Risk management and internal control
The Board is ultimately responsible for the Group's system of internal control and meets annually to formally review the effectiveness of such controls. The control systems are designed to manage, rather than eliminate, various risks of failure to achieve the Company and Group's objectives and therefore are only able to provide reasonable and not absolute, assurance against material mis-statement or loss.
There is a comprehensive system of financial reporting with monthly performance reports presented to the Board. The annual budget and the business plan, upon which the budget is based, is reviewed and approved by the Board.
There is a continuous process for identifying, evaluating and managing the significant risks the Group faces, which has been in place for the year under review and up to the date of approval of the Financial Statements. This process is regularly reviewed by the Board and accords with the Turnbull Guidance.
Major commercial, technological and financial risks are formally assessed during the annual business planning process, which normally takes place in the last quarter of the financial year. The Board monitors exposure to key business risks and progress towards achieving strategic aims.
The Executive Committee, which consists of the executive directors and senior management, meets regularly to monitor and control operations. Business performance is reviewed, risks and opportunities identified, financial and other implications assessed and corrective actions agreed as necessary.
Given the Group’s scale of operations and centralisation of activities, the Board does not consider it necessary to have a dedicated internal audit function. Instead it has chosen to date to contract-out such activities as necessary on a project by project basis.
Principal risks and uncertainties
In the Directors’ opinion, the key risks and uncertainties facing the Group are as follows:
Commercialisation
The Group’s commercial progress depends upon its ability to establish and maintain successful relationships with appropriate licensees and other third parties to successfully exploit the Group’s IP through development, manufacturing and distribution agreements. The timing and quantum of volume sales of products incorporating the Group’s IP are dependent on the decisions by, and circumstances of, the Group’s customers and those of its Joint Venture.
Creation or acquisition of technical solutions and intellectual property protection
Future performance of the Group will be impacted by its ability to develop and deliver new products, inventions and improvements in its technology that meet the needs of its customers. The continuing ability to establish, protect and enforce our proprietary rights relating to IP deriving from past and future developments is fundamental to the Group. This is principally achieved through the process of patent application and establishing patent protection.
Failure to protect the Group’s IP rights may result in another party copying or otherwise obtaining and using its proprietary content and technology without authorisation. There also may not be adequate protection for IP rights in every country in which the Group’s technology is made available.
Investigating and subsequently prosecuting or defending any infringement of the Group’s IP or claimed infringement by the Group of a third party’s IP may be difficult and involve substantial costs. The outcome of any litigation is subject to uncertainty and could have a material impact on the Group’s financial position and future prospects.
Competition and technical advances
The markets within which the Group operates are characterised by evolving technology, market practices, regulation and industry standards which can have a positive or negative impact on the Group. Some of the companies that currently or in the future will compete against the Group may have greater technical, commercial and financial resources and may have better established market and customer reach. Competitors may also develop more effective technical solutions. The Group’s future financial performance is therefore subject to its ability to successfully compete within this environment and achieve acceptable pricing for its IP and other sales activities.
Financial
The Group’s current financial resources, whilst believed to be sufficient to support the planned commercialisation of the Group’s IP, are limited such that, if sufficient revenue cannot be generated within anticipated timescales from royalties, sales of products and services and dividends from joint ventures, or if significant new expenditure is required to exploit additional business opportunities, it may become necessary to raise additional capital. The ability to arrange such financing in the future would depend upon market conditions and the Group’s prospects at that time.
Senior management and skilled personnel
The Group is dependent on members of its senior management and skilled personnel and believes its future success will depend in part on its ability to retain and attract them. The departure from the Group of any of its executive directors or certain senior employees could, in the short term, have a material adverse impact on the Group’s activities.
Research and development tax credits
The Group has benefited in the past and expects to continue to benefit in the future from research and development tax credits. If there is a change in legislation removing these credits the Group’s financial position would be adversely impacted.
Economic drivers and environmental legislation
Demand for the Group’s products may be influenced by legislation or general economic conditions that are outside of the Group’s control and which could positively or negatively impact the Group’s future sales.
These areas and uncertainties are reviewed according to risk procedures described above.