Report on the audit of the financial statements
In our opinion:
- Arix Bioscience plc's Group financial statements and Company financial statements (the "financial statements") give a true and fair view of the state of the Group's and of the Company's affairs as at 31 December 2018 and of the Group's profit and cash flows for the year then ended;
- the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;
- the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 "Reduced Disclosure Framework", and applicable law); and
- the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Accounts (the "Annual Report"), which comprise: the Consolidated and Company Statements of Financial Position as at 31 December 2018; the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Cash Flows, and the Consolidated and Company Statements of Changes in Equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit and Risk Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors' responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC's Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC's Ethical Standard were not provided to the Group or the Company.
Other than those disclosed in the Note 5 to the financial statements of the Report and in the Report of the Audit and Risk Committee of the Audit and Risk Committee, we have provided no non-audit services to the Group or the Company in the period from 1 January 2018 to 31 December 2018.
Our audit approach
- Overall Group materiality: £2.70 million (2017: £1.46 million), based on 1% of net assets.
- Overall Company materiality: £2.31 million (2017: £1.45 million), based on 1% of net assets.
- We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
- We audited the Parent Company and the three significant subsidiaries of the Group, which together account for 127% of its profit before tax, and 99% of its net assets. The three significant subsidiaries subject to audit were Arix Bioscience Holdings Limited, Arix Capital Management Limited and Arthurian Life Sciences SPV GP Limited as they represent a significant portion of the Group income, profit before tax or net assets. In addition we have performed specified audit procedures over Arix Bioscience, Inc., which made a loss and is in a net liability position.
Key Audit Matters
- Valuation of unquoted investments (Group).
- Share-based payments expense (Group and Company).
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the Group and its industry, we identified that the principal risks of non-compliance with laws and regulations related to the UK regulatory principles, such as those governed by the Financial Conduct Authority, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the preparation of the financial statements such as the Companies Act 2006 and the UK tax legislation. We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inaccurate journal entries to increase the value of assets, and management bias in accounting estimates and judgemental areas of the financial statements such as the valuation of investments. Audit procedures performed by the Group engagement team included:
- Discussions with management, including consideration of known or suspected instances of non-compliance with laws and regulations and fraud;
- Understanding and evaluation of management's controls designed to prevent and detect irregularities;
- Reviewing the correspondence with regulators and legal advisers in so far as it related to non-compliance with laws and regulations and fraud;
- Reviewing relevant meeting minutes, including those of the Board of Directors and the Audit and Risk Committee;
- Designing audit procedures to incorporate unpredictability around the nature, timing and extent of our testing of expenses;
- Reviewing of tax returns submitted by the Group;
- Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation to valuation of investments (see related key audit matter below); and
- Identifying and testing journal entries, in particular any journal entries posted with unusual account combinations or posted by senior management.
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.
Key audit matters
Key audit matters are those matters that, in the auditors' professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.
|Key audit matter||How our audit addressed the key audit matter|
Valuation of unquoted investments
Refer to (Accounting Policies, note 11 and the Report of Audit and Risk Committee.
The fair value of the unquoted investments is £70.3m as at 31 December 2018. This is an area of focus due to the fact that unquoted investments ('investee entities') do not have readily determinable prices. The valuation methodology primarily used by the Group is based on the 'price of recent investment' or a 'milestone approach'. The price of recent investment approach refers to any investment in the investee entity that would give an indication of fair value. The milestone approach refers to monitoring the fair value of the investments for potential adjustments based on meeting certain milestones or performance targets. As such, the valuation of unquoted investments is judgemental, increasing the risk of material misstatement based on the size of the investments held in relation to the overall financial statements.
Arix Capital Management Limited (formerly Arthurian Life Sciences Limited) ("ACML") also has a direct investment in Wales Life Science Investment Fund ("the WLSIF").
The direct investment into the WLSIF is held at Fair Value and was valued at £4.5m at the year end. This value is derived from the amounts entitled to ACML from WLSIF as at 31 December 2018 based on its Net Asset Value ("NAV"). This is an area of focus due to the fact that WLSIF does not have a readily determinable price and the underlying investments consist of unquoted securities.
The investment in carried interest arises through ACML's 100% interest in the 'carried interest' vehicle (Arthurian Life Sciences Carried Interest Partner LP) of WLSIF. Carried interest represents a share of the profits arising in the WLSIF. The fair value of this carried interest investment is determined to be nil.
The valuation of investment in the carried interest is determined at the reporting date through the assistance of a management's expert using a discounted cash flow model which takes into account the future carried interest cash flows arising from the WLSIF. The key assumptions used in the model include the expected 'exit values' and 'exit dates' for the underlying investments in the WLSIF and the discount rate to be applied.
As noted above, this is an area of focus due to the fact that WLSIF does not have a readily determinable price and the underlying investments consist of unquoted securities.
We understood and evaluated the valuation methodology applied by reference to industry practice and applicable accounting standards, and tested the techniques used by management in determining the fair value of the investee entities.
We performed the following:
- Agreed the price of recent investments to supporting documentation such as purchase agreements, funding drawdown request or bank statements.
- Held meetings with management to understand the performance of each investee entity in relation to its plan and the rationale for the valuation methodology applied (including any assumptions being used) and then obtained supporting financial information and board papers from the investee entities that corroborated those discussions held with management and the adjustments made to the valuations.
For investment in WLSIF and carried interest:
- We obtained management expert's report, the discounted cash flow model for the unquoted investments and tested the mathematical accuracy of the model and agreed the calculation to the supporting documents.
- We assessed the management expert's qualifications and expertise and read their terms of engagement with the Group to determine whether there were any matters that might have affected their objectivity. We found no evidence to suggest that the objectivity of the management's expert was compromised.
- We held meetings with management to understand the assumptions made in determining the value of the investments in the WLSIF. We obtained supporting information, including board papers and financial projections of the investee companies and market comparable information to support the values.
- We applied various sensitivities to the assumptions used by management in the valuation model to assess the impact that this would have on the overall valuation.
We found that management's valuation of investments including those relating to the investment in WLSIF and carried interest, and in particular that the assumptions used were supported by the audit evidence we obtained.
Share-based payments expense
Refer Accounting Policies, note 18 and the Report of the Audit and Risk Committee.
The share-based payment expense is determined to be an area of focus given the assumptions used by management, estimates made, and the complexity of the Black-Scholes and the Monte Carlo valuation models.
These factors increase the risk of material misstatement based on the size of the share-based payment charges in relation to the financial statements. There is also a risk that due to the complexity of some of the incentive and share arrangements that the charge is not completely recognised. The share-based payment expense amounted to £3.3m for the year.
In testing the share-based payment expense, we performed the following testing to address the risks identified for the types of share-based payment transaction:
- Obtained and read the contracts for new and amended awards in the year and shareholder agreements to examine whether all share-based payments have been accounted for. We did not identify any material omissions.
- Tested each of the new awards in the period by checking that they were appropriately authorised, consistent with scheme plans, classified correctly as equity or cash settled and used an appropriate share price.
- Obtained the valuation models for new schemes and grants made in the year and tested those models by agreeing key inputs (service commencement date, exercise price, share amount, vesting period) used to the share agreements in place, and examining that the models were appropriate in the context of an industry accepted pricing model.
- Assessed the reasonableness of the estimates in relation to performance conditions and/or service conditions for existing awards. The key assumptions in calculating the share-based payment expense are the share volatility of the Group, the exercise date for the shares, the assumed dividend yields of the Group's shares, the forfeiture rates of the share options, the leaver rate and performance conditions.
- Assessed whether all disclosures required by IFRSs as adopted by the EU had been made and appropriately reflected the scheme agreements and the calculations and estimates made.
Based on our work, we found that the pricing model used to value the awards was in line with accepted market practice and that the assumptions made by management were supported by audit evidence we obtained.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate.
We have held a number of early planning discussions with those charged with governance and with management in order to appropriately scope and plan the audit.
This has allowed us to adequately capture the areas of focus for the audit. We audited the Company and three significant subsidiaries of the Group, which together account for 127% of its profit before tax, and 99% of its net assets. This, together with procedures performed over the consolidation, has provided the evidence we need for our opinion on the Group financial statements.
We also performed audit procedures on the Group consolidation adjustments and the financial statement disclosures. The three significant subsidiaries subject to audit were Arix Bioscience Holdings Limited, Arix Capital Management Limited and Arthurian Life Sciences SPV GP Limited as they represent a significant portion of the Group's income, profit before tax or net assets. In addition to the Group audit and audit of the three subsidiaries, we have performed specified audit procedures over Arix Bioscience, Inc., which holds certain Group investments, which is a specific risk and is part of the key audit matter on valuation of unquoted investments.
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
|Group financial statements||Company financial statements|
|Overall materiality||£2.70 million (2017: £1.46 million).||£2.31 million (2017: £1.45 million).|
|How we determined it||1% of net assets.||1% of net assets.|
|Rationale for benchmark applied||Net assets is the primary measure used by the shareholders in assessing the performance of the Group, and is a generally accepted auditing benchmark for businesses such as the Group, which invests in other businesses for capital appreciation.||Net assets is the primary measure used by the shareholders in assessing the performance of the Company, and is a generally accepted auditing benchmark for businesses such as the Company, which invests in other businesses for capital appreciation.|
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £20,000 and £2.3m. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality.
We agreed with the Audit and Risk Committee that we would report to them misstatements identified during our audit above £135,000 (Group audit) (2017: £73,000) and £115,000 (Company audit) (2017: £72,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
In accordance with ISAs (UK) we report as follows:
We are required to report if we have anything material to add or draw attention to in respect of the Directors' statement in the financial statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the Directors' identification of any material uncertainties to the Group's and the Company's ability to continue as a going concern over a period of at least 12 months from the date of approval of the financial statements.
We have nothing material to add or to draw attention to.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group's and Company's ability to continue as a going concern. For example, the terms on which the United Kingdom may withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the Group's and Company's trade, customers, suppliers and the wider economy.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, 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 audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. 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 based on these responsibilities.
With respect to the Strategic Report, Directors' Report and Corporate Governance Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06) and ISAs (UK) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated).
Strategic Report and Directors' Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors' Report for the year ended 31 December 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors' Report. (CA06)
Corporate Governance Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Report about internal controls and risk management systems in relation to financial reporting processes and about share capital structures in compliance with rules 7.2.5 and 7.2.6 of the Disclosure Guidance and Transparency Rules sourcebook of the Financial Conduct Authority ("DTR") is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify any material misstatements in this information. (CA06)
In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Report with respect to the Company's corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the DTR. (CA06)
We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by the Company. (CA06)
The Directors' assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group
As a result of the Directors' voluntary reporting on how they have applied the UK Corporate Governance Code (the "Code"), we are required to report to you if we have anything material to add or draw attention to regarding:
We have nothing to report in respect of this responsibility.
- The Directors' confirmation in Risk Management of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.
- The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
- The Directors' explanation in Risk Management of the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Other Code Provisions
As a result of the Directors' voluntary reporting on how they have applied the Code, we are required to report to you if, in our opinion:
We have nothing to report in respect of this responsibility.
- The statement given by the Directors in the Directors' Report, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the Group's and Company's position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company obtained in the course of performing our audit.
- The description of the work of the Audit and Risk Committee does not appropriately address matters communicated by us to the Audit and Risk Committee.
In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. (CA06).
Responsibilities for the financial statements and the audit
Responsibilities of the Directors for the financial statements
As explained more fully in the Statement of Directors' Responsibilities of the Director's Report, the Directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors are also responsible for such internal control as they 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 Group's and the 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 Group or the Company or to cease operations, or have no realistic alternative but to do so.
Auditors' responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' 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.
A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors' report.
Use of this report
This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
- we have not received all the information and explanations we require for our audit; or
- adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or
- certain disclosures of Directors' remuneration specified by law are not made; or
- the Company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Following the recommendation of the Audit and Risk Committee, we were appointed by the Directors on 9 December 2016 to audit the financial statements for the year ended 31 December 2016 and subsequent financial periods. The period of total uninterrupted engagement is three years, covering the period ended 31 December 2016 to 31 December 2018.
Other voluntary reporting
The Directors have requested that we review the viability statement in relation to going concern as if the Company were a premium listed Company. We have nothing to report having performed our review.
The Directors' assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group
The Directors have requested that we perform a review of the Directors' statements in Risk Management that they have carried out a robust assessment of the principal risks facing the Group and in relation to the longer-term viability of the Group, as if the Company were a premium listed Company. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors' process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit. We have nothing to report having performed this review.
Richard McGuire (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
28 March 2019