Forsite_Diagnostics_Limit - Accounts

The directors present the strategic report for the year ended 30 June 2022.

Our mission is aligned with that of our parent Abingdon Health Plc; to improve life by making rapid results accessible to all. We achieve this by supporting our customers in developing and manufacturing lateral flow tests across a range of sectors including human health, such as infectious disease testing, animal health, plant pathogen and environmental testing. The Company is responsible for all manufacturing of such products for the Abingdon Group of Companies.

As a well-established knowledge leader within the area of lateral flow testing, we are focused on providing a broad contract development and manufacturing organisation (“CDMO”) service to an international customer base. We believe the CDMO business model, well-established in the pharmaceutical industry, has direct application to the medical diagnostics market and we offer our customers a turn-key full-service offering in lateral flow which includes research, development, scale-up, technical transfer, manufacturing, regulatory approval, supply chain management, and commercial support. Our long-term strategic objective is to become the leading full-service CDMO in the lateral flow market.

We strongly believe that we are at the start of a paradigm-shift in the use and application of rapid testing across a wide range of applications and that the Abingdon Health group, of which the Company is part of, is well positioned to support customers in bringing new, innovative products to market across a range of sectors.

2022 activity was dominated by COVID-19 business with three key technical transfers, Avacta, Vatic and Biosure, all of which were successfully transferred into manufacturing, which was a real credit to the hard work and diligence of the team, but ultimately were not commercially successful for our customers nor, therefore, for the Company. The anticipated manufacturing volumes from these three products did not materialise and were a key reason for the disappointing revenue performance in the financial year. During the second half of 2022 we started to rebuild our customer pipeline focusing on opportunities outside of COVID-19 as we started to see, firstly, COVID-19 strategies across many countries move towards treating it as a seasonal illness and secondly many of our prospective customers move their product development strategies away from COVID-19 and towards more normalised activities.

We have seen an encouraging uplift in contract development opportunities across a range of areas and we are expanding our contract development team to support this increase in activity. We believe our knowledge leadership position and our integrated service offering is resonating with prospective customers who range from small, innovative start-ups to some of the largest global healthcare companies. We believe contract development will become a significant driver of revenue growth in the short-term and beyond, and will also drive increased opportunities for technical transfer and manufacturing over-time.

We currently have two active technical transfers that should be complete in H1 2023. We have a number of additional transfer opportunities within our pipeline which we are looking to bring in during the remainder of calendar year 2022 and in 2023.

We have continued during 2022 to manufacture lateral flow tests for customers across human health, animal health, plant health and environmental testing. A key objective is to grow our manufacturing base through successful transition of tests into manufacture and importantly these will build “annuity income” to underpin future revenues.

We are seeing our CDMO customer base expand and we are encouraged by the growth in the range of potential opportunities. Our key priorities are to grow our revenues and alongside this, given the economically uncertain outlook, reduce our cash-burn through continued close cost management. To this end we will focus our team’s activities on CDMO business and near-term revenues with own-product development being given less priority until we are closer to break-even.

The lateral flow testing market is forecast to strongly grow for the next decade and the Abingdon Group, as a knowledge leader in the sector with a well-established track record of bringing products from “idea to market”, is well-placed to support a broad range of customers. We believe our full-service contract service proposition strongly resonates with customers and we look forward to building our business after an extremely challenging two years during where COVID-19 dominated our industry.

In the year revenue fell 75% to £2.8m (2021: £11.1m). Excluding DHSC revenue from the prior year, revenue fell 55%.

Gross margin in the financial year was (113)%, though this includes provisions for stock write off of £3.7m, which has been recognised in cost of sales, mainly relating to Abingdon owned AbC-19™ stock and an increase in provisions for obsolete items. Adjusting for this one-off charge, underlying gross margin was 18%. This direct gross profit margin continued to be impacted by the reduced level of manufacturing output in relation to the labour overhead, carried due the expectation that contracts would transition into contract manufacturing in the early new year. As previously explained, this did not happen and this overhead has since been reduced.

The Directors have compared the projected results of the Group to the carrying value of its property, plant and equipment, which is considered to form a single cash generating unit ("CGU") for impairment testing purposes. The Group had invested heavily in growing the capacity of the Group in anticipation of the DHSC contract fulfilment, along with associated contracts.

The future cashflows were tested on a group basis, which showed an estimated present value of future group cashflows into perpetuity of £1.8m, and future cashflows attributable to the Company of representing an overall impairment in the Company of £3.3m. This was discounted at a rate of 23.7% and with a long-term growth normalising at 3.0%. The Directors also performed a complementary check of the expected capacity modelling for each key machine, which approximated to the outcome of the cashflow model on a Group basis.

Note 12 to the accounts provide more details on the impairment.

On behalf of the board

The directors present their annual report and financial statements for the year ended 30 June 2022.

The principal activity of the company continued to be that of developing and manufacturing lateral flow devices for the diagnostics sector.

The results for the year are set out on page 9.

No ordinary dividends were paid (2021 - £nil). 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:

Going concern

The Directors have considered the principal risks and uncertainties facing the business, along with the company’s objectives, policies and processes for managing its exposure to financial risk. In making this assessment the Directors have prepared detailed cash flows on a group basis until June 2023, and high level cash flows on a group basis beyond this, and continue to evaluate financial forecasts.

The parent company, Abingdon Health Plc, has experienced a delay in recovery of monies on a large trade receivable. Through the process of contractual dispute resolution negotiations with the customer the monies have been received in July 2022, meaning that Abingdon Health Plc now has significant funds to be able to continue to support Forsite Diagnostics Limited for the foreseeable future. These funds form a key part of the group cash flow forecasts.

The company in its own right continues to benefit from its trading results. However, the results for the current year have been impacted by a number of adjustments arising from Abingdon Health Plc's settlement with the trade receivable, most notably resulting in significant inventory impairments being recognised in the Income Statement. Such costs are not expected to reoccur in future years, and are non-cash in nature, therefore the company's future results are expected to be more representative of the underlying trade.

As the receivable in the parent company has subsequently been received post year end, and from the support of existing shareholders, the Directors are of the opinion that this provides further comfort that the Group, and therefore the company, will have access to the funds that will permit it to remain a going concern, and as such the Directors continue to adopt a going concern basis for the preparation of these financial statements.

The company'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 company'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 company at the year end were equivalent to XX day's purchases, based on the average daily amount invoiced by suppliers during the year.

In accordance with the company's articles, a resolution proposing that BDO LLP be reappointed as auditor of the company will be put at a General Meeting.

So far as each person who was a director at the date of approving this report is aware, there is no relevant audit information of which the company’s auditor is unaware. Additionally, the directors individually have taken all the necessary steps that they ought to have taken as directors in order to make themselves aware of all relevant audit information and to establish that the company’s auditor is aware of that information.

The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), comprising FRS 101. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to:

•     select suitable accounting policies and then apply them consistently;

•     make judgements and accounting estimates that are reasonable and prudent;

•     state whether applicable UK Accounting Standards, comprising FRS 101 have been followed, subject to any material departures disclosed and explained in the financial statements;

•     prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In our opinion the financial statements:

• give a true and fair view of the state of the Company’s affairs as at 30 June 2022 and of its loss for the year then ended;

• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

• have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements of Forsite Diagnostics Limited (“the Company”) for the year ended 30 June 2022 which comprise the Statement of Comprehensive Income, the Statement of Financial Position and the Statement of Changes in Equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).

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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the 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.

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 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 Directors report and financial statements, 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.

Other Companies Act 2006 reporting

In our opinion, based on the work undertaken in the course of the audit:

• the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

• the Directors’ report has been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in 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, or returns adequate for our audit have not been received from branches not visited by us; or

• the 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; or

• The Directors were not entitled to take advantage of the small companies’ exemptions from the requirement to prepare a Strategic report.

As explained more fully in the Statement of Directors Responsibilities, 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 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 Company or to cease operations, or have no realistic alternative but to do so.

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 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.

Extent to which the audit was capable of detecting irregularities, including fraud

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 extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:

As part of the audit we gained an understanding of the legal and regulatory framework applicable to the group and the industries in which it operates, and considered the risk of acts by the group that were contrary to applicable laws and regulations, including fraud. We considered the group’s compliance with laws and regulations that have a significant impact on the financial statements to be UK company law, UK tax legislation, the accounting framework and ISO security standards, and we considered the extent to which non-compliance might have a material effect on the group and company financial statements.

Based on our understanding we designed our audit procedures to identify instances of non-compliance with such laws and regulations. Our procedures included inquiries of management and of the directors, reviewing the financial statement disclosures agreeing to underlying supporting documentation where necessary, review of Board meeting minutes and review of any applicable correspondence with legal counsel or tax authorities.

We considered the susceptibility of the financial statements to fraud through the risk of management override and inappropriate revenue recognition. In respect of management override we tested journal entries processed during the year, and subsequent to the year end, and considered bias in accounting estimates, including stock provisions. Our risk assessment in respect of the potential for fraud in revenue identified specific areas of focus including fictitious orders, fictitious customers, use of credit notes, cut-off and manual journals posted to revenue nominal codes.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.

Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that 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, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed 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 are to become aware of it.

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.

The income statement has been prepared on the basis that all operations are continuing operations.

The accompanying notes on pages 12 - 28 form an integral part of these financial statements.

Forsite Diagnostics Limited is a private company limited by shares incorporated in England and Wales. The registered office is York Biotech Campus, Sand Hutton, York, YO41 1LZ. The company's principal activity is developing and manufacturing lateral flow devices for the diagnostics sector.

The financial statements have been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101) and in accordance with the Companies Act 2006 as applicable to companies using FRS 101.

The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £1.

The financial statements have been prepared on the historical cost basis. The principal accounting policies adopted are set out below.

As permitted by FRS 101, the company has taken advantage of the following disclosure exemptions from the requirements of IFRS:

• the requirements of IFRS 7 Financial Instruments : Disclosure, on the grounds that equivalent disclosures for financial instruments are presented in the group accounts of Abingdon Health Plc;

• the requirements of IAS 7 Statement of Cash Flows to present a statement of cash flows;

• the requirements of IAS 24 Related Party Disclosures to disclose related party transactions and balances between two or more members of a group;

• the requirements of paragraphs 62, B64(d), B64(e), B64(g), B64(h), B64(j) to B64(m), B64(n)(ii), B64(o)(ii), B64(q)(ii), B66 and 367 of IFRS 3 ' Business Combinations ', for which equivalent disclosures are included in the group accounts of Abingdon Health Plc;

• the requirement in paragraph 38 of IAS 1 ' Presentation of Financial Statements ' to present comparative information in respect of:

• (i) paragraph 79 (a)(iv) of IAS 1;

• (ii) paragraph 73 (e) of IAS 16 ' Property , Plant and Equipment '; and

• (iii) paragraph 118 (e) of IAS 38 ' Intangible Assets '.

• the requirements of paragraphs 10 (d) , 10(f) , 39 (c) and 134-136 of IAS 1 ' Presentation of Financial Statements; and

• the requirements of ' paragraphs 134(d)-134 (f) and 135 (c)-35(e) of IAS 36 ' Impairment of Assets

Where required, equivalent disclosures are given in the group accounts of Abingdon Health Plc. The group accounts of Abingdon Health Plc are available to the public and can be obtained as set out in note 26.

The Directors have considered the principal risks and uncertainties facing the business, along with the company’s objectives, policies and processes for managing its exposure to financial risk. In making this assessment the Directors have prepared truedetailed cash flows on a group basis until June 2023, and high level cash flows on a group basis beyond this, and continue to evaluate financial forecasts.

The parent company, Abingdon Health Plc, has experienced a delay in recovery of monies on a large trade receivable. Through the process of contractual dispute resolution negotiations with the customer the monies have been received in July 2022, meaning that Abingdon Health Plc now has significant funds to be able to continue to support Forsite Diagnostics Limited for the foreseeable future. These funds form a key part of the group cash flow forecasts.

The company in its own right continues to benefit from its trading results. However, the results for the current year have been impacted by a number of adjustments arising from Abingdon Health Plc's settlement with the trade receivable, most notably resulting in significant inventory impairments being recognised in the Income Statement. Such costs are not expected to reoccur in future years, and are non-cash in nature, therefore the company's future results are expected to be more representative of the underlying trade.

As the receivable in the parent company has subsequently been received post year end, and from the support of existing shareholders, the Directors are of the opinion that this provides further comfort that the Group, and therefore the company, will have access to the funds that will permit it to remain a going concern, and as such the Directors continue to adopt a going concern basis for the preparation of these financial statements.

The company applies IFRS 15 ' Revenue from contracts with customers '. Under IFRS 15, the company applies the 5 - step method to identify contracts with its customers, determine performance obligations arising under those contracts, set an expected transaction price, allocate that price to the performance obligations, and then recognises revenues as and when those obligations are satisfied.

Product sales and contract manufacturing

Goods are supplied under contracts where the key performance criteria for the company are the manufacturing and delivery of the products. The fair value of the revenue, being the price per unit net of volume discounts and sales taxes, are recognised as revenue at the point of transfer of control to the customer, which is typically on dispatch from the company’s premises. Product sales include a range of rights to return, which are accrued as appropriate where expected to be utilised by the customer.

Contract development

Contract Development services typically represent a rate for a period of work with demonstrable milestones. Where milestones are met, these will typically trigger an additional stage of work, or alternatively will become a stop point for the contract. This milestone is the risk of the end customer. The company therefore breaks down these milestone payments and recognises revenue over time based on a proportion of completion basis, using its judgement as to the stage of completion of the contract through to the point of completion of that milestone.

Although Contract Development services typically cover a period of several weeks or months, the pricing of this is typically set on a day rate as opposed to any milestone or percentage of completion approach. As such, the performance obligations are considered to be availability of staff to fulfil each day’s work, as opposed to the overall contract qualifying as a long-term contract.

Revenues are therefore recognised at a point in time on the day that each unit of contract development is provided, or the day that a member of staff have been utilised, at the day rate agreed on that particular contract. Where contracts include significant uncertainties as to the technical feasibility of outcome, the revenue recognition is deferred until such time as the company has reasonable certainty as to the likely success of the development work. As the contracts typically involve the transfer of knowledge, and as any intellectual property created is owned by the customer, the Directors do not consider that there is any deferred element to the provision of staff.

A contract liability does, however, arise where services are invoiced in advance of performance, or where a customer makes payment in advance of an invoice being raised and work being performed. The amount is released to the profit or loss in subsequent periods in reference to utilisation of staff at the prevailing day rate. A contract receivable arises where services are performed, and a sales invoice is not raised before the reporting period end.

Intangible assets acquired separately from a business are recognised at cost and are subsequently measured at cost less accumulated amortisation and accumulated impairment losses.

Intangible assets acquired on business combinations are recognised separately from goodwill at the acquisition date where it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity and the fair value of the asset can be measured reliably; the intangible asset arises from contractual or other legal rights; and the intangible asset is separable from the entity.

Amortisation is recognised so as to write off the cost or valuation of assets less their residual values over their useful lives on the following bases:

Intellectual property            10 - 25% straight line

Property, plant and equipment are initially measured at cost and subsequently measured at cost or valuation, net of depreciation and any impairment losses.

Depreciation is recognised so as to write off the cost or valuation of assets less their residual values over their useful lives on the following bases:

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.

At each reporting end date, the company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

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.

Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition.

Inventories held for distribution at no or nominal consideration are measured at the lower of cost and replacement cost, adjusted where applicable for any loss of service potential.

Net realisable value is the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities.

Financial assets are recognised in the company's statement of financial position when the company becomes party to the contractual provisions of the instrument. Financial assets are classified into specified categories, depending on the nature and purpose of the financial assets.

At initial recognition, financial assets classified as fair value through profit and loss are measured at fair value and any transaction costs are recognised in profit or loss. Financial assets not classified as fair value through profit and loss are initially measured at fair value plus transaction costs.

When any of the above-mentioned conditions for classification of financial assets is not met, a financial asset is classified as measured at fair value through profit or loss. Financial assets measured at fair value through profit or loss are recognized initially at fair value and any transaction costs are recognised in profit or loss when incurred. A gain or loss on a financial asset measured at fair value through profit or loss is recognised in profit or loss, and is included within finance income or finance costs in the statement of income for the reporting period in which it arises.

Financial instruments are classified as financial assets measured at amortised cost where the objective is to hold these assets in order to collect contractual cash flows, and the contractual cash flows are solely payments of principal and interest. They arise principally from the provision of goods and services to customers (eg trade receivables). They are initially recognised at fair value plus transaction costs directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment where necessary.

Debt instruments are classified as financial assets measured at fair value through other comprehensive income where the financial assets are held within the company’s business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A debt instrument measured at fair value through other comprehensive income is recognised initially at fair value plus transaction costs directly attributable to the asset. After initial recognition, each asset is measured at fair value, with changes in fair value included in other comprehensive income. Accumulated gains or losses recognised through other comprehensive income are directly transferred to profit or loss when the debt instrument is derecognised.

The company has made an irrevocable election to recognize changes in fair value of investments in equity instruments through other comprehensive income, not through profit or loss. A gain or loss from fair value changes will be shown in other comprehensive income and will not be reclassified subsequently to profit or loss. Equity instruments measured at fair value through other comprehensive income are recognized initially at fair value plus transaction cost directly attributable to the asset. After initial recognition, each asset is measured at fair value, with changes in fair value included in other comprehensive income. Accumulated gains or losses recognized through other comprehensive income are directly transferred to retained earnings when the equity instrument is derecognized or its fair value substantially decreased. Dividends are recognized as finance income in profit or loss.

Financial assets carried at amortised cost and FVOCI are assessed for indicators of impairment at each reporting end date.

The expected credit losses associated with these assets are estimated on a forward-looking basis. A broad range of information is considered when assessing credit risk and measuring expected credit losses, including past events, current conditions, and reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument.

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 company recognises financial debt when the company 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'.

Financial liabilities are classified as measured at fair value through profit or loss when the financial liability is held for trading. A financial liability is classified as held for trading if:

•     it has been incurred principally for the purpose of repurchasing it in the near term, or

•     on initial recognition it is part of a portfolio of identified financial instruments that the manages together and has a recent actual pattern of short-term profit taking, or

•     it is a derivative that is not designated and effective hedging instrument.

Financial liabilities at fair value through profit or loss are stated at fair value with any gains or losses arising on remeasurement recognised in profit or loss.

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 company’s obligations are discharged, cancelled, or they expire.

Equity instruments issued by the 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 at the discretion of the company.

Share capital represents the nominal value of shares that have been issued. Share premium represents the excess consideration received over share capital upon the sale of shares, less any incidental costs of issue.

Retained earnings include all current and prior period retained earnings.

The capital contribution reserve relates to the company's share of the fair value expense imposed on the company in respect of options granted over the equity shares of the company's parent Abingdon Health Plc.

The tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting end date.

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. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each reporting end date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when the company has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority.

The costs of short-term employee benefits are recognised as a liability and an expense, unless those costs are required to be recognised as part of the cost of inventories or non-current assets.

The cost of any unused holiday entitlement is recognised in the period in which the employee’s services are received.

Termination benefits are recognised immediately as an expense when the company is demonstrably committed to terminate the employment of an employee or to provide termination benefits.

Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due.

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 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.

Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing at the dates of the transactions. At each reporting end date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the reporting end date. Gains and losses arising on translation in the period are included in profit or loss.

Research and development expenditure credits

Where the company receives research and development expenditure credits ("RDEC") these are accounted for as government grant income within operating income as it more closely aligns with grant income as opposed to a taxation credit. The income is recognised on the performance model under IAS 20 Accounting for Government Grants and Disclosures '.

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.

The following judgements (apart from those involving estimates) have had the most significant effect on amounts recognised in the financial statements.

The accounts are prepared on the going concern basis, despite significant level of retained losses. Further explanation of this judgement is provided in note 1.2.

In line with IFRS 15 management are required to determine appropriate revenue recognition points for all revenue streams. Disclosure of the key assumptions and judgements on this is provided in note 1.3. Where multiple contracts are entered into with a single counterparty any instalment payments are not considered to be a key indicator of the satisfaction of a performance obligation, although linked contracts with a counterparty are considered in conjunction when identifying the appropriate point for revenue recognition.

The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are as follows:

The company converts raw materials to finished goods. Stock values include any costs such as labour and overheads attributable to generating finished goods, as management believe this is the most suitable costing method to take into account the matching concept of accounting.

In addition, the company provides against the cost of inventories where the value of the inventory is considered to be irrecoverable, either through demand or through expiration. Details of the current inventory provision is provided in note 15.

The determination of the fair values of the EMI options and SAYE scheme options have been made by reference to the Black-Scholes model. The expense associated with these options is adjusted to reflect the anticipated staff attrition rates over the life of each scheme.

The company is not itself party to such options, however it is the employer for staff who receive share options in the parent company, Abingdon Health Plc, and takes the benefit of services provided by those employees.

Included within cost of sales for the year of £6,012,701 (2021 - £7,736,451) is provisions for stock write off of £3,685,470 (2021 - £nil), mainly relating to Abingdon owned AbC-19™ stock and an increase in provisions for obsolete items which the company considers to be a one-off exceptional charge.

In addition to the above redundancy costs, it is notable that the company has recognised significant costs in relation to the impairment of inventories, as disclosed in notes 7 and 15. These costs are trading in nature and as such have not been disclosed as exceptional items, however the Directors consider it important to understand the impact of this non-cash adjustment in understanding the underlying performance of the company.

The average monthly number of persons (including directors) employed by the company during the year was:

Their aggregate remuneration comprised:

The directors of the company are remunerated through the parent company, Abingdon Health Plc.

In the current and prior years the company's audit fee has been borne by its parent, Abingdon Health Plc.

The charge for the year can be reconciled to the loss per the income statement as follows:

The UK corporation tax rate was 19% throughout the year.

In the March 2021 Budget, a change to the future UK corporation tax rate was announced, indicating that the rate will increase to 25% from April 2023. Deferred tax balances at the reporting date are therefore measured at 25% (2021 - 25%).

Impairment tests have been carried out where appropriate and the following impairment losses have been recognised in profit or loss:

Following the ongoing results of the business and reduced projections for future activity, the Directors have compared the anticipated results of the Company to the carrying value of its property, plant and equipment, which is considered to form a single cash generating unit ("CGU") for impairment testing purposes.

The future cashflows were tested on a group basis, which showed an estimated present value of future cashflows into perpetuity of £1,800,000 when discounted at a rate of 23.2% and with a long term growth normalising at 3.0%. Further details of this assessment can be found in the group accounts of Abingdon Health Plc.

For the Company, the cashflows have been adjusted to remove intercompany charges relating to the use of the site, and accordingly the Directors consider that the present value of the Company's future cashflows are £734,524, using the same discount rate and assumptions as the Group. Accordingly, the property, plant and equipment have been impaired to this value.

An increase in the discount rate of 2% would have resulted in the impairment increasing to £4.06m; a decrease in the rate of 2% would have reduced the value of the impairment to £2.18m.

Included within plant & machinery are assets under construction with value £2,487,632 (2021 - £2,577,646). The assets are not depreciated until brought into use.,

More information on impairment movements in the year is given in note 12.

Inventories comprise of products, which are not generally subject to rapid obsolescence on account of technological, deterioration in condition or market trends. Consequently, management considers that there is little risk of significant adjustments to the company’s inventory assets within the next financial year except for on AbC-19 Tests and associated components; these items are now fully impaired.

The company has recognised a total provision of £7,857,862 (2021 - £206,099) against its inventories. Included within the total provision is £4,778,493 relating to raw materials and work in progress under a contract between Abingdon Health Plc ("AH"), the immediate parent, and the Department of Health and Social Care ("DHSC"), for which Forsite Diagnostics Limited is subcontracted for manufacturing. An expense has been recognised in the year relating to new impairments of £3,685,470 (2021 - £531,129).

Following an agreement in June 2022 between AH and DHSC, an ongoing dispute which led to significant outstanding trade receivables remaining unpaid was settled, and funds received in July 2022. As a result of this, significant inventories held in the company in anticipation of sales were no longer utilisable, and are not expected to be used on other contracts. The company has therefore recognised the provisions for irrecoverability shown above. These provisions are not expected to reoccur in future years as no further inventories will be acquired for the DHSC contract.

Expected credit losses for the following 12 months have been estimated in accordance with IFRS 9 'Financial Instruments'. The current year expected credit losses have been adjusted to reflect credit risks outstanding at the current reporting period date. This has been determined by reference to past default experience and known issues. Write offs are made when the irrecoverable amount becomes certain. The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.

Contract assets have been calculated in accordance with IFRS 15 'Revenue from Contracts with Customers'.

Included within contract assets is the recharge of staff, materials, and property, plant and equipment purchased on behalf of the parent company, Abingdon Health Plc, with total value £nil (2021 - £372,609).

The interest rate on the loan with Abingdon Health Plc, the company's ultimate parent, is 8% per annum.

Included with accruals and contract liabilities is £99,741 (2021 - £56,004) relating to deferred revenues, calculated in accordance with IFRS 15 'Revenue from Contracts with Customers'. The amount of deferred revenues relating to the prior year has been fully released in the current financial year.

The amounts owed to parent undertaking primarily represent amounts advanced to purchase inventories related to the parent company's government contracts. The loan has no fixed repayment terms but there is a general agreement that this will be repaid when inventories are converted into cash. The Directors at present have no clarity over the timing of this, and as such the loan has been presented as due within one year.

The following are the major deferred tax liabilities and assets recognised by the company and movements thereon during the current and prior reporting period.

The company has estimated tax losses of £13,242,000 (2021 - £4,550,000) which have not been recognised as a deferred tax asset due to uncertainty over the timing and extent of the company's ability to utilise these against future taxable profits. If a deferred tax asset was recognised in full in respect of this, the company's net assets would increase by approximately £3,311,000 (2021 - £1,138,000).

The company operates a defined contribution pension scheme for all qualifying employees. The assets of the scheme are held separately from those of the company in an independently administered fund.

At the year end there is a pension creditor of £11,367 (2021 - £19,755).

The company has recognised the following expense in the year in respect of share-based payments:

The fair value expense relates to options granted to employees of the company but are for issue of shares in Abingdon Health Plc, the company's immediate and ultimate parent; accordingly the company has taken advantage of the disclosure exemptions under FRS 101 not to present this information.

The capital contribution reserve relates to the company's share of the fair value expense imposed on the company in respect of options granted over the equity shares of the company's parent Abingdon Health Plc. Amounts transferred from the reserve into retained profits represent the forfeit of share options that will not vest.

At 30 June 2022 the company had contracted for capital commitments of approximately £nil (2021 - £0.8 million). These amounts have not been reflected in the financial statements.

The company is not party to any contingent liabilities or guarantees as at the current or comparative year end.

The company has taken advantage of the disclosure exemptions conferred by FRS 101 to not disclose related party transactions and balances where relevant group companies are all wholly owned by the group headed by Abingdon Health Plc. Details of the outstanding balances at the year end are given in notes 16 and 18.

The company's immediate parent company is Abingdon Health Plc, a company registered in England and Wales.

The ultimate parent company and controlling party is Abingdon Health Plc, a company incorporated in England and Wales with registered office York Biotech Campus, Sand Hutton, York, YO41 1LZ. Abingdon Health Plc is the smallest and largest group into which Forsite Diagnostics Limited is consolidated.