1m, and less stringent covenants than the current facilities. This agreement was made with credit approval and full knowledge of the considerable challenge presented by Covid-19. In the event, the company decided not to proceed with this change, and instead agreed with the funder to accept a temporary waiver of all covenants described below at 31 March 2020, and relief from the capital repayment of GBP75,000 due in March 2020.

In respect of the borrowing facilities in place at the reporting date, the group is required to comply with the following financial covenants at each quarter end in respect of the prior 12 month period:

   -           Cash flow to debt service ratio of no less than 1.25:1 
   -           Interest cover ratio of no less than 4:1 
   -           Leverage ratio of no greater than 2:1 

6. Trade and other payables

 
 
                                         2019         2018 
                                      GBP'000      GBP'000 
================================  ===========  =========== 
  T rade payables                       1,026        1,083 
  Corporation tax payable                   -            - 
  Other tax and social security           173          156 
  Other payables                          319          317 
================================  ===========  =========== 
                                        1,518        1,556 
================================  ===========  =========== 
 

7 . Contingent liabi lities and financ i al commit ments

T hes e areasfo l lo w s:

(a) Transition to IFRS16

This note explains the impact of the adoption of IFRS 16 'Leases' on the Group's financial statements and disclosesthe new accounting policy that has been applied from 1 January 2019.IFRS 16 replaces IAS 17 'Leases' along with three Interpretations (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').

The adoption of this new Standard has resulted in the Group recognising a right-of-use asset and related liability in connection with all former operating leases with the exception of those identified as low-value or having a remaining lease term of less than 12 months from the date of initial application.

The new standard has been applied using the "modified retrospective" transition approach. There is no adjustment to the opening balance of retained earnings for the current period however reclassifications arising from the new standard have been recognised in the opening balances as at 1 January 2019. Prior periods have not been restated, as permitted under the specific transitional provisions in the standard.

For contracts in place at 1 January 2019, the Group has elected to apply the definition of a lease from IAS 17 and IFRIC 4 and has not applied IFRS 16 to arrangements that were previously not identified as leases under IAS 17 and IFRIC 4.

The Group has elected to measure the right-of-use assets at 1 January 2019 at an amount equal to the lease liability, adjusted for any prepaid or accrued lease payments that existed at the date of transition. The liabilities weremeasured at the present value of the remaining lease payments, discounted at an incremental borrowing rate of 6%.

On transition, for leases previously accounted for as operating leases with a remaining lease term of less than 12 months and for leases of low-value assets, the Group has applied the optional exemption to not recognise right-of use assets but to account for the lease expense on a straight-line basis over the remaining lease term.

The Group has benefited from the use of hindsight for determining the lease term when considering options to extend and terminate leases.

The following is a reconciliation of total operating lease commitments at 31 December 2018 (as disclosed in the financial statements to 31 December 2018) to the lease liabilities recognised at 1 January 2019:

 
                                                                 GBP'000 
  Total operating lease commitments disclosed at 31 December 
   2018                                                            1,766 
                                                               --------- 
  Recognition exemptions at 1 January 2019: leases less 
   than 12 months or low value                                      (42) 
                                                               --------- 
  Leases committed to at 31 December 2018 but not commenced            - 
   at 1 January 2019 
                                                               --------- 
  Commitments not meeting the definition of a right of                 - 
   use asset 
                                                               --------- 
  Operating lease liabilities before discounting                   1,724 
                                                               --------- 
  Discounting effects using incremental borrowing rates 
   as at 1 January 2019                                            (330) 
                                                               --------- 
  Operating lease liabilities after discounting as at 
   1 Janaury 2019                                                  1,394 
                                                               --------- 
  Of which are: 
                                                               --------- 
  Current lease liabilities                                          162 
                                                               --------- 
  Non-current lease liabilities                                    1,232 
                                                               --------- 
 

At 1 January 2019 the recognised right-of-use assets all relate to Property and Car leases. Instead of performing an impairment review on the right-of-use assets at the date of initial application, the Group has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of IFRS 16. This assessment did not identifyany onerous lease contracts requiring an adjustment to the right-of-use asset at the date of initial application. The adoption of IFRS 16 has impacted the following items:

Impact on the statement of financial position

 
                                                           As at 1 January                           As at 31 December 
                                                                      2019                                        2019 
                                               Assets          Liabilities                Assets            Liabiities 
                                    -----------------  -------------------  --------------------  -------------------- 
                                              GBP'000              GBP'000               GBP'000               GBP'000 
                                    -----------------  -------------------  --------------------  -------------------- 
  Right of use assets and lease 
   liabilites                                   1,394                1,394                 1,241                 1,276 
                                    -----------------  -------------------  --------------------  -------------------- 
  Of which are: 
                                    -----------------  -------------------  --------------------  -------------------- 
  Current lease liabilites                                             162                                         190 
                                    -----------------  -------------------  --------------------  -------------------- 
  Non-Current lease liabilites                                       1,232                                       1,086 
                                    -----------------  -------------------  --------------------  -------------------- 
  Impact on Equity                                                       -                                        (35) 
                                    -----------------  -------------------  --------------------  -------------------- 
  Total impact on statement of 
   financial 
   position                                     1,394                1,394                 1,241                 1,241 
                                    -----------------  -------------------  --------------------  -------------------- 
 

The adoption of IFRS 16 on 1 January 2019 had a nil impact on the net assets of the Group due to applying the modified retrospective approach. As at 31 December 2019 lease liabilities of GBP1.3m do not match the value of the right-of-use assets due to the depreciation charge in the period being lower than the lease repayments (net of interest charges).

A reconciliation of the value of right-of-use assets and lease liabilities from 1 January 2019 to 31 December 2019 is presented below:

 
  Right of use assets                Property      Plant       IT equipment    Car leases      Total 
                                      GBP'000    GBP'000            GBP'000       GBP'000    GBP'000 
                                   ----------  ---------  -----------------  ------------  --------- 
  Right of use assets and lease 
   liabilities as at 1 January 
   2019:                                1,249          -                 11           134      1,394 
                                   ----------  ---------  -----------------  ------------  --------- 
  Additions                                 -         17                  -            33         50 
                                   ----------  ---------  -----------------  ------------  --------- 
  Disposals                                 -          -                  -             -          - 
                                   ----------  ---------  -----------------  ------------  --------- 
  Depreciation                          (144)        (3)                (4)          (52)      (203) 
                                   ----------  ---------  -----------------  ------------  --------- 
  Right of use assets and lease 
   liabilities as at 31 December 
   2019                                 1,105         14                  7           115      1,241 
                                   ----------  ---------  -----------------  ------------  --------- 
  Impact on Income statement:                                     12 months 
                                                             to 31 December 
                                                          ----------------- 
                                                                    GBP'000 
                                                          ----------------- 
  Other operating expenses                                               41 
                                                          ----------------- 
  Impact on EBITDA                                                      245 
                                                          ----------------- 
  Depreciation                                                        (203) 
                                                          ----------------- 
  Finance costs                                                        (77) 
                                                          ----------------- 
  Impact on profit before tax                                          (35) 
                                                          ----------------- 
 
 

Prior to the adoption of IFRS 16 rental payments were charged to the income statement on a straight-line basis, under IFRS 16 rental charges in the income statement are replaced with depreciation on the right-of-use asset and interest charges on the lease liability. The adoption of IFRS 16 therefore gives rise to a net cost of GBP35,000 in the twelve months to 31 December 2019, reflecting depreciation and interest charges of GBP280,000 being GBP35,000 higher than the net rental charges which would have been incurred prior to the adoption of the new standard. At EBITDA level, the adoption of IFRS 16 gives a benefit of GBP245,000 being the elimination of the rental charges.

At the date of transition a provision for dilapadations had already been recognised in relation to property lease. On transition to IFRS16 no amendment to this provision has been recognsed and no additional amount recorded within the right of use asset.

(b) Capital com mitm ents

At 31 De ce m ber 2 0 19 the Group h ad c api t al co m mi t m e nts totali n g GBP 7,000 (20 18: GBP nil)

8. Post balance sheet events

A non-adjusting post balance sheet event has been recognised with the anticipated financial effect of more widespread coronavirus infection having significant impact on the Group in relation to the following accounting treatments:

Goodwill impairment

Subsequent to the year end, the potential effects of the Covid-19 outbreak and consequential impact on the availability of NHS resources, may have a further and more significant impact on the directors view of short to medium term cash flows. This has not been quantified, and there is not yet sufficient experience to make such a judgement. Nevertheless, it is recognised by the directors that further impairment is likely to be necessary in the year ending 31 December2020. The financial effect of this adjustment cannot be estimated.

Going concern and funding

Management have to make judgements on various uncertain future outcomes of events or conditions, consideration when determing whether or not the Group can prepare its financial statements on the going concern bases:

The degree of uncertainty associated with the outcome of Coronavirus increases significantly the further into the future. Management will assess all available information and will continually assess the situation.

The nature and condition of the Group and the degree to which its is affected by external factors affect the judgement regarding the outcome of Coronavirus. key end user markets is now becoming more apparent, as hospitals rightly free up capacity to cope with seriously ill patients. These necessary actions will inevitably lead to delays and cancelation of routine surgical procedures such as those announced in the NHS over the last week. Management have devised a series of mitigating actions, designed to preserve cash resources, maintain delivery of essential products to our customers and distributors, and protect our workforce from the health risks and economic impact.

Any judgement anout the future is based on information at the time at which the judgement is made. Subsequent events may result in outcomes that are inconisistent with judgements that were reasonable at the time they were made. Management will continually assess the information available at the time of publication.

The directors had carried out an evaluation of financial forecasts, sensitised to reflect a rational judgement of the level of inherent risk. This exercise concluded that adequate financial resources were available to ensure that the Company could meets its obligations for a twelve month period with reasonable certainty. It has subsequently become clear that there will need to be reliance upon outside agencies including the UK Government, Yorkshire Bank, and possibly others to ensure that these conditions continue to apply. The financial effect of further funding cannot be estimated.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

FR SDDEDSESSEED

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March 31, 2020 02:00 ET (06:00 GMT)

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