notes to the financial statements 1–7
1. General information
Renovo Group plc is a Company incorporated on 18 April 2005 in the UK under the Companies Act 1985. The address of the registered office is given in the Advisers section. The nature of the Group’s operations and its principal activities are set out in the Chief Executive Officer’s Review and Financial Review.
These financial statements are presented in Sterling because this is the currency of the primary economic environment in which the Group operates.
At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective:
| Amendments to IFRS 1 | Additional Exemptions for First-time Adopters |
| IFRS for SMEs | IFRS for Small and Medium-sized Entities |
| Amendments to IFRS 2 | Group Cash-settled Share-based Payment Transactions |
| Improvements to IFRSs 2009 | Improvements to IFRSs 2009 |
| Amendments to IFRS 7 | Improving Disclosures about Financial Instruments |
| IFRS 1 | First-time Adoption of International Financial Reporting Standards |
| IFRS 3 | Business Combinations |
| Amendments to IAS 23 | Borrowing Costs |
| Amendments to IAS 1 | Presentation of Financial Statements |
| Amendments to IAS 27 | Consolidated and Separate Financial Statements |
| Amendments to IFRS 2 | Vesting Conditions and Cancellations |
| Amendments to IAS 32 and IAS 1 | Puttable Financial Instruments and Obligations Arising on Liquidation |
| Amendments to IFRS 1 and IAS 27 | Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate |
| Improvements to IFRSs 2008 | Improvements to IFRSs 2008 |
| IFRS 8 | Operating Segments |
| IFRIC 15 | Agreements for the Construction of Real Estate |
| IFRIC 17 | Distributions of Non-cash Assets to Owners |
| IFRIC 18 | Transfers of Assets from Customers |
The Directors anticipate that the adoption of these standards and interpretations in future periods will have no material impact on the financial statements of the Group.
2. Significant accounting policies
Basis of accounting
The financial statements have been prepared in accordance with IFRSs. The financial statements have also been prepared in accordance with IFRSs adopted for use in the European Union and therefore comply with Article 4 of the European Union IAS Regulation.
Renovo Group plc is a research and development based business with no currently marketed products. It expects to incur further losses as it continues to develop its portfolio of candidate products and related technology and may require additional financing for the future operation of its business, including further equity funding as appropriate, before it reaches sustained profitability.
The Group is well funded with £65.3 million in cash and investments as at 30 September 2009 on which it relies to meet its pending commitments. Having considered reasonably possible variations to the Group’s forecasts the Directors confirm that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they have adopted the going concern basis in preparing the financial statements. The financial statements have been prepared on the historical cost basis.
Representation of prior year accounts
The principal accounting policies adopted are set out below and have been applied consistently in the current and prior years except for the presentation of the research and development costs in the income statement. Previously, costs associated with revenue generating activities were disclosed as cost of sales and other research and development costs shown separately as operating costs. The Directors consider this presentation to be unhelpful to the users of the financial statements and have therefore incorporated a subtotal of total research and development costs and removed the previous subtotal of gross profit. The income statement for the prior year had accordingly be represented: all amounts previously reported as ‘cost of sales’ which represent cost recharged in full or in part are now under the heading ‘research and development – revenue related’ and all amounts previously reported as research and development within operating costs are now under the heading ‘research and development – development and discovery programmes’.
Basis of consolidation
On 27 April 2005, the Company became the legal parent of Renovo Limited in a share for share transaction. Due to the relative value of the companies, the former Renovo Limited shareholders became the shareholders of Renovo Group plc. Further, the Company’s continuing operations and Executive management were those of Renovo Limited. Accordingly, the substance of the combination was that Renovo Limited acquired Renovo Group plc in a reverse acquisition.
Under the requirements of the Companies Act 2006, it would normally be necessary for the Company’s consolidated accounts to follow the legal form of the business combination. In that case the pre-combination results would be those of Renovo Group plc and its subsidiary undertakings, which would exclude Renovo Limited. Renovo Limited would then be brought into the Group from 27 April 2005. However, this would portray the combination as an acquisition of Renovo Limited by Renovo Group plc and would, in the opinion of the Directors, fail to give a true and fair view of the substance of the business combination. Accordingly, the Directors have adopted reverse acquisition accounting as the basis of consolidation in order to give a true and fair view.
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 30 September each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. All intra group transactions, balances, income and expenses are eliminated.
In accordance with Section 408 of the Companies Act 2006, no profit and loss account is presented for the Company.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for services provided in the normal course of business, net of discounts, VAT and other sales related taxes. The principal components of the Group’s turnover and their respective accounting treatments are as follows:
Licensing and development fees
Licensing and development fees represent revenues derived from product out-licensing agreements and from contract research and development agreements.
Initial licence fees received in connection with product out-licensing agreements, even where such fees are non-refundable and not creditable against future royalty payments, are deferred and recognised by reference to the total anticipated development costs required to reach the next milestone.
Revenue from contract research and development agreements is recognised as the services are performed.
Milestone payments
During the term of certain research and development agreements and licensing agreements, the Group receives non-refundable milestone payments as certain technical targets are achieved. Revenue is recognised upon achievement of research and development milestones.
The Group also receives non-refundable clinical milestones when certain targets are achieved during the clinical phases of development, such as the submission of clinical data to a regulatory authority. These clinical milestones are recognised when receivable (i.e. on completion of the relevant phase). If milestone payments are creditable against future royalty payments, the milestones are deferred and released over the period in which the royalties are anticipated to be paid.
Interest income
Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.
Grants
Grants from the Government are recognised at their fair value where there is reasonable probability that the grant will be received and the Group will comply with all attached conditions. Government grants relating to property, plant and equipment are treated as deferred income and released to profit and loss over the expected useful lives of the assets concerned.
Foreign currencies
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income statement for the period.
Research and development expenditure
Expenditure on research activities is recognised as an expense in the period in which it is incurred. Costs incurred on in-process development projects will be recognised as intangible assets when it is probable that the project will be a success considering its commercial and technological feasibility and cost can be measured reliably. Other development expenditures are recognised as an expense as incurred.
Patents and trademarks
Patents and trademarks in respect of research activities are measured at purchase cost and are recognised as expenditure in the period in which they are incurred.
Taxation
Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted at the balance sheet date.
Research and development tax credits are claimed where possible and recognised on an accruals basis.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Deferred tax is calculated at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on the tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Deferred tax is measured on a non-discounted basis.
Pension costs
The Group participates in a money purchase pension scheme. The amount charged to the income statement in respect of pension costs and other post-retirement benefits is the amount of contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the balance sheet.
Employee benefit trust
The Group operates an employee benefit trust as part of its incentive plans for all employees. All assets and liabilities within the trust are recorded in the balance sheet as assets and liabilities of Renovo Group plc until such time that the assets are awarded to the beneficiaries. All income and expenditure of the trust is similarly brought into the results of the Group.
Operating leases
Rentals payable under operating leases are charged on a straight-line basis over the lease term of the relevant lease.
Property, plant and equipment
Fixtures and equipment are stated at cost less accumulated depreciation and any recognised impairment loss.
Depreciation is charged so as to write off the cost or valuation of assets over their estimated useful lives, using the straight-line method, on the following bases:
| Scientific equipment | 20% |
| Fixtures and fittings | 20% |
| Computers | 33.3% |
| Leasehold improvements | 16.7% |
Cash, cash equivalents and investments
Cash and cash equivalents comprise cash on hand and demand deposits and other short-term, highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Fixed term deposits with a maturity date of greater than three months are reported in the financial statements as investments.
Critical accounting judgements and key sources of estimation or uncertainty
In the preparation of the financial statements, the Board is required to make estimates and assumptions, in accordance with IFRSs, that affect the amounts reported as assets and liabilities, disclosure of contingent assets and liabilities as at the date of reporting the financial statements and the reported amounts of revenues and expenditure during the year. In the preparation of the consolidated financial statements, estimates and assumptions have been made by the Board concerning the fair value of share options, the estimated useful lives of fixed assets, accruals and provisions required, the carrying value of investments, capitalisation of research and development expenditure and other similar evaluations. Actual amounts that result could differ from those estimates.
Revenue recognition
The Group recognises revenue from licensing transactions over the period of any associated development agreement. The amount of revenue recognised is determined in accordance with the stage of completion of the development agreement determined by reference to the costs incurred as a proportion of the total costs expected to be incurred. In making their judgement the Directors consider inter alia, the detailed development plan and the total estimated cost of fulfilling that agreement.
Share-based payments
The Group has applied the requirements of IFRS 2 Share-based Payment. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested at 1 October 2005.
The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity‑settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the non market-based vesting conditions.
Fair value is measured by use of a Black-Scholes model. Management also measured fair value using a Binomial model but found that the relative proportions of options which are non-market performance based and market performance based resulted in an immaterial difference in the two calculations. As options are granted in future periods the basis used for measurement of fair value will be re-evaluated. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects on non-transferability, exercise restrictions and behavioural considerations.
Investments in subsidiaries
Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment. The Directors consider that the cost of investment in Renovo Limited is supported by the intellectual property owned by the subsidiary and the potential future income streams from it. The cost of share options issued to employees of a Group subsidiary have been capitalised as part of the investment in accordance with IFRIC 11 IFRS 2 – Group and Treasury Share Transactions.
3. Segmental analysis
All of the Group’s turnover and operating results arose in the UK from its principal activity. All net assets are in one geographical area, being the UK.
4. Loss for the year
Loss for the year has been arrived at after charging/(crediting):
|
2009 |
2008 |
|---|---|---|
Net foreign exchange losses/(gains) |
455 |
(130) |
Research and development costs |
21,625 |
23,658 |
Government grants |
(223) |
(86) |
Depreciation of property, plant and equipment |
792 |
482 |
Staff costs (see note 5) |
8,851 |
10,649 |
Fees payable to the Company’s auditors for the audit of the Company’s annual accounts |
5 |
5 |
Fees payable to the Company’s auditors and their associates for other services to the Group |
|
|
The audit of the Company’s subsidiaries pursuant to legislation |
32 |
32 |
TOTAL AUDIT FEES |
37 |
37 |
Tax services |
12 |
33 |
Other services |
17 |
17 |
TOTAL NON-AUDIT FEES |
29 |
50 |
TOTAL |
66 |
87 |
A description of the work of the Audit Committee is set out in the Audit Committee Report and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by auditors.
5. Staff costs
The average monthly number of employees (including Executive Directors) was:
|
2009 |
2008 |
|---|---|---|
Discovery and development |
81 |
86 |
Medical |
73 |
76 |
Administration |
17 |
18 |
|
171 |
180 |
Their aggregate remuneration comprised:
|
2009 |
2008 |
|---|---|---|
Wages and salaries |
6,611 |
7,713 |
Redundancy payments |
425 |
— |
Social security costs |
721 |
861 |
Other pension costs |
609 |
607 |
Share-based payment costs |
485 |
1,468 |
|
8,851 |
10,649 |
All of the Group’s remuneration is paid by a subsidiary undertaking with the exception of payments made to Non-executive Directors. Details of Directors’ remuneration is included in the Directors’ Remuneration Report.
6. Finance income
|
2009 |
2008 |
|---|---|---|
Interest on bank deposits maturing in one year or less |
2,610 |
5,056 |
7. Taxation
|
2009 |
2008 |
|---|---|---|
CURRENT TAX |
|
|
Research and development tax credits |
3,014 |
3,308 |
Adjustment in respect of prior years |
25 |
— |
TOTAL TAX CREDIT ON LOSS ON ORDINARY ACTIVITIES |
3,039 |
3,308 |
The credit for the year can be reconciled to the loss per the income statement as follows:
|
2009 |
2008 |
|---|---|---|
LOSS ON ORDINARY ACTIVITIES BEFORE TAX |
(20,182) |
(16,679) |
Tax on ordinary activities at standard UK corporation tax rate of 28% (2008: 29%) |
(5,651) |
(4,837) |
Effects of: |
|
|
Expenses not deductible for tax purposes |
224 |
421 |
Difference between capital allowances and depreciation |
119 |
(795) |
Research and development tax credits |
(596) |
83 |
Increase in tax losses to carry forward |
2,906 |
2,316 |
Share options exercised |
— |
(496) |
Prior year adjustment |
(25) |
— |
Deduction in respect of share options exercised in the year |
(16) |
— |
CURRENT TAX CREDIT FOR THE YEAR |
(3,039) |
(3,308) |
Deferred tax is provided as follows: |
|
|
Accelerated capital allowances |
870 |
989 |
Tax losses available |
(870) |
(989) |
|
— |
— |
No deferred tax asset has been recognised in respect of excess tax losses of £55.1 million (2008: £46.3 million) on the basis that it is not anticipated that these losses will be utilised in the foreseeable future.