Note on the Group Financial Statements

Diaceutics PLC (the "Company") is a public company limited by shares, incorporated, domiciled and registered in Northern Ireland. The Company's registration number is NI055207 and the registered office is 55-59 Adelaide Street, Belfast, BT2 8FE.

The consolidated financial statements consolidate those of the Company and its subsidiaries (together referred to as the Group). The Company financial statements present information about the Company as a separate entity and not about the Group.

The principal activity of Diaceutics PLC ("the Company") and its subsidiaries (together "the Group") is data, data analytics and implementation services. The Group has established a core suite of products and outsourced advisory services which help its Pharma clients to optimise and deliver their marketing and implementation strategies for companion diagnostics. Their mission is to design, create and implement innovative solutions that enhance speed to market and increase the effectiveness of all the stakeholders in the personalised medicine industry.

The financial statements are presented in pound sterling.

Basis of accounting

These consolidated financial statements have been prepared on a going concern basis and in accordance with international accounting standards in conformity with the Companies Act 2006 applicable to companies reporting under IFRS. These financial statements have been prepared under the historical cost convention.

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. Judgements in applying accounting policies and key sources of estimates and uncertainty are disclosed in the notes.

The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Going concern

The financial performance and balance sheet position at 31 December 2020 along with a range of scenario plans to 31 December 2022 has been considered, applying different sensitives to revenue. Across these scenarios, including at the lower end of the range, there remains significant headroom in the minimum cash balance over the period to 31 December 2022 and therefore the Directors have satisfied themselves that the Group has adequate funds in place to continue in operational existence for the foreseeable future.

Basis of Consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved when the Company:

-   Has power over the subsidiary;

-   Is exposed, or has rights, to return from its involvement with the subsidiary; and

-   Has the ability to use its power to affect its returns.

1.      General Information (continued)

The Company considers all relevant facts and circumstances in assessing whether or not it has sufficient influence and control over a subsidiary, including the ability to direct the relevant activities at the time that decisions need to be made.

Intra-group balances and transactions, and any unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated.

The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.

2      Accounting policies

New and amended accounting standards adopted by the Group

The Group has applied the following standards and amendments for the first time for their annual reporting year commencing 1 January 2020:

§ Amendments to references to conceptual framework in IFRS standards

§ Definition of a business (Amendment to IFRS 3)

§ Interest rate benchmark reform (Amendment to IFRS 9, IAS 39 and IFRS 7)

The above amendments did not have any impact on the amounts recognised in prior years. The impact of applying IFRS16 is not material and thus no adjustment has been made. The other amendments listed above are not expected to significantly affect the current or future years.

New accounting standards and interpretations not yet adopted by the Group

The following new accounting standards, amendments and/or interpretations have been published but not yet endorsed by the EU and are not mandatory for 31 December 2020 reporting year. They have not been early adopted by the group and these standards are not expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions:

§ IFRS 17 insurance contracts

§ Classification of liabilities as current or non-current (amendments to IAS 1)

§ Sale or contribution of assets between an investor and its associate or joint venture (amendments to IFRS10 and IAS 28)

§ COVID-19 related rent concessions (Amendment to IFRS16)

Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the provision of services in the ordinary course of the Group's activities. Revenue is shown net of value-added tax and after eliminating sales within the Group.

The Group has two revenue streams, Implementation services and Data. The Group's performance obligations for both revenue streams are deemed to be the provision of specific deliverables to the

2.      Accounting policies (Continued)

customer. Revenue billed to the customer is allocated to the various performance obligations, based on the relative fair value of those obligations, and is then recognised as follows:

§ Where a contractual right to receive payment exists, revenue is recognised as over the period services are provided using the percentage of completion method, based on the input method using time spent; and

§ Where no contractual right to receive payment exists, revenue is recognised upon completion of each separate performance obligation, which is typically when implementation services are complete or data has been provided to the customer.

Segment reporting

The Group currently has one operating segment.

Government grants

Grants, which include research and development tax credits where the recovery of those credits is not restricted, are recognised at their fair value where there is a reasonable assurance that the grant will be received, and the Group will comply with all attached conditions.

Grants that compensate the Group for expenses incurred are recognised in profit or loss as other income on a systematic basis in the periods in which the expenses are recognised, unless the conditions for receiving the grant are met after the related expenses have been recognised. In this case the grant is recognised when it becomes receivable.

Grants relating to development projects are included in non-current liabilities as deferred income and are credited to the profit and loss account on a straight-line basis over the expected useful economic lives of the related assets.

Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated financial statements are presented in Sterling, which is the Group's presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account.

(c) Group companies

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

2.      Accounting policies (Continued)

§ assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

§ income and expenses for each profit and loss account are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and

§ all resulting currency translation differences are recognised in other comprehensive income and disclosed as a separate component of equity in a foreign currency translation reserve.

Exceptional items

The Group presents as exceptional items those material items of income and expense which, because of the nature and expected infrequency of the events giving rise to them, merit separate presentation on the face of the profit and loss account in order to allow shareholders to understand better the elements of financial performance in the year, so as to facilitate comparison with prior periods and to better assess trends in the financial performance.

Employee benefits

The Group operates a defined contribution pension scheme which is open to employees and directors. The assets of the scheme are held by investment managers separately from those of the Group. The contributions payable to the scheme is recorded in the profit and loss account in the accounting period to which they relate.

The Group also operates a long-term incentive plan (LTIP), an element of which is the ability for eligible employees to be awarded a discretionary cash bonus based on Group performance. These short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

Share based payments

The company has a number of classes of shares in issue. Where shares are issued to employees that contain restrictions that mean they have obtained those shares by virtue of their employment, those shares are accounted for as share based payments. When the shares are issued a determination is made, based on the rights of those shares, as to whether there is a contractual liability for the Company to reacquire the shares at some point (cash settled) or not (equity settled). For equity settled shares, a fair value of those shares is established at the date the shares are granted and, if the employee is required to complete a period of service before the shares vest, this fair value is spread over that period (vesting period).

Taxation

The tax expense for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity respectively.

2.      Accounting policies (Continued)

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the group's subsidiaries operate and

generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity of different taxable entities where there is an intention to settle the balances on a net basis.

Intangible assets

Research and development

Expenditure on research activities and patents is recognised in the profit and loss account as an expense as incurred.

Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Group intends and has the technical ability and sufficient resources to complete development, future economic benefits are probable and if the Group can measure reliably the expenditure attributable to the intangible asset during its development. Development activities involve design for, construction or testing of the production of new or substantially improved products or processes. The expenditure capitalised includes the cost of infrastructure and direct labour including employer national insurance. Other development expenditure is recognised in the profit and loss account as an expense as incurred. Capitalised development expenditure is stated at cost until it is brought into use.

Other intangible assets

Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and less accumulated impairment losses.

Amortisation

Amortisation is charged to the profit or loss on a straight-line basis over the estimated useful lives of intangible assets. Intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows:

2.      Accounting policies (Continued)

§ Patents and trademarks                      3 years (33.3% straight line) from date of registration

§ Datasets                                                     4 years (25% straight line)

§ Software                                                    5 years (20% straight line)

§ Platform                                                     10 years (10% straight line)

The Group reviews the amortisation period and method when events and circumstances indicate that the useful life may have changed since the last reporting date (refer to note 16).

Property, plant & equipment

Property, plant & equipment is stated at cost less accumulated depreciation and accumulated impairment losses.

The Group assesses at each reporting date whether there are indicators of impairment.

Depreciation is charged to the profit and loss account on a straight-line basis over the estimated useful lives of each part of an item of tangible fixed assets. The estimated useful lives are as follows:

§ Office equipment   5 years (20% straight line)

Depreciation methods, useful lives and residual values are reviewed if there is an indication of a significant change since the last annual reporting date in the pattern by which the Group expects to consume an asset's future economic benefits.

Lease liabilities

Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture.

Financial assets

(a)   Classification

The Group classifies its financial assets in the following measurement categories:

§      Those to be measured at amortised cost; and

§       Those to be measured subsequently at fair value (either through Other Comprehensive Income or through profit and loss).

The classification depends on the Group's business model for managing the financial assets and the contractual terms of the cash flows. The Group reclassifies its financial assets when and only when its business model for managing those assets changes.

(b) Recognition and measurement

At initial recognition, the group measures a financial asset at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. A trade receivable without a significant financing component is initially measured at the transaction price.

Subsequent measurement of financial assets depends on the Group's business model for managing those financial assets and the cash flow characteristics of those financial assets. The Group only has financial assets classified at amortised cost. These assets are subsequently measured at amortised cost using the effective interest method. The amortised cost is reduced by impairment losses.

2.      Accounting policies (Continued)

Interest income, foreign exchange gains and losses and impairment are recognised in profit or loss. Any gain or loss on derecognition is recognised in profit or loss.

(c) Impairment

The Group assesses on a forward-looking basis, the expected credit losses associated with its debt instruments carried at amortised cost. For trade receivables the Group applies the simplified approach permitted by IFRS9, which requires expected lifetime losses to be recognised from the initial recognition of the receivables. For other receivables the Group applies the three-stage model as prescribed in IFRS 9, to determine expected credit losses.

Financial liabilities

Financial liabilities comprise trade and other payables and borrowings due within one year and after one year, which are recognised initially at fair value and subsequently carried at amortised cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognised in profit or loss. Any gain or loss on derecognition is also recognised in profit or loss.

The Group does sometimes make use of derivative financial instruments or hedge accounting for foreign currency transactions. Trade payables represent obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year. If not, they are presented as non-current liabilities.

Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held on call with banks, other short term highly liquid investments with original maturities of three months or less and bank overdrafts.

Equity

Ordinary shares are classified as equity. Incremental costs directly attributable for the issue of new shares are shown in equity as a deduction from the proceeds.

The share premium reserve represents the excess over the nominal value of the fair value of consideration received for equity shares, net of expenses on the share issue.

The capital redemption reserve records the nominal value of shares repurchased by the Company.

Distributions to equity holders

Dividends and other distributions to the Company's shareholders are recognised as a liability in the financial statements in the period in which the dividends and other distributions are approved by the Company's shareholders. These amounts are recognised in the statement of changes in equity.

Related party transactions

The Group discloses transactions with related parties which are not wholly owned within the same group. Where appropriate, transactions of a similar nature are aggregated unless, in the opinion of the directors, separate disclosure is necessary to understand the effect of the transactions on the Group financial statements.

3.      Judgements in applying accounting policies and key sources of estimation uncertainty

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for income and expenditure during the year. However, the nature of estimation means that actual outcomes could differ from those estimates. The Group's only assets/liabilities that are significantly impacted by key sources of estimation uncertainty are the Group's intangible assets. The assessment of useful life of data purchases and platform require estimation over the period in which that data will be utilised. Further details on the estimation uncertainty has been disclosed in note 16.

Impairment of intangibles and key sources of estimation uncertainty are reviewed annually using the discount cash flow method. Further details are disclosed in note 16 intangibles.

With respect to revenue recognition, as described in note two accounting policies, where the input method is used to determine recognition over time, a key source of estimation will be the actual hours spent vs the total budgeted hours to completion.

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

4.      Revenue

Operating Segments

The Group currently operates under one reporting segment but revenue is analysed under two separate revenue streams. 

Revenue represents the amounts derived from the provision of services which fall within the Group's ordinary activities, stated net of value added tax. Revenue is principally generated from implementation services and data. 

The following tables present revenue of the Group for the years ended 31 December 2020 and 2019. 

Revenue stream

Geographical Area

4.      Revenue (continued)

In 2020 three customers each had sales which exceeded 10% of total revenue with the largest customer accounting for £1,398,000 (11%); the second accounting for £1,395,000 (11%) and the third accounting for £1,332,000 (10.5%) of revenue. 

In 2019 two customers each had sales which exceeded 10% of total revenue with the largest customer accounting for £1,595,000 (11.9%) and the second accounting for £1,557,000 (11.6%) of revenue. 

5.      Operating (loss)/profit:

6.      Auditor's remuneration

7.      Staff numbers

        The average monthly number of employees, excluding directors, during the year was as follows:

8.       Directors emoluments

Directors

Highest paid director

The highest paid director received the following emoluments:

Key senior management

Key senior management received total compensation as follows:

9.      Share based payments

The Company currently has an Employee share Option Plans ("ESOP") for employees and a Long-Term Incentive Plan ("LTIP") for key management.

The ESOP and LTIP are designed to provide long term incentives for senior management and above, and certain employees (including executive directors) to deliver long-term shareholder returns and promote staff retention. Under these schemes, employees are granted options which only vest if certain performance standards are met. For the ESOP and LTIP options that are outstanding as at 31 December 2020, the only performance obligations attached are continued employment to date of vesting, with no more than two unsatisfactory performance reviews. The total expense recognised in the year in relation to share based payment charges is £290,000 (2019: 24,000).

9.      Share based payments (continued)

Set out below are summaries of options granted under the plans:

ESOP:

LTIP:

Share options outstanding at the year-end have the following expiry dates and exercise prices:

ESOP:

9.      Share based payments (continued)

LTIP:

The weighted average remaining contractual life of options outstanding at the end of the year was 2.24 years. No options expired during the year.

Fair value of options granted:

The weighted average fair value at grant date of options granted during the year-ended 31 December 2020 was £0.72 per option. The fair value at grant date is independently determined using an adjusted Black-Scholes model which takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and the expected price volatility of the underlying share, and the risk-free interest rate for the term of the options.

The expected price volatility is based on the historical volatility & companies within similar industries.

10.   Other operating income

11.   Exceptional items

11.   Exceptional Items (continued)

In December 2020, the Group carried out a restructure with the aim of reducing operating cost base and re-positioning staff to support the future operations as a platform business. Exceptional costs of £388,000 were reflected in the profit & loss account, with an associated provision recognised within current liabilities on the balance sheet of £360,000 which will be utilised by 31 March 2021. The exceptional costs relate to redundancy costs and professional fees which were wholly and exclusively attributable to the restructure event. In 2019 the Group incurred £2,597,000 of transaction costs and other IPO related costs as a result of the application made to the London Stock Exchange for all the issued and to be issued Ordinary share capital to be admitted to trading on AIM.  £1,348,000 was included within operating profit and £1,044,000 was offset against the Share Premium account in accordance with IAS 32 'Financial Instruments'.

12.   Finance income

13.   Finance costs

14.   Income tax (credit)/expense

(a) Tax on (loss)/profit

(b) Factors affecting the tax charge for the year

        The tax assessed for the year differs from (2019: differs from) the effective standard rate of corporation tax in the UK of 19.00% (2019: 19.00%). The differences are reconciled below:

14.   Income tax (credit)/expense (continued)

(c) Deferred tax

The deferred tax included in the balance sheet is as follows:

Deferred tax balance

The deferred tax balance consists of a deferred tax asset amounting to £301,000 (2019: £371,000) and a deferred tax liability of £366,000 (2019: £315,000), netting to a Liability of £65,000 (2019: an asset of £56,000). The deferred tax asset is recognised on the basis that the Group has forecasted sufficient profits on which the deferred tax asset can be utilised.

The deferred tax asset includes amounts receivable after more than one year amounting to £Nil (2019: £Nil). Tax losses carried forward amount to £6,684,000 (2019: £3,400,000) within Diaceutics PLC. In addition, the Group has tax losses arising in subsidiary undertakings. Due to the uncertainty of the recoverability of the tax losses within these subsidiaries, a potential deferred tax asset of £186,000 (2019: £66,000) has not been recognised. Deferred tax assets and liabilities have otherwise been recognised as they arise.

15.   Earnings per share 

Basic earnings per share are calculated based on the (loss)/profit for the financial year attributable to equity holders divided by the weighted average number of shares in issue during the year. The weighted average number of shares for all periods presented has been adjusted for the reorganisation and bonus issue of shares undertaken on 13 March 2019 prior to the admission of the company to the AIM market of the London Stock Exchange. 

Adjusted earnings per share are calculated based on the (loss)/profit for the financial year adjusted for exceptional items as disclosed in Note 11. Diluted earnings per share is calculated on the basic earnings per share adjusted to allow for the issue of ordinary shares on the assumed conversion of the convertible loan notes and employee share options.

Profit attributable to shareholders

Weighted average number of shares to shareholders

Earnings per share

16.   Intangible assets

*Development expenditure relates to an asset under construction and as such no amortisation has been charged.

Intangible assets relate to patents, trademarks, software and datasets which are recorded at cost and amortised over their useful economic life which has been assessed as two to five years.

16.   Intangible Assets (Continued)

On 1 December 2020 the Group's platform - DXRX was commissioned and brought into use. On this date £6,577,000 was transferred out of development expenditure and into platform.

The Group assesses the useful life of all assets on an annual basis. On reviewing the useful life of the data sets it was determined that based on latest information on commercial and technical use, four years represented the best estimate of the useful life of such assets.

The Group has determined that the useful life of data and the useful life of platform is a significant area of estimation.

The platform has been assessed to have a useful life of 10 years based on information on the estimated technical obsolescence of such assets. However, the actual asset useful life may be shorter or longer than 10 years depending on technical innovations and other external factors. If the useful life were eight years, the carrying amount of the asset would reduce by £10,000 to £6,527,000. If the useful life of the asset were 12 years, the carrying amount of the asset would increase by £7,000 to £6,544,000.

Data sets have been assessed to have a useful life of four years based on information on the estimated commercial and technical use of such assets. However, the actual asset useful life may be shorter or longer than 4 years depending on technical innovations and other external factors. If the useful life were 3 years, the carrying amount of the asset would reduce by £26,000 to £1,854,000. If the useful life of the asset were 5 years, the carrying amount of the asset would increase by £15,000 to £1,895,000. The change in estimated useful life from two years to four years has resulted in £64,000 less in amortisation charges in 2020.

The recoverable value of intangible assets is measured using discounted cash flow forecasts and the valuation model at 31 December 2020 indicated no impairment on these assets. Whilst there is no indication of impairment, the discounted cash flow model uses prospective information on revenues which is subject to estimation. Within the model, sensitivity analysis shows a 7% reduction in the compound annual growth rate of revenues over the term would still leave sufficient headroom with no indication of impairment.

Amortisation in respect of Patents and trademarks and Software is expensed to the Profit and Loss Account as Administrative expenses. Platform and Datasets amortisation is included within Cost of sales.
 

17.   Property, plant and equipment

18.   Investments

Group undertakings

The following were subsidiaries of the Company at 31 December 2020:

18.   Investments (Continued)

The principal business of all the subsidiary undertakings is data and implementation services. All entities were incorporated before 1 January 2020 with the exception of Diaceutics Precision Medicine Technology (Guangzhou) limited which was incorporated during the year ended 31 December 2020.

*The holding in Diaceutics Precision Medicine Technology (Guangzhou) Limited is held indirectly through the subsidiary of Diaceutics PLC, Diaceutics PTE Ltd.

19.   Trade and other receivables

Trade receivables are non-interest bearing, are generally on 90-day terms and are shown net of a provision for impairment. The amount of the provision netted against the trade receivables balance was £20,000 (2019: £20,000). The default percentage used in the expected credit loss calculation was 0.16% (2019: 0.16%) for debt up to 30 days old; 0.20% (2019:0.20%) for debt between 31 and 60 days old; 0.31% (2019:0.31%) for debt between 61 and 90 days old; 0.84% (2019:0.84%) for debt between 91 and 180 days old and 8.09% (2019: 8.09%) for debt over 180 days old. Bad debts amounting to £Nil (2019: £Nil) were realised.

Other receivables are considered to have low credit risk and the loss allowance recognised during the year was therefore limited to 12 months expected credit losses. The amounts were not material. The age profile of the trade receivables are as follows:

Included within trade receivables are contract assets of £1,265,000 (2019: £796,000). The Group's contracts with customers are typically less than one year in duration and any contract assets as at the balance sheet date would be expected to be invoiced and received in the following year. The increase in value of contract assets from £796,000 to £1,265,000 is driven by an increase in the average value of contracts with customers.

19.   Trade and other receivables (continued)

The following table shows the movement in contract assets:

The carrying amount of trade and other receivables are denominated in the following currencies:

The maximum exposure to credit risk is the carrying value of each class of receivables. The Group does not hold any collateral as security.

20.   Trade and other payables

Contract liabilities of £303,000 (2019: £387,000) which arise in respect of amounts invoiced during the year for which revenue recognition criteria have not been met by the year-end. The Group's contracts with customers are typically less than one year in duration and any contract liabilities would be expected to be recognised as revenue in the following year.

20.   Trade and other payables (continued)

The following table shows the movement in contract liabilities:

The Group and Company's exposure to currency and liquidity risk related to trade and other payables is disclosed in note 23.

21.   Financial liabilities

22.   Interest bearing loans and borrowings

The fair value of the Group's loans and borrowings is £118,000 (2019: £108,000). The fair value of current borrowings equals their carrying amounts as the impact of discounting is not significant.

The following table shows the changes in liabilities arising from financing activities:

22.   Interest bearing loans and borrowings (continued)

The interest on convertible loan notes and foreign exchange losses are non-cash items, all other items are cash related movements.

The following table shows the net debt:

(a)   Revolving credit facility

In July 2020 the Group entered into a revolving credit facility with Silicon Valley Bank who provided a credit facility for £4,000,000. This facility is available to be drawn in US dollars, Sterling or Euro and was unused at 31 December 2020. The Maturity Date of the facility is 16 July 2023.  

(b)   Convertible loan notes

On 15 October 2018, the Company issued £454,000 of unsecured convertible loan notes ("Loan Notes") and on 15 February 2019, the Company issued a further £850,000 of Loan Notes. £1,204,000 of the Loan Notes were converted into Ordinary Shares in the Company immediately prior to Admission. 

£100,000 of the Loan Notes issued on 15 February 2019 remain in place (10% interest rate payable annually from 1 April 2019). These loan notes can be converted into Ordinary Shares in the Company on or after 31 March 2022.

In line with IFRS 9, Financial Instruments, the total finance cost of the convertible loan notes was spread over the maturity period using an effective interest rate. Consequently, an interest charge of £10,000 (2019: £23,000) has been recognised in the profit and loss account using an effective rate of 10%.

23.   Financial instruments

Classification of financial instruments

The principal financial instruments used by the Group from which financial instrument risk arises are trade receivables, cash and cash equivalents and trade and other payables, loans, the revolving credit facility and convertible loan notes. The impact of the discounting of financial instruments is not material.

The Group's financial instruments are classified as follows:

Credit risk

Credit risk is the risk that the counterparty fails to discharge their obligation in respect of the instrument. The Group trades only with recognised, creditworthy third parties. Receivable balances are monitored on an on-going basis with the result that exposure to bad debts is normally not significant. As the Group trades only with recognised third parties there is no requirement for collateral.

Other financial assets comprise of cash and cash equivalents which are therefore subject to minimal credit risk. 

Liquidity risk

Liquidity risk arises from the Group's management of working capital and is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. 

Group policy is that funding is reviewed in line with operational cash flow requirements and investment strategy. Repayment terms and conditions are approved by the Board in advance of acceptance of any facility. At each board meeting, and at the reporting date, the cash flow projections are considered by the Board to confirm that the Group has sufficient funds and available funding facilities to meet its obligations as they fall due. 

The Group had a revolving credit facility for up to £4,000,000.

23.   Financial Instruments (continued)

Foreign currency risk

Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

The Group seeks to transact the majority of its business in its reporting currency (£Sterling).  However, many customers and suppliers are outside the UK and a proportion of these transact with the company in US dollars and euro. For this reason, the Group operates current bank accounts in US dollars and euro as well as in its reporting currency and has a revolving credit facility available which can be drawn in US dollars, pounds sterling or euro. 

To the maximum extent possible receipts and payments in a particular currency are made through the bank account in that currency to reduce the amount of funds translated to or from the reporting currency.

Cash flow projections are used to plan for those occasion when funds will need to be translated into different currencies so that exchange rate risk is minimised. In addition, the Group has entered into a revolving credit facility which can be drawn in US dollars, pounds sterling or euro. 

If the exchange rate between sterling and the US dollar had been 10% higher/lower at the reporting date, the effect on profit would have been approximately (£35,000)/£4,000 respectively (2019:(£120,000)/147,000). If the exchange rate between sterling and euro had been 10% higher/lower at the reporting date the effect on profit would have been approximately (£27,000)/£15,000 respectively (2019: (£195,000)/£239,000). If the exchange rate between sterling and the US dollar had been 10% higher/lower at the reporting date, the effect on equity would have been approximately (£268,000)/£327,000 respectively (2019: (£374,000)/£457,000). If the exchange rate between sterling and euro had been 10% higher/lower at the reporting date the effect on equity would have been approximately (£434,000)/£531,000 respectively (2019: (£195,000)/£238,000).

Interest rate risk

Cash flow interest risk arises from the Group's external loans and revolving credit facilities, which carry interest based on underlying base rates in the UK, US and the EU. These loans were fully repaid in 2019 from the funds raised from the Company's listing on the London Stock Exchange. The revolving credit facility remains unused at 31 December 2020.

23.   Financial Instruments (continued)

Maturity

The Group's financial liabilities measured as a contractual undiscounted cash flow mature as follows:

As at 31 December 2020

As at 31 December 2019

At each year-end there are no financial liabilities due after five years.

24.   Equity Share capital

On 11 June 2020, the Company undertook a Placing of 14,137,931 new ordinary shares to raise, in aggregate £20.5m (before expenses of £0.9m). On 12 June 2020 the Company issued 347,915 Ordinary Shares pursuant to the exercise of warrants at an exercise price of 76p per Ordinary Share. The issued share capital of the Company immediately following completion of the Placing and the exercise of warrants and at 31 December 2020, was 84,068,923 Ordinary Shares of £0.002 each (December 2019: 69,583,077 Ordinary Shares of £0.002 each).

All Ordinary Shares rank pari passu in all respects including voting rights and the right to receive all dividends and other distributions, if any, declared or made or paid in respect of Ordinary Shares.

Reserves

Share premium account: This reserve records the amount above the nominal value received for shares sold, less transaction costs.

Capital redemption reserve: This reserve records the nominal value of shares repurchased by the Company.

25.   Commitments and contingencies

There are no material capital commitments, financial commitments or contingent liabilities at the balance sheet date not provided for in these financial statements. 

26.   Related parties

At 31 December 2020 amounts owed to/from related parties was £Nil (2019: £Nil) by the Group. The remuneration of key management and personnel and details of directors' emoluments are shown in note 8.

No related party transactions occurred during the year.

27.   Ultimate controlling party

The Company is controlled by its shareholders. There is no one party which is the ultimate controlling party of the Group and Company.

28.   Capital risk management

The group's objectives when managing capital are to safeguard the group's ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.  In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt/net funds divided by total equity.

Net debt is calculated as total borrowings (current and non-current) as shown in the group balance sheet less cash and cash equivalents.

The gearing ratios at 31 December were as follows: