The directors present the strategic report for the year ended 31 December 2023.
2023 was a successful year of growth for the Paragraf group. The board are pleased with the company’s progression, along with its expected financial position at the year end.
In February the Company moved into its new Huntingdon premises on the completion of its office fit out. This saw the relocation of non-laboratory based teams take up residence in the new facility. Work started on the build of manufacturing space and continues at the year end with expected completion in the middle of 2024. Part of this work involves key infrastructure of bringing on site a new 3MVA electricity supply to power the required capacity. Delivery was also taken of several key pieces of front end of line process equipment that will enable increased production capacity.
April saw the acquisition of Cardea Bio Inc, a biosensing company based in San Diego, California. This transaction enabled the expansion of the molecular sensor product offering and our global reach through expert know how, patents and a US base of operations. Dedication from the Paragraf & Cardea Bio teams delivered a structured plan with successful technology sharing and operational integration completed by the end of the summer, being finalised with a rebranding and company name change to Paragraf USA Inc.
Success was seen through the year via various awards and recognitions. Paragraf was named the Business of the Year at the Business Weekly annual awards and was a finalist in the Royal Academy of Engineering’s prestigious MacRobert Award; CEO Simon Thomas was named as one of WIRED magazine’s Trailblazers; and Paragraf was listed as one of Bloomberg’s 25 UK startups to watch and featured in several mainstream publications such as The New York Times, The Observer, Bloomberg, along with vlogs in partnership with The London Stock Exchange, The ICAEW and the European Magnetics Field Laboratory. These activities are enthusiastically supported by a cross section of employees keen to get in front of the camera and proudly show off their work.
Technology progression continued, with commercially led advancements made across all technology platforms; magnetic, current and position sensors; molecular sensors and solid-state devices. Some of this progression has been supported through grant funding from Innovate UK.
During the year key hires were made to bring on board Dr Andrew McInnes as Executive Materials Director and Mark Davis as Biosensor Director. These hires have enabled us to accelerate progression in these areas. The Company delivered a successful internship program, taking our first overseas interns from MIT, in total offering six summer placements and four year-long sandwich placements. We have supported two college students with long-term course-required work experience in business administration.
During the year, as a result of internal development and acquisition, we increased our number of granted patents granted from 58 to 128, and the number of pending patents from 106 to 127. The number of patent families grew from 45 to 60. Patents cover all our main technology streams of sensors, electronic devices and our USP of graphene growth. We finished the year with 38 registered Trademarks and 13 trademark applications.
During the year the Company launched its ESG policy and objectives focusing on environmental management, diversity & social mobility, and corporate governance and compliance. Our objectives are aligned to our Company values along with the UN’s Sustainable Development (SDG) goals.
Company spend was within planned budget, ensuring our series B runway was maintained and therefore providing us with the resources to deliver our planned milestones. Revenues have increased, through the sale of engineering samples and non-recurring engineering (NRE) projects.
The management of the business and the execution of Paragraf’s business strategy are subject to several risks which are recorded, reviewed, and considered in the company’s Context of the Organisation (COTO) business risk management log. The directors consider the following risks to generate the greatest threats to the company, these are mitigated against by the implementation of specific tailored strategies.
Risk | Mitigation strategies |
Business financing | Investment round closing quarter 3 2024, to support near-term expenditure and manufacturing expansion plans. Monthly reviews of financial performance KPI’s completed to monitor business financing. |
Commercial traction | Focus is made on high priority product releases which align to confirmed customer demands, with new products planned for release from quarter 2 2024. |
Production scaling to meet demand | Construction of phase 1 of production facility on target to complete quarter 3 2024. |
The directors’ goals are to:
Continue commercial traction growth to increase product sales.
Scale business to support product manufacturing in line with sales growth.
Expand product range enabling current market share increase and new market entry.
These goals are disseminated into department, team, and individual objectives. The company reviews its position against these objectives through monthly KPI reporting, which is led by the management team, covering technical project progression, cash runway, budget deviation and revenues.
Going forward Paragraf will continue to be committed to materially transforming electronics through the development of high purity graphene, and other two-dimensional material, products that will facilitate massive improvements in the performance of technologies across all aspects of life. For 2024 this will be demonstrated through the delivery of commercial success and the capacity for high volume manufacturing.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 December 2023.
The results for the year are set out on page 9.
No ordinary or preference dividends were paid, the directors do not recommend payment of a final dividend.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The group maintains insurance policies on behalf of all the directors against liability arising from negligence, breach of duty and breach of trust in relation to the group.
The group's current policy concerning the payment of trade creditors is to follow the CBI's Prompt Payers Code (copies are available from the CBI, Centre Point, 103 New Oxford Street, London WC1A 1DU).
The group's current policy concerning the payment of trade creditors is to:
settle the terms of payment with suppliers when agreeing the terms of each transaction;
ensure that suppliers are made aware of the terms of payment by inclusion of the relevant terms in contracts; and
pay in accordance with the company's contractual and other legal obligations.
Trade creditors of the group at the year end were equivalent to 50 day's purchases, based on the average daily amount invoiced by suppliers during the year.
The Series B runway is expected to run until quarter 3 2025, therefore at year-end all group funds are held in instant access accounts across three financial institutions, for which we regularly check their bank ratings. There is risk to the group that cash may be lost through the collapse of a financial institution, the impact of which would decrease our runway. By spreading funds across financial institutions this risk is reduced.
The group continues its research into the three product streams of magnetic sensors, molecular sensors and solid-state devices. The acquisition of Cardea Bio Inc has accelerated research and development in molecular sensors with the expectation of an accelerated product launch in 2024. Working with customer and partners the group continues its R&D program in the other product streams.
The group completed an investment funding close in 2024, providing a runway into 2025.
Work on the first phase of the Huntington manufacturing facility is continuing, with an expected completion date in the summer. This will bring online the world’s first 2D materials foundry, enabling Paragraf to deliver at scale to meet customer demands.
Additionally, at the start of quarter 2 Paragraf launched its first products available to purchase through an online webstore. The products included a graphene field effect transition which is used for molecular sensing along with a supporting breakout board.
The auditor, Saffery LLP, is deemed to be reappointed under section 487(2) of the Companies Act 2006.
Details of the Group's financial risk management objectives and policies are disclosed in the Strategic Report as permitted by s414c(11) of the Companies Act.
We have audited the financial statements of Paragraf Limited (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2023 which comprise the group statement of comprehensive income, the group and parent company statement of financial position, the group and parent company statement of changes in equity, the group statement of cash flows and the group and parent company notes to the financial statements, including significant accounting policies.
The financial reporting framework that has been applied in their preparation is applicable law and UK adopted international accounting standards.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group's and parent company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual report other than the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit:
the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and parent company and their environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
the parent company financial statements are not in agreement with the accounting records and returns; or
certain disclosures of directors' remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the parent company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the group and parent company financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The specific procedures for this engagement and the extent to which these are capable of detecting irregularities, including fraud are detailed below.
Identifying and assessing risks related to irregularities:
We assessed the susceptibility of the group and parent company’s financial statements to material misstatement and how fraud might occur, including through discussions with the directors, discussions within our audit team planning meeting, updating our record of internal controls and ensuring these controls operated as intended. We evaluated possible incentives and opportunities for fraudulent manipulation of the financial statements. We identified laws and regulations that are of significance in the context of the group and parent company by discussions with directors and by updating our understanding of the sector in which the group and parent company operate.
Laws and regulations of direct significance in the context of the group and parent company include The Companies Act 2006, and UK Tax legislation as well as similar laws and regulations prevailing in each country in which we identified a significant component.
Audit response to risks identified:
We considered the extent of compliance with these laws and regulations as part of our audit procedures on the related financial statement items including a review of group and parent company financial statement disclosures. We reviewed the parent company’s records of breaches of laws and regulations, minutes of meetings and correspondence with relevant authorities to identify potential material misstatements arising. We discussed the parent company’s policies and procedures for compliance with laws and regulations with members of management responsible for compliance.
During the planning meeting with the audit team, the engagement partner drew attention to the key areas which might involve non-compliance with laws and regulations or fraud. We enquired of management whether they were aware of any instances of non-compliance with laws and regulations or knowledge of any actual, suspected or alleged fraud. We addressed the risk of fraud through management override of controls by testing the appropriateness of journal entries and identifying any significant transactions that were unusual or outside the normal course of business. We assessed whether judgements made in making accounting estimates gave rise to a possible indication of management bias. At the completion stage of the audit, the engagement partner’s review included ensuring that the team had approached their work with appropriate professional scepticism and thus the capacity to identify non-compliance with laws and regulations and fraud.
As group auditors, our assessment of matters relating to non-compliance with laws or regulations and fraud differed at group and component level according to their particular circumstances. Our communications included a request to identify instances of non-compliance with laws and regulations and fraud that could give rise to a material misstatement of the group financial statements in addition to our risk assessment.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
A further description of our responsibilities is available on the Financial Reporting Council's website at: https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
During the year ended 31 December 2023, the Company generated a loss of £13,169,560 (2022 - £9,916,259 loss).
Paragraf Limited is a private company limited by shares incorporated in England and Wales. The registered office is 7-8 West Newlands, Somersham, Cambridgeshire, PE28 3EB.
The group consists of Paragraf Limited and all of its subsidiaries.
The principal activities of the group continue to be the research, development and production of graphene electronic devices.
The financial statements are prepared in sterling, which is the functional currency of the group. Monetary amounts in these financial statements are rounded to the nearest £.
The consolidated group financial statements consist of the financial statements of the parent company Paragraf Limited together with all entities controlled by the parent company (its subsidiaries) and the group’s share of its interests in joint ventures and associates.
All financial statements are made up to 31 December 2023. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the group.
All intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Subsidiaries are consolidated in the group’s financial statements from the date that control commences until the date that control ceases.
The Company has taken advantage of the exemption granted by Section 408 of the Companies Act 2006 from presenting its own Income Statement. The loss (2022: loss) generated by the Company is disclosed under the Company Statement on Financial Position.
In the prior year, the group took advantage of the exemption under Section 402 of the Companies Act 2006 not to prepare consolidated financial statements on the basis that none of the subsidiaries were required to be consolidated. The only subsidiary held at this point was Paragraf USA Inc which was excluded on the grounds of immateriality.
Therefore, this is the first year the group has prepared consolidated financial statements.
The group recognises revenue from the following major sources:
Product sales
Non-recurring engineering
The nature, timing of satisfaction of performance obligations and significant payment terms of the group's major sources of revenue are as follows:
Revenue represents sales to external customers at invoiced amounts less value added tax or local taxes on sales. Revenue is recognised at the point where control is considered to pass to the customer. With the application of the EXWorks Incoterm (EXW), this is typically on the shipment date once all performance obligations have been fulfilled. In all instances, the transaction price is agreed with the customer prior to transfer of goods on a stand-alone basis.
Non-recurring engineering design and research revenue is recognised as revenue over time on a percentage of completion method unless the outcome of the contract cannot be reliably determined, in which case contract revenue is only recognised to the extent of contract costs incurred that are recoverable. Foreseeable losses, if any, are provided for in full as and when it can be reasonably ascertained that the contract will result in a loss.
Revenue is invoiced in accordance with the terms of the contract which are written on an individual basis. At each reporting period, receivables are recognised for revenues yet to be invoiced or settled to the extent that it is highly probable that there will not be a significant reversal of the amounts accrued in the future. Where invoices are raised in excess of the value of the consideration recognised as revenue based on the stage of completion, deferred income balances are recorded that represent unfulfilled performance obligations. These performance obligations are expected to be fulfilled within a year of the reporting date.
An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.
The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is recognised in the income statement.
Assets under construction represent installation of offices at the company premises which is not yet complete or ready for use. Once in use they will be transferred to leasehold improvements and will be depreciated over the useful economic life of each asset.
Interests in subsidiaries, associates and jointly controlled entities are initially measured at cost and subsequently measured at cost less any accumulated impairment losses. The investments are assessed for impairment at each reporting date and any impairment losses or reversals of impairment losses are recognised immediately in profit or loss.
Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership to another entity.
The group recognises financial debt when the group becomes a party to the contractual provisions of the instruments. Financial liabilities are classified as either 'financial liabilities at fair value through profit or loss' or 'other financial liabilities'.
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary
course of business from suppliers. Amounts payable are classified as current liabilities if payment is due
within one year or less. If not, they are presented as non-current liabilities. Trade payables are
recognised initially at transaction price and subsequently measured at amortised cost using the
effective interest method.
Other financial liabilities, including borrowings, trade payables and other short-term monetary liabilities, are initially measured at fair value net of transaction costs directly attributable to the issuance of the financial liability. They are subsequently measured at amortised cost using the effective interest method. For the purposes of each financial liability, interest expense includes initial transaction costs and any premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.
Financial liabilities are derecognised when, and only when, the group’s obligations are discharged, cancelled, or they expire.
The component parts of compound instruments issued are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangement. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for a similar non-convertible instrument. This amount is recorded as a liability on an amortised cost basis using the effective interest method until extinguished upon conversion or at the instrument's maturity date.
Equity instruments issued by the parent company are recorded at the proceeds received, net of direct issue costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer payable at the discretion of the company.
The tax expense represents the sum of the tax currently payable and deferred tax.
Equity-settled share-based payments are measured at fair value at the date of grant by reference to the fair value of the equity instruments granted using the agreed valuation with HMRC and the Black Scholes model. The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the estimate of shares that will eventually vest. A corresponding adjustment is made to equity.
When the terms and conditions of equity-settled share-based payments at the time they were granted are subsequently modified, the fair value of the share-based payment under the original terms and conditions and under the modified terms and conditions are both determined at the date of the modification. Any excess of the modified fair value over the original fair value is recognised over the remaining vesting period in addition to the grant date fair value of the original share-based payment. The share-based payment expense is not adjusted if the modified fair value is less than the original fair value. Cancellations or settlements (including those resulting from employee redundancies) are treated as an acceleration of vesting and the amount that would have been recognised over the remaining vesting period is recognised immediately.
At inception, the group assesses whether a contract is, or contains, a lease within the scope of IFRS 16. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Where a tangible asset is acquired through a lease, the group recognises a right-of-use asset and a lease liability at the lease commencement date. Right-of-use assets are included within property, plant and equipment, apart from those that meet the definition of investment property.
Right of use assets
The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date plus any initial direct costs and an estimate of the cost of obligations to dismantle, remove, refurbish or restore the underlying asset and the site on which it is located, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of other property, plant and equipment. The right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
Lease liability - initial measurement
The lease liability is initially measured at the present value of the lease payments that are unpaid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the group's incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise fixed payments, variable lease payments that depend on an index or a rate, amounts expected to be payable under a residual value guarantee, and the cost of any options that the company is reasonably certain to exercise, such as the exercise price under a purchase option, lease payments in an optional renewal period, or penalties for early termination of a lease.
Lease liability - remeasurement
The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in: future lease payments arising from a change in an index or rate; the group's estimate of the amount expected to be payable under a residual value guarantee; or the group's assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
Low value assets and short term
The group has elected not to recognise right-of-use assets and lease liabilities for short-term leases of machinery that have a lease term of 12 months or less, or for leases of low-value assets including IT equipment. The payments associated with these leases are recognised in profit or loss on a straight-line basis over the lease term.
Research and development expenditure
If it is not possible to distinguish the research phase of an internal project from the development phase, then all expenditure is treated as if it were incurred in the research phase. Research expenditure is written off against profits in the year in which it is incurred. Identifiable development costs are recognised as an intangible asset only if the company can demonstrate all of the following:
a. the technical feasibility of completing the intangible asset so that it will be available for use or sale.
b. the intention to complete the intangible asset and use or sell it.
c. the ability to use or sell the intangible asset.
d. how the intangible asset will generate probable future economic benefits.
e. the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
f. an ability to measure reliably the expenditure attributable to the intangible asset during its development.
In the current year, the Group has adopted the following new IFRSs (including amendments thereto) and IFRIC interpretations, that became effective for the first time:
Their adoption has not had any material impact on the disclosures or amounts reported in the financial statements.
At the date of authorisation of these financial statements, the following standards and interpretations relevant to the Group and which have not been applied in these financial statements, were in issue but were not yet effective:
There have been small amendments to other IFRS in issue however, the Directors anticipate that the adoptions of these standards and interpretations in future periods will have no material impact on the financial statements of the company.
In the application of the company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are outlined below.
In the year, Paragraf acquired Cardea Bio Inc (“Cardea”). Cardea is an early stage development company which holds a number of patents and associated know-how, which are considered to be critical to the ongoing development of Paragraf.
Management considered the definition of a business combination in accordance with IFRS 3 and in particular the optional concentration test under IFRS 3.B7B. A key judgement was made that the value of Cardea as a whole is substantially equal to the value of the patents and developed technology owned by Cardea; this judgement reflects the absence of other non-monetary assets and the fact that Cardea does not have any existing trading revenues. As a result of this judgement, management determined that the concentration test was met, specifically that substantially all of the fair value of the gross assets acquired is concentrated in the patents and development technology, and that this explained the value agreed for the consideration paid for Cardea.
As a result of this test being met, management have accounted for this transaction as an asset acquisition.
Had this judgement not have been made, Cardea would have met the definition of a business under IFRS 3 and been accounted for as a business combination. Therefore goodwill would have arisen on the acquisition, and required the determination of fair values associated with the acquisition. It is likely, but not a foregone conclusion, that the fair value determined for patents and developed technology would have approximated to the consideration paid for Cardea. However, material transaction costs associated with the acquisition would have been expensed to the Income Statement, whereas using the concentration test these are capitalised as a cost of the intangible asset acquired and amortised over the associated estimated useful life of that asset.
At the end of the reporting period management assesses whether any indication of impairment exists in relation to any assets held at the balance sheet date.
If there is any indication that an asset may be impaired, the recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash-generating unit (CGU) to which the asset belongs.
In management's view, the Paragraf Group CGU has been identified as the smallest identifiable unit for this purpose due to its generation of largely independent cash flows and the presence of an active market for its products.
In accordance with IFRS 16 the cost of the right-of-use asset includes an estimate of costs to be incurred in dismantling and removing the underlying asset and restoring it to the condition required by the terms and conditions of the lease, known as decommissioning.
Determining the level of costs which may be incurred in relation to decommissioning is a key estimate made by management. A provision has been calculated as 20% of laboratory build and service installation costs on a rolling basis and is recorded as a non-current liability on the Statement of Financial Position. This rate has been determined using the professional judgement and experience of management.
At 31 December 2023 the carrying amount of the provision was £64k (2022: £186k).
The acquisition of a subsidiary during the year was effected in part via share for share exchange which in turn required management to assess the fair value of those shares. There is significant estimation uncertainty in ascribing fair value to shares in an unlisted and pre-revenue business. Management's estimate was informed by other valuation exercises undertaken and using the support of third party experts.
The average monthly number of persons (including directors) employed by the group during the year was:
Their aggregate remuneration comprised:
The number of directors for whom retirement benefits are accruing under defined contribution schemes amounted to 1 (2022 - 1).
The charge for the year can be reconciled to the loss per the income statement as follows:
Deferred tax balances at the reporting date are measured at 25% (2022 - 25%).
The company has recognised deferred tax assets and liabilities, which are offset on the grounds that these unwind against each other and are with the same tax authority. Deferred tax assets are recognised on losses to the extent that these cancel out net liabilities arising on other timing differences only. The Directors do not consider there is sufficient certainty around the timing of future profits to recover tax losses for any further deferred tax asset to be recognised in respect of these losses.
The total value of deferred tax assets and liabilities as at 31 December 2023 is £7.8m (2022 £5.5m) resulting in a recognised deferred tax balance of nil. Unrecognised deferred tax assets total £10.1m (2022: £6.6m).
As detailed in the critical accounting estimates and judgements section the concentration test under IFRS 3.B7B has been applied and met. As a result, management have accounted for the acquisition of Cardea Bio Inc as an asset acquisition.
This gives rise to an addition of developed technology on consolidation comprising of the amount of consideration allocated to technology and know-how acquired from the purchase of Cardea Bio Inc and directly attributable transaction costs.
Management have reviewed the intangible assets for impairment at the balance sheet date. They have determined that it is not possible to estimate the recoverable amount of the individual intangible assets held. As a result, management have determined the recoverable amount of the cash-generating unit (CGU) to which these assets belong. That being the enlarged Paragraf group as noted in the critical accounting estimates and judgements section of these statements.
All right-of-use assets recognised under IFRS 16 are considered to be under one class, leasehold property. All leases have terms ending on 31 January 2029 or 1 November 2037 and are for properties used in the company's operations. An assumption has been made that no break clauses will be exercised until this date and is disclosed as a critical judgement in Note 3.
Details on the recognition and measurement of right-of-use assets are disclosed as accounting policies in Note 1.
During the year the lease of one of the right of use assets was renegotiated, as a result the right of use asset cost and accumulated depreciation includes modification adjustments to reflect the modified lease liability in relation to the revised lease agreement.
Within the plant and equipment category are assets with a value of £4,939k (2022: £442k) which are not yet in use and therefore not depreciated.
Details of the company's subsidiaries at 31 December 2023 are as follows:
Registered office addresses (all UK unless otherwise indicated):
Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions.
The company has implemented policies that require maintaining appropriate credit limits on all customers. The company's credit risk is primarily attributable to its trade receivables balance. The amounts presented in the Statement of Financial Position are net of allowances for doubtful debts.
The company does not have significant concentrations of credit risk. The deposits with banks are only held with reputable financial institutions for which credit worthiness is reviewed through the use of industry standard credit scores. All customers that are not Government Institutes or Universities are credit checked by obtaining a credit report from a reputable credit agency, from which credit limits and terms are set. Regular reviews for repeat customers are undertaken.
The company applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. Owing to a limited customer base over which Management maintain high visibility, the expected loss allowance at the reporting date is determined to be immaterial. On this basis, no allowance for doubtful debts has been recognised.
The directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value.
Except as detailed below, the carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the group's maximum exposure to credit risk.
The directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value.
Allowances for receivables represent bad and doubtful debts from customers, which are deemed unlikely to be recovered.
The directors consider that the carrying amounts of financial liabilities carried at amortised cost in the financial statements approximate to their fair values.
The following table details the remaining contractual maturity for the group's financial liabilities with agreed repayment periods. The contractual maturity is based on the earliest date on which the group may be required to pay.
The company manages liquidity risk by maintaining sufficient cash to enable it to meet its operational requirements. Operating cash flows are actively managed with annual cash flow forecasts updated as required and subject to board review.
The net proceeds received from the issue of the convertible loan notes have been split between the financial liability element and an equity component, representing the fair value of the embedded option to convert the financial liability into equity as follows:
The liability component is measured at amortised cost, and the difference between the carrying amount of the liability at the date of issue and the amount reported in the statement of financial position represents the effective interest rate less interest paid to that date.
The effective rate of interest is 6%.
The equity component of the convertible loan notes has been credited to the equity reserve.
The company's operations expose it to a variety of financial risks that include the effects of foreign exchange risk, credit risk, liquidity risk and interest rate risk. The company's overall risk management programme focuses on the unpredictability of the markets in which it operates and seeks to minimise associated volatility of the company's financial performance. The company does not use derivative financial instruments to manage interest rate costs and as such, no hedge accounting is applied.
Foreign exchange risk
The company purchases products from international sources and is exposed to foreign exchange risk arising from various currency exposure, primarily with respect to the US Dollar and the Euro. Foreign exchange risk arises from future commercial transactions and recognised trade payables. The company has implemented policies to monitor movements in the exchange rate and buying decisions are timed to minimise the impact of foreign exchange gains and losses.
Interest rate cash flow risk
The company has both interest bearing assets and interest bearing liabilities. Interest bearing assets comprise only cash balances which earn interest at floating rates, interest bearing liabilities include preferred shares.
Disclosure of credit risk, liquidity risk and capital risk management is covered in the proceeding notes.
Lease liabilities are classified based on the amounts that are expected to be settled within the next 12 months and after more than 12 months from the reporting date, as follows:
Total cash outflows for leases during the reporting period was £326,368 (2022: £125,000).
All relevant leases recognised under IFRS 16 have lease terms ending on 31 January 2025, 31 January 2029 or 1 November 2037 and are for properties used in the company's operations. An assumption has been made that no break clauses will be exercised until this date and is disclosed as a critical judgement in Note 3.
Lease liabilities are calculated by discounting future lease payments to their present value by the company's incremental borrowing rate, which is a rate of interest that the company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain a value similar to the right-of-use asset. This rate is determined as 8% plus the Bank of England base rate at the date of measurement.
The company operates approval EMI and CSOP share option schemes for the benefit of all UK employees, an ISO share option scheme for the benefit of all US employees and an unapproved share option scheme for any employees who are not able to benefit from an approved scheme. Granted options vest over a 5 year period. The first vesting date is 12 months from date of grant, at which 20% of granted options can be exercised, and every 6 months following, at which 10% of granted options can be exercised. The options are accounted for as equity settled share based payment transactions.
The following table illustrates the number and weighted average exercise prices of, and movements in, share options during the year:
Share capital contains amounts subscribed for share capital at nominal value.
Ordinary Shares
Each ordinary share is entitled to one vote in any circumstances. Each ordinary share is entitled pari passu to dividend payments or any other distribution. Each ordinary share is entitled pari passu to participate in a distribution arising from a winding up of the company.
Preferred 1 and 2 shares
1. The company will, with the approval of the board and the consent of a preferred investor majority, pay in respect of each Preferred Share, a cash preferential dividend at the annual rate of 8 per cent of the issue price per Preferred Share. Such dividend shall be paid when a dividend or distribution on any Shares is to be declared by the board. If the company has insufficient profits to pay in full on the due date any preference dividend, then it will pay it to the extent that it is then able to do so. Ordinary shares shall not be entitled to such a cash preferential dividend.
2. Subject to the below, on a distribution of assets on a liquidation or a return of capital, the surplus assets of the company remaining after payment of its liabilities shall be applied:
(a) first, in paying a sum equal to £x plus £100 (where x is an amount equal to the aggregate issue price of all the Preferred Shares in issue), to be distributed as to 0.0001% per cent to the holders of Ordinary Shares (pro rata according to the number of Ordinary Shares held), with the balance to the holders of the Preferred Shares, up to the issue price of each Preferred Share. The available assets shall be distributed to the holders of the Preferred Shares and the Ordinary Shares pro rata to the amounts they would have received under this section; and
(b) the balance of the surplus assets (if any) shall be distributed as to 0.0001% per cent to the holders of the Preferred Shares, with the balance distributed among the holders of the Ordinary Shares (both pro rata to the number of shares held).
If on a distribution of assets as above, holders of the Preferred Shares would be entitled to a greater pro rata portion per share of such assets if such shares were converted to Ordinary Shares, the holder shall be entitled to receive such amounts as if they had been converted. A holder of Preferred Shares shall be entitled, on notice to the company, to require conversion into Ordinary Shares of all their fully paid Preferred Shares, at any time and provided that the holder may state that conversion is conditional upon certain events.
3. Preferred Shares shall automatically convert into Ordinary Shares on the date of a notice given by the holders of a majority of the Preferred Shares. Preferred Shares shall automatically convert into Ordinary Shares on an IPO.
Growth shares
Growth shares have no voting rights and no entitlements to dividends. They do participate on acquisition or liquidation. In the opinion of the directors the fair value of growth shares is not considered to be material. Therefore, no IFRS 2 charge has been recognised in the financial statements.
During the year the following issues of share capital were made:
4,250 share options with nominal value 0.1p were exercised.
372,745 growth shares with nominal value of 0.1p were issued to two employees.
822,457 ordinary shares with nominal value 0.1p were issued as part consideration for an acquisition.
The merger reserve at 31 December 2023 arose from a share for share exchange as part of the consideration for the acquisition of Paragraf USA Inc (formerly Cardea Bio Inc).
At 31 December 2023 the group had capital commitments as follows:
On 23 February investment funding of £14,491,949 was completed, through the issue of 754,789 preferred 3 shares over 2 tranches. With tranche 1 amounting to £7,245,984 received on signing and the remaining balance scheduled for receipt by the end of quarter 2.
Additionally, the £5,000,000 convertible loan note issued in 2023 (shown in note 20) was converted on 21 February 2024 through the issue of 338,498 preferred 3 shares.
Management regard the capital structure of the company to consist of the ordinary and preferred shares in issue.
The company's objectives when managing capital are to safeguard the company's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The company keeps the capital structure under review through the use of monthly financial forecasts. These forecasts, including a detailed run rate forecast, provide the Board with an assessment of the company's capital adequacy for the period under review. Management consider the current management of capital to be satisfactory.
The remuneration of key management personnel, including directors, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.
In addition to the above, fees of £134,192 were awarded to other members of key management personnel in respect of services provided to the company.
As of the reporting date, the entity does not have an ultimate controlling party.
Transaction costs directly attributable to the acquisition of subsidiary amounting to £446,344 were expensed to the profit or loss in the prior year in accordance with IFRS 3:53. However, as the concentration test was subsequently met, the acquisition of the subsidiary has been accounted for as an asset acquisition as detailed in the critical accounting estimates and judgements section of these statements.
As such, the transaction falls under the scope of IAS 38, whereby any directly attributable expenditure on preparing the asset for its intended use are incorporated into the cost of the asset acquired. Therefore, a restatement was required to ensure these costs were included in the cost of the investment in subsidiary in the parent company statement of financial position.
This is the first year that the group has prepared consolidated financial statements. As a result, there has been no restatement of the group statement of financial position or income statement on this basis.
The average monthly number of persons (including directors) employed by the company during the year was:
Their aggregate remuneration comprised:
All right-of-use assets recognised under IFRS 16 are considered to be under one class, leasehold property. All leases have terms ending on 31 January 2029 or 1 November 2037 and are for properties used in the company's operations. An assumption has been made that no break clauses will be exercised until this date and is disclosed as a critical judgement in Note 3.
Details on the recognition and measurement of right-of-use assets are disclosed as accounting policies in Note 1.
During the year the lease of one of the right of use assets was renegotiated, as a result the right of use asset cost and accumulated depreciation includes modification adjustments to reflect the modified lease liability in relation to the revised lease agreement.
Within the plant and equipment category are assets with a value of £4,939k (2022: £442k) which are not yet in use and therefore not depreciated.
Details of the company's principal operating subsidiaries are included in note 14.
During 2023 Paragraf Inc. closed and the name was transferred to Paragraf USA Inc (Formely Cardea Bio Inc). As such, the carrying amount of the investment in this company was disposed of in the year.
The directors consider that the carrying amounts of financial liabilities carried at amortised cost in the financial statements approximate to their fair values.
The net proceeds from the issue of the convertible loan notes have been split between the financial liability element and an equity component, representing the fair value of the embedded option to convert the financial liability into equity as follows:
The liability component is measured at amortised cost, and the difference between the carrying amount of the liability at the date of issue and the amount reported in the statement of financial position represents the effective interest rate less interest paid to that date.
The effective rate of interest is 6%.
The equity component of the convertible loan notes has been credited to the equity reserve.
Lease liabilities are classified based on the amounts that are expected to be settled within the next 12 months and after more than 12 months from the reporting date, as follows:
The fair value of the company's lease obligations is approximately equal to their carrying amount.
Total cash outflows for leases during the reporting period was £278,750 (2022: £125,000).
All relevant leases recognised under IFRS 16 have lease terms ending on 31 January 2029 or 1 November 2037 and are for properties used in the company's operations. An assumption has been made that no break clauses will be exercised until this date and is disclosed as a critical judgement in Note 3.
Lease liabilities are calculated by discounting future lease payments to their present value by the company's incremental borrowing rate, which is a rate of interest that the company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain a value similar to the right-of-use asset. This rate is determined as 8% plus the Bank of England base rate at the date of measurement.
Decommissioning provision
This provision is the discounted present value of estimated future costs to be incurred in dismantling and removing modifications made to leasehold properties occupied by the company at 1 Tower Road and restoring these to the conditions required by the terms and conditions of the respective lease. The provision has been calculated as 20% of laboratory build and service installation costs on a rolling basis. This rate has been determined using the professional judgement and experience of Management. The relevant lease has a lease term ending 1 November 2037.
Dilapidation provision
In accordance with the lease for units 7&8 and 17/18 West Newlands Road, 6 months before the end of the lease the properties must be decorated. Management have taken a best estimate of the future expenditure, based on current property condition, and typical costs incurred with other decoration projects. The provision reflects the present value of expenditure to settle this obligation which will fall due between 1 August 2028 and 31 January 2029.