The directors present the strategic report for the year ended 31 December 2018.
Align Technology is a global medical device company engaged in the design, manufacture and marketing of the Invisalign system, the most advanced clear aligner system in the world, and iTero intraoral scanners and services for orthodontic and restorative dentistry.
The orthodontic market in the UK represents approximately 75 ,000 case starts annually. Align’s share of orthodontic case starts remains underpenetrated and the company’s growth reflects continued adoption of clear aligner therapy. The clear aligner market is highly competitive, with a number of clear aligner companies operating in the country, many of whom spend considerate budgets on advertising to consumers. The Invisalign system continues to be adopted by the British doctors and has been a popular choice among the patients who have general high awareness of available teeth straightening solutions and who continue to search for Invisalign treatment by name. However, as the number of clear aligner competitors increases, it is essential that the company continue to invest in new technological enhancements and solutions, as well as consumer demand creation programs and advertising.
The risks and uncertainties that relates to the future profitability of the business are:
• Overall economic trading conditions
• Changes in the competitive landscape
Our operating results depend to a significant extent on our ability to market and develop our products. The life cycles of our products are difficult to estimate due, in part, to the effect of future product enhancements and competition. Our inability to successfully develop and market our products as a result of competition or other factors would have a material adverse effect on our business, financial condition and results of operations.
The Result of the year, as set out on page 5, shows a profit on ordinary activities before tax of £1 .275m (2017: £ 0.844m).
For the 2017 comparison number, the share based incentive adjustment has been excluded from the KPIs as it is a notional entry to account for the capital contribution.
The directors are pleased with the level of performance for the year.
The Company has made significant progress throughout the year in relation to key elements of our strategy. The Board monitors the progress of the company with reference to the following KPIs:
2018 2017
Revenue % increase 48% 62%
Gross Profit as % of Turnover 7.4% 7.3%
Effective 2018, gross profit includes share base incentive expenses.
The Company’s innovative products and technology and focus on providing Invisalign doctors with exceptional hands-on customer support, has enabled the company to continuously outpace the growth rate of the underlying market for orthodontic treatment and increase its performance. The company will continue to drive growth for its business by gaining share of the existing orthodontic market as well as by expanding the market for clear Aligners treatment.
The company will continue to invest in its local infrastructure to support its growth aspirations for the future.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 December 2018.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The results for the year are set out on page 6.
No ordinary dividends were paid. The directors do not recommend payment of a final dividend.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard , and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:
the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue .
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
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 such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in 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 in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit :
the information given in the strategic report and the directors' r eport for the financial year for which the financial statements are prepared is consistent with the financial statements ; and
the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
As explained more fully in the directors' r esponsibilities s tatement, 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.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: http://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.
Align Technology UK Limited is a private company limited by shares incorporated in England and Wales. The registered office is 2800 The Crescent, Solihull Parkway, Birmingham Business Park, Solihull, B37 7YL. The principal place of business is 6th Floor, Cannongate House, 62-64 Cannongate Street, London, EC4N 6AE.
These financial statements have been prepared in accordance with FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (“FRS 102”) and the requirements of the Companies Act 2006.
The financial statements are prepared in sterling , which is the functional currency of the company. Monetary a mounts in these financial statements are rounded to the nearest £.
The financial statements have been prepared under the historical cost convention. The principal accounting policies adopted are set out below.
This company is a qualifying entity for the purposes of FRS 102, being a member of a group where the parent of that group prepares publicly available consolidated financial statements , including this company, which are intended to give a true and fair view of the assets, liabilities, financial position and profit or loss of the group . T he company has therefore taken advantage of e xemptions from the following disclosure requirements:
- Section 4 ‘Statement of Financial Position’: Reconciliation of the opening and closing number of shares;
- Section 7 ‘Statement of Cash Flows’: Presentation of a statement of cash flow and related notes and disclosures;
- Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instrument Issues’ : Carrying amounts, interest income/expense and net gains/losses for each category of financial instrument; basis of determining fair values; details of collateral, loan defaults or breaches, details of hedges, hedging fair value changes recognised in profit or loss and in other comprehensive income ;
- Section 26 ‘Share based Payment’ : Share-based payment expense charged to profit or loss, reconciliation of opening and closing number and weighted average exercise price of share options, how the fair value of options granted was measured, measurement and carrying amount of liabilities for cash-settled share-based payments, explanation of modifications to arrangements ;
- Section 33 ‘Related Party Disclosures’ : Compensation for key management personnel .
The financial statements of the company are consolidated in the financial statements of Align Technology Inc, incorporated in the United States . These consolidated financial statements are available from its registered office at 2820, Orchard Parkway, San Jose California, 95134, United States.
A t the time of approving the financial statements , t he directors have a reasonable expectation that the company has adequate resources to continue in operational existence for the foreseeable future. Thus t he directors continue to adopt the going concern basis of accounting in preparing the financial statements.
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 credited or charged to profit or loss .
At each reporting period end date, the company reviews the carrying amounts of its tangible 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.
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.
Recognised impairment losses are reversed if, and only if, the reasons for the impairment loss have ceased to apply. 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.
Basic financial assets, which include trade and other receivables and cash and bank balances, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.
Other financial assets, including investments in equity instruments which are not subsidiaries, associates or joint ventures, are initially measured at fair value, which is normally the transaction price. Such assets are subsequently carried at fair value and the changes in fair value are recognised in profit or loss, except that investments in equity instruments that are not publicly traded and whose fair values cannot be measured reliably are measured at cost less impairment.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or are settled, or when the company transfers the financial asset and substantially all the risks and rewards of ownership to another entity, or if some significant risks and rewards of ownership are retained but control of the asset has transferred to another party that is able to sell the asset in its entirety to an unrelated third party.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.
Basic financial liabilities, including trade and other payables, are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future receipts discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. A m ounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade payables are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Derivatives, including interest rate swaps and forward foreign exchange contracts, are not basic financial instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are s ubsequently re-measured at their fair value. Changes in the fair value of derivatives are recognised in profit or loss in finance costs or finance income as appropriate, unless hedge accounting is applied and the hedge is a cash flow hedge.
Debt instruments that do not meet the conditions in FRS 102 paragraph 11.9 are subsequently measured at fair value through profit or loss. Debt instruments may be designated as being measured at fair value though profit or loss to eliminate or reduce an accounting mismatch or if the instruments are measured and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy.
Financial liabilities are derecognised when the company’s contractual obligations expire or are discharged or cancelled.
Equity instruments issued by the company are recorded at the proceeds received, net of transaction costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the company.
In the application of the company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in the period of the revision and future periods where the revision affects both current and future periods.
The following judgements (apart from those involving estimates) have had the most significant effect on amounts recognised in the financial statements.
Tangible fixed assets are recorded at cost less accumulated depreciation. Judgement is required to determine whether there are indicators of impairment of the company’s tangible assets. Factors taken into consideration in reaching such a decision include the economic viability and expected future financial performance of the asset.
An analysis of the company's revenue is as follows:
Exchange differences recognised in profit or loss during the year, except for those arising on financial instruments measured at fair value through profit or loss, amounted to £1,853 (2017 - £5,694).
The average monthly number of persons (including directors) employed by the company during the year was:
Their aggregate remuneration comprised:
As total directors' remuneration was less than £200,000 in the current year, no disclosure is provided for that year.
As of 31 December 2018 and 31 December 2017, the company did not have any equity-settled plans or transactions. However, the company's ultimate parent Align Technology Inc, a company listed in the US Stock exchange issued the 'Amended and Restated 2005 Incentive Plan' based on which the parent provided the employees an opportunity to take part in an employee incentive scheme which included issue of restricted stock units and stock options.
Under this plan, the company's ultimate parent issues shares of Align Technology Inc upon vesting of restricted stock units (RSUs) or performance stock units (PSU). The issuance of shares and cash received upon exercise or sale is undertaken solely by Align Technology Inc. Until the previous year, these incentives did not have any impact on the company's shareholder's equity or cash flows. Therefore, these have been treated as capital contributions from the parent during the year ended 31 December 2017, having no impact on the reserves of the company.
However, from the year ended 31 December 2018, the UK company has started to reimburse the US company, the extent of share based incentive relating to the employees in its payroll, calculated in accordance with the intrinsic fair value of the units as on the date of grant, apportioned over the vesting period. The expense payable for the year 2018 amounted to £1,957,538.
Align Technology Inc's relevant employee benefit plans are summarized as follows:
(1) RSU
RSUs granted under this plan vest over four years, based on continued employment, and are settled upon vesting in shares of Align Technology Inc's common stock for on a one-for-one basis. The fair value is the listed market price on the grant date of Align Technology Inc's stock on NASDAQ (US stock exchange).
(2) PSU
PSUs granted under this plan vest over a period of three years commencing from the date of grant based on continued employment. Any market units that vest in accordance with this plan, will be paid to participant in whole shares at the end of the vesting period. The number of market stock units in which the participant may vest will depend upon Align Technology Inc's Stock price performance as compared to the NASDAQ Composite price performance for the performance period.
The actual (credit)/charge for the year can be reconciled to the expected charge/(credit) for the year based on the profit or loss and the standard rate of tax as follows:
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon:
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 reporting end date the company had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:
During the year the company entered into the following transactions with related parties:
The following amounts were outstanding at the reporting end date:
The following amounts were outstanding at the reporting end date:
The company has taken advantage of the exemption available in Paragraph 33.1A of FRS102 whereby it has not disclosed transactions with other companies that are wholly owned within the Group.
The balances due with the parent entities are interest-free, unsecured and repayable on demand.
The i m mediate parent company is Align Technology BV, a company registered in the Netherlands.
The financial statements are consolidated into the ultimate parent company , Align Technology Inc , which is registered in the United States of America. Copies of the financial statements can be obtained from Align Technology Inc, 2820, Orchard Parkway, San Jose, California, 95134, United States.
No one person has overall control.
As detailed in Note 7, prior period restatement accounting for the share based incentive expense borne by the US parent is treated as as 'capital contribution'.