02 annual report 2016 diamorph · diamorph annual report 2016 05 key figures key figures 2015 2016...

2016Diamorph AB (publ) - 556647-5371

Annual Report

ANNUAL REPORT 2016 DIAMORPH02

ANNUAL REPORT 2016DIAMORPH 03

Contents

423,6The year in brief

139,8 1,49

NET SALES/MILLION SEK

OPERATING PROFIT/MILLION SEK

EARNINGS PER SHARE/SEK

The formal annual report and accounts comprises pages 14 to 50.

1 ABOUT DIAMORPH

CEO's message 04

Key figures 05

2 OPERATIONS

Organisation 06

Description of operations 08

Business areas 10

Corporate governance report 12

The Share 13

3 ADMINISTRATION REPORT

Operations 14

Group income statement 19

Group balance sheet 20

Group changes in equity 21

Group cash flow 22

Parent Company income statement 23

Parent Company balance sheet 24

Parent Company changes in equity 25

Parent Company cash flow 26

Accounting principles and notes 27

Auditor's report 51

4 BOARD OF DIRECTORS AND

MANAGEMENT

Board of directors 54

Management 55


Last year I talked about how 2015 was a period of consolidation and

transition for Diamorph, including changes in the management team. During

2016 we have been focusing on continuing to strengthen the business to

accelerate the rate of growth. This has required some investments which have

impacted to an extent on our profits in 2016 but I believe that good progress

has been made during the past year. There are a number of initiatives to drive

future growth but I will touch on the key elements.

Toward the end of 2015 we increased the rate at which we were adding

sales and marketing resources to enable us to capture opportunities we see

to penetrate our existing markets more deeply and extend our geographic

reach. We have been careful to expand the skillset within the organisation,

including foreign language capabilities. In parallel we have actively extended

our network of sales agents and distributors and invested in a number of

other functional areas to exceed our customers’ expectations of us. Some

investments already started to deliver results in 2016, for example in our rail

and marine businesses, but others will take a little more time before we see

the full benefits.

In parallel we are seeking to commercialise new products with a key focus

being on Ferobide, a new wear part product, which we launched in late

2015. We have initially focused on the agricultural sector which is naturally

conservative when it comes to adopting new technologies. We continue

to respond to customer feedback and develop the technical performance

of Ferobide. We are now also looking to other applications outside of the

agricultural sector and remain cautiously optimistic about the prospects for

this product.

To boost our new product development capabilities, one of our longer term

growth initiatives has been the modernisation of our Innovation Centre

in Manchester, UK. This represented SEK 4 million of capital investment

during 2016 and we now have an excellent facility that will enable us to drive

forward our research and development activities in the years ahead, work

more collaboratively with customers as well as making our business more

attractive to the brightest talents within the industrial research community.

Our ceramic conveyor roller business has delivered another year of strong

growth. During 2016, we have evaluated and now committed to make

a SEK 27 million investment to meet demand from the market for even

longer rollers. This investment will keep us right at the forefront of the

market and significantly expand capacity from current levels.

Despite the growth we delivered in the areas noted above some of our

business areas have experienced much more challenging conditions

in 2016, particularly those more exposed to the oil and gas sector.

Consequently, overall during 2016 we have reported flat sales at fixed

exchange rates. This performance has however again demonstrated the

diversity and quality of our business and our strategy is unchanged. We

continue to focus on using our specialist materials knowledge to help

solve demanding challenges for our broad customer base in over 60

countries, working in a wide variety of different markets with many product

applications. Our largest customer accounted for 3% of our sales in 2016

and our largest 10 customers comprised just 19% of sales.

Looking ahead we have a good platform to grow the business by making

selective acquisitions that complement and support the organic growth

strategy. Our strong cash flow has enabled significant deleveraging in

the last couple of years and the ratio of net debt to EBITDA at the end

of 2016 was 2.0 times. This means we have good financial capacity to

support acquisitions as well as a proven model following the successful

acquisitions of Certec and Tenmat. We have started a process to identify

potential acquisition targets and this work will accelerate in 2017.

With a substantial part of our business located in the UK, we are obviously

alert to the potential impact from the outcome of the UK’s referendum on

EU membership. In 2016 we have already experienced quite significant

exchange rate movements and reductions in long term UK interest rates

which have given rise to quite large movements in group equity. It is

too early to know the longer term impact on the business. However, as

negotiations between the relevant parties develop, we will proactively plan

for any changes that may impact on our business.

In January 2017, we gave notice to our bondholders that we were exercising

our option for voluntary partial repayment of SEK 50 million out of the total

SEK 500 million outstanding bonds. The repayment was made on 6 March

2017 from surplus cash at a premium of 102% of the nominal amount (SEK

1 million).

In February 2017, we completed the acquisition of the final 10% of Diamorph

Bearings AB and so the Group now controls 100% of each of its subsidiaries.

The purchase price has been calculated consistent with arrangements agreed

at the time of the acquisition of our Hob Certec business in 2011.

CEO's message

“Plotting the path to an accelerated rate of growth”


Key figuresKey figures 2015 2016 Δ%

Net sales 431,5 423,6 01

Operating profit1 151,2 139,8 -8

Operating profit margin, %1 35,0 33,0

Profit before tax1 113,5 102,4 -10

Operating cash flow 160,9 115,8 -28

Operating cash conversion, % 106 83

Net debt 329,2 305,9 -7

Earnings per share1 (SEK) 1,67 1,49 -11

Average number of shares (’000) 52 594 52 741

Operating profit - reported 151,2 139,6 -8

Profit before tax - reported 108,2 141,1 30

Earnings per share - reported (SEK) 1,65 2,08 26

¹ Adjusted to fixed exchange rates or excluding non-recurring items - see definition on page 49.

Since 2012 a significant part of the cash flow generated by the Group has

been applied to deferred and other payments linked to the Tenmat and

Certec acquisitions. The completion of this transaction in February means

that all of these payments are now concluded.

Despite these payments since the year end the Group today still holds

significant surplus cash. Alongside our pursuit of growth, we will review our

borrowing structure during 2017 to ensure that it appropriately balances the

certainty of availability of finance, our borrowing costs, and the flexibility we

desire to support our growth ambitions.

At the end of March 2017, Heinz Pöhlmann stepped down as joint Managing

Director of Hob Certec. Following the carefully planned management

transition, Jan Roubal will continue to act as Managing Director of the Hob

Certec business.

I would like to again thank all employees, customers, partners, shareholders

and bondholders for their support during 2016.

Gordon MacLeman

CEO

"During 2016, we have invested SEK 4 million in our Innovation Centre in Manchester to support our medium to long term growth ambitions"


Organisation

Founded in 2003, Diamorph has its creative roots in materials research at Stockholm University. Since its inception, the Company has been focused on advanced materials solutions for niche applications in highly demanding industrial environments. Today, the Diamorph

Group has production, development and sales across two manufacturing units in the United Kingdom and the Czech Republic, as well as sales teams based in Sweden, USA, Germany, France and Italy. The Group operates globally and had sales to customers in 60 countries in 2016.

OPERATIONS

customers in

countries60

Customers

Sales team

R&D and production


Environment

In order to satisfy customer requirements in a diverse range of markets,

Diamorph works with a range of innovative materials and processes.

The raw materials used can be broadly categorised into metals, ceramic

powders, fibres and polymers. The Group’s categorised operations are

regulated by a variety of environmental legislation and the Group holds all

the necessary permits for its operations legislation at production facilities

in Manchester, United Kingdom and Horni Briza, Czech Republic.

Diamorph works continuously to minimise the environmental impact of

its products and processes, and has a number of programs underway

targeting reduced environmental impact of operations. In 2016, all waste

and emissions were within permissible limits.

Strategy

Diamorph’s strategy to be a leading supplier of advanced materials

solutions comprises four parts:

• To actively seek market niches in particularly demanding applications

• To focus on materials excellence in every product area the Company

chooses to operate in

• To be agile in responding to market needs and seizing opportunities

which arise

• To ensure we remain as differentiated as possible from competitors

Diamorph typically identifies opportunities for individual components in

complex industrial systems, where the Company’s particular combination

of advanced materials expertise and precision engineering capabilities

allow it to create value in the customer’s process. This is achieved by

focusing on leading edge performance in the materials we work with,

and focusing close, long term customer relationships which allow us to

stay at the forefront of developments in our chosen markets.

Management, from left to right: Dr Kapil Chopra, Heinz Pöhlmann, Gordon MacLeman, Jan Roubal, Mark Hutchison


Description of operations

Market

Diamorph is an advanced materials company, producing highly

differentiated, high performance materials and components for very

demanding industrial applications. Our products are designed to

extend the lifespan, performance and reliability of components in the

customer’s application.

Diamorph focuses on “deep niches” which are typified by high regulation,

lengthy approvals processes and long testing cycles. Diamorph

components are found for example in trains, ships, automotive applications,

building fire protection systems, high temperature process plants for

metals, glass and ceramics production, industrial pumps and high

voltage switchgear systems. In order to meet the diverse requirements of

our customers we work with a variety of advanced materials platforms,

including ceramics, fibre-reinforced polymers and metals.

Revenues by business areas

Diamorph has two business areas: high temperature materials, and

wear parts and bearings. The business areas have diversified product

portfolios targeting different industries with varying dynamics. High

temperature materials accounts for 64% (62%) of total sales and wear

parts and bearings accounts for 36% (38%) of total sales.

Wear parts

and bearings36%64%High

temperature

materials

Total group sales amounted to SEK 423.6 (431.5) million representing

a decrease of 2% as reported. At fixed exchange rates sales were

flat compared to the same period last year. This again highlights the

diversity of the business as growth in many of our business areas has

offset the impact of declining sales in certain others.

High temperature materials

Sales of high temperature materials amounted to SEK 270.3 (267.1)

million representing an increase of 1% as reported. At fixed exchange

rates sales increased by 3% compared to last year.

Throughout 2016 demand for our ceramic conveyor roller products has

remained very healthy. Within our fire protection business sales have

continued to grow in the USA and sales of our ventilated fire barrier

products have grown strongly within Europe. However demand for some

fire protection products has been influenced by the knock-on effect of

reduced building insulation incentives offered by the UK government.

Within other high temperature product applications there has been good

demand for hot gas filter products which are influenced by environmental

regulations, however sales of a number of other product lines have not

kept pace with the level of sales in 2015.

Wear parts and bearings

Sales of wear parts and bearings amounted to SEK 153.3 (164.4) million

representing a decrease of 7% as reported. At fixed exchange rates

sales decreased by 4% compared to the same period last year.

The Group achieved very good growth in the rail and marine businesses

in 2016, supplemented by the first significant sales of the Ferobide

product line. However this has been more than offset by reduced

sales of high performance engineered component product lines and

in particular rotor vane product sales where the pace of customer

expenditure in the oil and gas industry has had a marked impact.

DIAMORPH 09ANNUAL REPORT 2016

Diamorph serves a diverse range of global industriesDuring 2016 our fire protection products found their way onto cruise vessels, now protecting lives on land and at sea


High temperature materials

Revenues

270.3 (267,1) MILLION SEK

3% INCREASE AT FIXED EXCHANGE RATES

Passive fire protection

In the event of a fire in a building fire spreads from one room to another via penetrations for

ventilation and electricity. Diamorph has developed products based on material that expands

when heated. Products are installed in connection with penetrations and they expand in the

event of fire and can thereby seal the cavities. This keeps the room/fire cell intact and delays the

fire from spreading through the building giving time for evacuations and fire-stopping activities.

Through the ability to control the direction in which the material will expand products are tailored

for cable penetrations, vent ducts, air gaps, recessed ceiling lights and doorsills.

Ceramic conveyor rollers

Diamorph offers a series of ceramic conveyor rollers used in kilns for the production of ceramic

tiles. During production the tiles are transported through a kiln at temperatures up to 1300-1400"C

by long rollers. To prevent the tiles from being destroyed at the firing the rollers need to have a

nice surface and remain rigid at high temperatures. Diamorph manufactures the world's longest

rollers, up to six metres long, of ceramic materials that are tailored to the needs of this demanding

application.

Refractories and other high temperature materials

Refractories are insulating materials that retain their physical and chemical integrity at high

temperatures. The Group supplies refractories and other high temperature components which are

used for example in the aluminium processing industry, as coverings for rollers in the float glass

manufacturing process, in hot gas filtration systems.

Filtration of hot gas has become increasingly important with increased focus on stricter

legislation around industrial pollution. Hot gas filtering requires materials that can withstand

high temperatures and in order to continuously minimise emissions the industry needs to use

advanced materials. Diamorph manufactures hot gas filters adapted for a variety of industries.

Business Areas


Wear parts

Components that solve problems with wear have many applications in several industries. The

purpose of the wear components is to extend the service life by protecting equipment and

accessories against wear. These components are highly abrasion resistant and are mounted

on surfaces that are particularly vulnerable to wear and tear. Applications are found in rail,

marine and agricultural industries.

Bearings

A bearing is a type of wear component that is used to give as low a friction as possible

between two components that move. Diamorph manufactures bearings and bushings for

applications such as marine, hydraulics, pumps and rail. Depending on the application, the

bearings are designed with special properties such as water lubrication for the marine industry

or low noise for the railway industry.

Rotor vanes

Vanes that are used in vacuum pumps are sliding wear components. These pumps are used

in agriculture for spreading of sludge and milking as well as in various industrial applications

including within the oil and gas, public health, laboratory and medical industries. Diamorph

vanes are designed for a specific type of pump for use with lubrication and are currently

used by the majority of customers in the niche market.

Wear parts and bearings

Revenues

153.3 (164.4) MILLION SEK

4% DECREASE AT FIXED EXCHANGE RATES


Corporate governance reportGeneral MeetingThe General Meeting is the highest decision-making body in which share-

holders exercise their right to decide on matters. Shareholders are informed

through notice of their right to have a matter considered at the meeting.

Notice of the AGM where the annual report will be presented, and an EGM

at which an amendment of the Articles of Association is proposed, shall

be published no earlier than six and no later than four weeks before the

meeting. Notice of other EGMs shall be published no earlier than six and no

later than two weeks before the meeting. Notice of a General Meeting shall

be published in Post-och lnrikes Tidningar and on the website. The fact that

notice has been given shall be simultaneously published in Dagens lndustri.

Shareholders who are registered in the share register on the record date

(five days prior to the date of the meeting) and have registered for the

meeting as set out in the notice convening the meeting, are entitled to

attend either in person or by proxy.

The AGM must be held within six months of the fiscal year. AGM

mandatory tasks include deciding on adoption of the income statement

and balance sheet for the Company and the Group, approval of dividends,

discharge from liability for directors and officers and the election and

remuneration of the directors and auditors.

The Board of DirectorsThe Board is responsible for the organisation and management of the

Company. The Board shall continuously monitor the Company's and

the Group's financial situation. The Board's responsibilities also include

deciding on acquisitions and divestitures of businesses, decisions on

major investments, appointment of the CEO, compensation and other

terms of employment for the CEO and ongoing monitoring of the business

during the year. The Board also evaluates the work of the CEO.

In 2016 the Board held 4 meetings including the statutory meeting. The

Board members all attended every meeting except that Ashkan Pouya,

Saied Esmaeilzadeh, Anthony Moore and Ola Ringdahl were each unable

to attend one of the meetings.

The Board receives information about the Company's economic and

financial situation through monthly reports and other reports issued prior

to board meetings. Prior to each Board meeting the Chairman and CEO

review the issues to be discussed at the Board meeting and relevant

material is sent to members a week prior to each meeting.

CEO and Group managementThe CEO is responsible for the ongoing management of the Company's

affairs according to the Board's guidelines and instructions. The CEO shall

provide information for decision-making in order to make well-founded

decisions as well as data in order to continuously monitor activities during

the year.

The CEO has appointed a management team consisting of the CFO and

the respective Managing Directors and Operations Director of the Hob

Certec and Tenmat businesses.

AuditorThe Company's auditor reviews the financial statements and accounting

records. The auditor reports the results of its work to the General Meeting

through its audit report.

Internal controlThe Board has overall responsibility for internal control. To fulfil this

responsibility the Board has established a policy document.

Based on the policy document the CEO is responsible for designing internal

processes and establishing policies and instructions that ensure a sound

framework of internal control. This is supplemented by an annual self-

assessment process over the operation of financial controls. Specific risk

assessment is carried out where each item is evaluated on the basis of

inherent risk, materiality and existing controls.

Auditor's report on the Corporate Governance StatementTo the general meeting of the shareholders of Diamorph AB (publ),

corporate identity number 556647-5371

Engagement and responsibility

It is the Board of Directors who is responsible for the corporate governance

statement for the year 2016 (the financial year 2016-01-01–2016-12-31)

on page 54 and that it has been prepared in accordance with the Annual

Accounts Act.

The scope of the audit

Our examination has been conducted in accordance with FAR’s auditing

standard RevU 16 The auditor’s examination of the corporate governance

statement. This means that our examination of the corporate governance

statement is different and substantially less in scope than an audit

conducted in accordance with International Standards on Auditing and

generally accepted auditing standards in Sweden. We believe that the

examination has provided us with sufficient basis for our opinions.

Opinions

A corporate governance statement has been prepared. Disclosures in

accordance with chapter 6 section 6 the second paragraph points 2–6 the

Annual Accounts Act and chapter 7 section 31 the second paragraph the

same law are consistent with the annual accounts and the consolidated

accounts and are in accordance with the Annual Accounts Act.

Stockholm 28 April 2017

Ernst & Young AB

Stefan Andersson Berglund

Authorised Public Accountant


The Share

Share capitalAccording to the Articles of Association the share capital shall be not

less than SEK 530 000 and not more than SEK 2 120 000 divided into

a minimum of 25 million and a maximum of 100 million shares. The

Company has only one class of share. Diamorph's registered share

capital after the direct share issue during the second quarter of 2016

amounted to SEK 1 105 608 divided into 52 846 841 shares. The changes

in shares in issue in the past five years are shown in the table below.

The Company holds none of its own shares.

At the Annual General Meeting each share entitles one vote.

Shareholders are entitled to vote for the full number of shares he or

she owns without any restrictions. Each share gives the shareholder

the same preferential rights to shares, warrants and convertible debt in

relation to the number of shares they own.

Year Transaction

Change of

number of

shares

Total number

of shares

Total share

capital

(SEK)

2012 Share issue 17 781 468 44 453 671 930 015

2012 Share issue in kind 5 143 564 49 597 235 1 037 623

2012 Share issue in kind 1 612 734 51 209 969 1 071 363

2013 Share issue 1 190 929 52 400 898 1 096 278

2013 Share issue in kind 192 853 52 593 751 1 100 313

2014 - - 52 593 751 1 100 313

2015 - - 52 593 751 1 100 313

2016 Share issue in kind 253 090 52 846 841 1 105 608

Information on the share issue in kind during 2016 can be found in the

section on Significant events during the financial year on page 14.

WarrantsAt the 2016 AGM, an issue of a maximum of 980 000 warrants was

approved. These warrants have subsequently been issued to a number

of senior executives and employees of the Group for no consideration

as a form of long-term incentive programme. Each warrant entitles the

holder to subscribe for one new share in the Company at a subscription

price of SEK 15. Warrants can only be exercised during the period from

1 September 2020 up to and including 31 December 2022, or up to

and including an earlier date that follows from the complete terms and

conditions of the warrants.

DividendDeclaration of dividends may be made at the AGM or EGM. Diamorph has

not paid any dividends to shareholders. The Board of Directors proposes

that the Annual General Meeting 2017 proposes that no dividend be paid

in respect of 2016 results.

OwnershipAs of 31 December 2016, the number of shareholders amounted to 234 (249),

of which the largest are shown in the table below:

Owner

Total number

of shares

Share

capital,%

Serendipity Ixora/Group AB* 15 273 716 28,9%

Latour-Gruppen AB 13 923 571 26,3%

First Kraft AB 4 672 558 8,8%

J P Morgan Bank Luxembourg SA 2 960 438 5,6%

Zhou Jun 1 612 734 3,1%

Tindaf AB 1 611 162 3,0%

Mikael Lönn 1 277 000 2,4%

AB Måttex 1 242 800 2,4%

SIX SIS AG 994 856 1,9%

Fredrik Palmstierna 803 742 1,5%

Anthony Moore 654 558 1,2%

Others 7 819 706 14,9%

Total 52 846 841 100,0%

*Serendipity Ixora AB owns 23.4%. Serendipity Group AB owns 5.5%.


Operations

Diamorph AB (publ) and its subsidiaries (“the Group” or “Diamorph”),

conducts research, development and commercialisation of advanced

materials solutions for especially demanding industrial applications.

The Group focuses on narrow niches with differentiated products to

solve industrial materials challenges. This requires close cooperation

with customers and long approval testing, resulting in high barriers to

entry for competitors.

Diamorph has two product categories: wear parts and bearings, and

high temperature materials. The largest customer accounts for 3% of

Diamorph’s total sales and the ten largest customers represent a total of

19% of sales. Diamorph’s sales are made to a wide customer base with

a wide geographical spread.

The Group

Diamorph AB (publ) is the Parent of the Group and principally acts as a

holding company. There have been no significant changes in the Group

structure in 2016 except for the acquisition of a further 10% of Diamorph

Bearings AB from 2 minority shareholders. Since the end of 2016, Diamorph

has acquired the final remaining minority interest in Diamorph Bearings AB

and therefore now controls 100% of each of its subsidiaries. These

acquisitions are described further in the sections below.

The Diamorph Group includes, besides the Parent Company, two main

companies that in turn control the main operating subsidiaries.

Diamorph AB (publ) controls the UK holding company Diamorph UK Ltd

(100%) which in turn controls Modular Stock Ltd (100%), the holding

company for the Tenmat business acquired in 2012, which in turn controls

Tenmat Ltd (100%) (“Tenmat”). Diamorph UK Ltd and Modular Stock Ltd

have no significant activities other than the funding and management of

their subsidiaries.

At 31 December 2016 Diamorph AB (publ) controlled the Swedish

company Diamorph Bearings AB (90%) which in turn controlled Diamorph

hob certec s.r.o. (100%) (“Hob Certec”) thereby giving Diamorph an effective

90% interest in the Hob Certec business acquired in 2011. At 31 December

2016 the remaining 10% of Diamorph Bearings AB was owned by 1 minority

shareholder. Since the year end Diamorph has acquired this final remaining

minority interest. This acquisition is described further in the section below.

For a detailed description of the Group’ shareholdings refer also to note 24.

Significant events during the financial year

Acquisition of 10% of Diamorph Bearings AB during 2016

After acquiring the Hob Certec business in 2011 and the Tenmat business

in 2012 there were no acquisitions in the three years between 2013 and

2015. In April 2016, Diamorph AB (publ) acquired a further 10% of Diamorph

Bearings AB from 2 of the minority shareholders for consideration of SEK

22.8 million in a combination of cash (SEK 19.0 million) and a promissory

loan note (SEK 3.8 million). After completing this acquisition, Diamorph AB

(publ) controlled 90% of Diamorph Bearings AB.

One of these former shareholders in Diamorph Bearings AB later used

the promissory loan note as consideration to purchase 253 090 shares

in Diamorph AB (publ) from Serendipity Ixora AB. Subsequently the

promissory loan note was cancelled when it was used as consideration

by Serendipity Ixora AB for the directed share issue of 253 090 shares

approved at the AGM in May 2016. Through the combination of these

transactions, Serendipity Ixora AB was put back to the same position as

it was in beforehand.

Investment in Innovation Centre

During 2016 we have invested SEK 4.2 million, and a considerable amount

of time and energy, in modernising our Innovation Centre in Manchester,

United Kingdom. We now have an excellent facility that will better enable

us to drive forward our research and development activities in the months

and years ahead.

We have a number of exciting product developments in our pipeline and

the newly refurbished Innovation Centre will better enable us to work

collaboratively with customers and other business partners as well as

making our business more attractive to the brightest talents within the

industrial research community.

Significant events after year end

Acquisition of 10% of Diamorph Bearings AB after year end

At 31 December 2016 the remaining 10% (159 shares) minority interest in

Diamorph Bearings AB was owned by 1 other minority shareholder. This

shareholder subscribed for these shares in Diamorph Bearings AB as part

consideration for the acquisition of Hob Certec in 2011. In February 2017

Diamorph acquired this final 10% minority interest for cash consideration

of SEK 32.0 million. The purchase price was calculated consistent with the

arrangements agreed at the time of acquisition of Hob Certec in 2011.

The put option relating to these arrangements (see note 4) was valued

at SEK 8.9 million in the balance sheet at 31 December 2016 and this

liability will be derecognised through equity in 2017. Diamorph AB (publ)

therefore today controls 100% of each of its subsidiaries.

Management transition

Subsequent to the year end, Heinz Pöhlmann has stepped down as

joint Managing Director of Hob Certec. Following the carefully planned

management transition, Jan Roubal will continue to act as Managing

Director of the Hob Certec business. Jan Roubal joined the Group in 2012

and is a member of the Diamorph senior management team. The other

current members of the senior management team are shown on page 55.

Liquidation of KHP Marketing Gmbh

KHP Marketing Gmbh is a subsidiary company in Switzerland that

became part of the Group at the time of the Hob Certec acquisition. The

Group has started a process to liquidate this company to simplify the

group structure and eliminate unnecessary administrative costs.

ADMINISTRATION REPORT


The liquidation process will ultimately involve the distribution of the

company’s net assets (principally cash and intercompany balances) to its

parent company Diamorph Bearings AB. This process is deemed to be

an effective distribution of profits and requires the settlement of SEK 5.9

million of withholding taxes to the Swiss tax administration. This payment

was made in January 2017.

No liability for this withholding tax payment was recognised in the balance

sheet at 31 December 2016 because the payment was not committed at

that date.

Voluntary repayment of SEK 50 million of bonds

In January 2017, Diamorph AB (publ) gave notice to its bondholders that it

was exercising its option for voluntary partial repayment of SEK 50 million

out of the total SEK 500 million outstanding bonds. The repayment was

made on 6 March 2017 from surplus cash resources at a premium of 102%

of the nominal amount (SEK 1 million).

Adjusted performance measures

The Group's financial performance can be impacted by non-recurring

items including foreign exchange gains and losses.

In order to better show the underlying performance of the business

management provides adjusted figures for key performance measures in

addition to those reported under IFRS. The operating profit performance

before non-recurring items and finance income and expense before

non-recurring items, are presented in the Group income statement on

page 19. Reconciliations of adjusted profits before tax and adjusted

earnings per share are shown in note 28.

The definitions of the adjusted measures are unchanged compared

to the last Annual Report except that the way sales growth at fixed

exchange rates is calculated has been expanded to additionally include

adjustments for the effect of changes in US Dollar and Euro exchange

rates on the consolidated GBP results of the Tenmat business. The way

changes in operating expenses at fixed exchange rates is calculated

has been similarly expanded and also adjusted to remove the effect of

unrealised gains and losses on forward exchange rates used for hedging

purposes. Both of these changes have been made in order to more fairly

demonstrate the underlying position given that GBP exchange rates

were impacted quite markedly in 2016 by uncertainty following the UK

referendum on EU membership.

Financial performanceRevenue and operating profit performance

Sales were SEK 423.6 (431.5) million, representing a decrease of 2% as

reported, but at fixed exchange rates sales were flat compared to the

previous year.

Gross profit amounted to SEK 237.6 (241.0) million in the full year giving a

gross profit margin of 56.1% (55.9%). The gross margin percentage can

be impacted by exchange rate effects as well as changes in the product

mix but overall is quite consistent with the previous year.

Operating expenses amounted to SEK 97.8 (89.8) million representing

an increase of 9% as reported and 12% at fixed exchange rates. The

increase continues to reflect investments that are being made to support

the launch of the Ferobide product and the strengthening of the sales

and marketing teams to support growth of other existing product lines.

Operating profit before non-recurring items therefore decreased to SEK

139.8 (151.2) million and the operating profit margin decreased to 33%

(35%). Overall the sales performance has not been at a level sufficient to

offset the investments in operating expenses referred to above.

Non-recurring expenses of SEK 0.2 (-) million were incurred relating

to legal expenses on the acquisition of 10% of Diamorph Bearings AB

referred to above.

Financing items and profits before tax

Net financial items amounted to income of SEK 1.5 (expenses of 43.0)

million. The changes in net financial items arise from a combination of

reductions in underlying financing charges and changes in non-recurring

financing items.

Underlying net financing expenses were SEK 37.4 (37.7) million, with the

small reduction over the full year relating to the continued amortisation of

the bank loan in the Hob Certec business.

Non-recurring financial income of SEK 38.9 (expenses of 5.3) million

was reported. They mainly comprise exchange gains and losses on

third party and intercompany financing balances and changes in the fair

value of derivative financial instruments. Significant gains arose in 2016 on

intercompany balances as GBP weakened against SEK in early 2016 both

in the run up to and subsequent to the UK referendum on EU membership.

In 2015, a smaller opposite exchange rate movement was experienced.

Adjusted profits before tax (adjusted to remove the effect of non-recurring

financing items) therefore decreased by 10% to SEK 102.4 (113.5) million.

Taxes

Income taxes amounted to a charge of SEK 29.0 (18.6) million. As for the

net financial expenses the tax charge comprises tax on the underlying

business performance as well as non-recurring tax items.

The underlying tax charge was SEK 21.4 (22.2) million, the decrease largely

due to a decrease in underlying profits before tax. The underlying tax

charge for the full year represents an effective tax rate of 21% (20%) of

adjusted profits before tax. The small increase in the tax rate reflects partly

a change in the mix of profits reported in different countries and also the

fact that the 2015 tax charge included credits relating to previous years.

Non-recurring tax charges of SEK 7.6 (credits of 3.6) million were reported.

These relate to tax effects on non-recurring financing items and other non-

recurring tax items. In 2016 non-recurring tax items include credits on

deferred tax liabilities arising as a result of a reduction to the corporation

tax rate from 19% to 17% expected in 2020 following announcements

by the government in the UK. They also include withholding tax charges

arising from the process of liquidating a dormant subsidiary company

(Tenmat Gmbh i.L) in Germany.


Earnings per share

After allowing for the profits after tax attributable to minority interests

adjusted earnings per share (adjusted for non-recurring financing and

tax items) decreased by 11% to SEK 1,49 (1,67). Earnings per share (as

reported under IFRS) increased by 26% to SEK 2,08 (1,65).

Cash flow and financial position

Net cash flow from operating activities before changes in working capital

amounted to SEK 93.1 (113.6) million in the full year. The decrease is

mainly explained by a combination of the decrease in operating profit

referred to above and an increase in tax payments. Cash tax payments

in 2015 were reduced by a number of factors including deductions for

foreign exchange losses whilst cash tax payments in 2016 have been

increased by tax charges on foreign exchange gains.

Changes in working capital reduced cash flow by SEK 16.4 (increase

of 8.5) million. Changes in working capital are mostly influenced by the

phasing of sales.

Cash outflows from investing activities were SEK 48.6 (24.2) million. Cash

outflows included investments in tangible and intangible fixed assets of

SEK 18.8 (10.0) million in the full year. This expenditure included investments

in our Innovation Centre in Manchester to support our medium to longer

term growth ambitions, as well as expenditure on new plant and equipment.

The cash flow also reflected the set aside of SEK 8.1 (5.9) million of cash

under a pledge agreement with a minority shareholder of Diamorph

Bearings AB and SEK 19.0 million relating to the acquisition of 10% of

Diamorph Bearings AB. In both years, cash outflows include payments

of GBP 230,000 into the Tenmat defined benefit pension scheme. In the

previous year the cash flow from investing activities included the final pay-

ment of SEK 14.4 million relating to the acquisition of the Tenmat business,

however these expenditures were partially offset by the disposal of SEK

9.0 million of marketable securities.

Cash flows from financial activities amounted to an outflow of SEK 7.5

(7.4) million in the full year. This relates to the continued amortisation of

the bank loan in the Hob Certec business.

Cash flow for the period therefore amounted to a cash inflow of SEK 20.6

(90.5) million. After adjusting for exchange rate differences, cash and cash

equivalents at the end of the year amounted to SEK 213.2 (194.3) million.

Net debt

Net debt at the end of the year amounted to SEK 305.9 (329.2) million, a

reduction of SEK 23.3 (87.9) million during the year.

Equity and number of shares

The parent company’s share capital at 31 December 2016 consisted of

SEK 1 105 608 (1 100 313) divided into 52 846 841 (52 593 751) shares

with a quota value of SEK 0.0209 (0.0209). The increase in share capital

since the start of the year relates to the directed share issue approved at

the 2016 AGM in May (as described further on page 14).

Group equity at 31 December 2016 amounted to SEK 461.6 (515.6) million,

a decrease of SEK 54.0 (increase of 130.4) million during the full year. In

addition to the net profit of SEK 112.1 (89.6) million reported for the year,

foreign exchange losses of SEK 109.8 (gains of 25.8) million arose primarily

on GBP denominated net assets within the business. As a result mainly of

significant changes to long term UK interest rates after the UK’s referendum

on EU membership, actuarial losses (net of tax) of SEK 35.4 (gain of 17.3)

million arose on the Tenmat defined benefit scheme (see defined benefit

pension scheme section below).

Further movements in group equity in the full year of 2016 related to the

directed share issue noted previously (SEK 3.8 million) and the transaction

with two shareholders to acquire 10% of Diamorph Bearings AB for total

consideration of SEK 22.8 million.

Defined benefit pension scheme

There is a defined benefit pension plan with the Group related to Modular

Stock Limited and its subsidiaries. At 31 December 2016, the net pension

deficit valued under IAS 19 was SEK 35.7 (surplus of 6.3) million. The

change in the IAS 19 pension valuation is driven mainly by a reduction in

long term UK interest rates and increases in inflation expectations. Most

of the change in the IAS 19 pension valuation during 2016 occurred soon

after the UK’s referendum result on EU membership was announced in

June 2016. Changes in the scheme’s funding position have the potential to

impact on the next triennial valuation of the scheme (required by the UK

Pension Regulator), however it remains too early to know the impact of this

on the ongoing cash contributions required by the group which are currently

committed at the level of GBP 230,000 in each of 2017 and 2018.

More detailed disclosures in respect of the defined benefit scheme are

set out in note 20.

Accounting principles

The detailed accounting policies are set out in note 2 on page 27. The

accounting policies are largely unchanged since the last annual report,

except that a new accounting policy is now required in respect of the

warrants issued and granted to employees as approved at the 2016 AGM

in May.

Following the requirements of IFRS2, the warrants are being accounted

for as equity-settled share-based payment arrangements. Although

there are specific circumstances in which the company may become

obligated to repurchase the warrants for cash consideration, this is not

assessed to be a probable outcome and hence no liability has been

recognised on the balance sheet. Following the requirements of IAS33,

there is currently no difference between the calculation of diluted and

undiluted earnings per share.

Risks

The Group operates and sells in various geographic markets and therefore

undertakes transactions in foreign currencies. The Group mainly transacts

sales and purchases in the following currencies: Euro (EUR), US Dollars

(USD), British Pounds (GBP) and Czech Koruna (CZK). The Group has

interest-bearing liabilities in SEK (the bond) and EUR (bank loan in Czech

Republic). Exposures to exchange rate fluctuations therefore arise.


The Group is only able to match the foreign currency cash inflows and

outflows to a limited extent. Strategies to manage the remaining net expo-

sures are continually reviewed but presently forward exchange contracts are

selectively used to mitigate the potential short term impact from changes in

exchange rates. Typically, a proportion of the expected foreign currency cash

flows are hedged looking at a period up to 12 months' forward.

Operationally the Group maintains a good degree of diversification in

terms of the customers and markets it serves. Also in the eyes of the

customer Diamorph's sales can comprise both capital as well as operating

expenditure so the Group's performance is partially protected from swings

in demand influenced by traditional capex cycles. Despite this the Group

would be and is exposed, like other industrial companies, to changes in

the macro-economic climate although there is some flexibility to adjust

costs in response to changes in demand due to the natural mix of variable

cost within the business.

The Group’s financial performance is at least partly dependent on its

ability to exploit and protect its intellectual property rights including

its trademarks. Only a proportion of the Group’s intellectual property

is protected by patent rights partly because the process of obtaining

a patent carries an inherent risk of putting information into the public

domain that can be exploited by third parties. The legal costs necessary

to incur to defend intellectual property rights can also be very expensive

especially given the fact that the Group is operating in several countries.

However the Group does take legal action to defend its rights where it

considers such action to be appropriate and therefore the Group can be

involved in ongoing legal actions from time to time.

The main financial risks faced by the Group are set out further in note

3, and additional information specific to the Group's defined benefit

pension scheme is set out in note 20.

R&D

The goal of Diamorph’s research and development is to develop new

materials and products that extend life, reliability and performance of our

customers’ products and applications. Research and development is

undertaken in Manchester, United Kingdom and Horni Briza, Czech Republic.

The Group invested 2% (2%) of sales in research and development in

2016. R&D costs were all expensed and no costs were capitalised in

either 2015 or 2016.

Share holders

As of 31 December 2016 the number of shareholders amounted to 234

(249). For more information, see page 13.

Related party transactions

Arrangements involving related parties are disclosed in note 26.

Number of employees

In 2016, an average of 272 (260) persons were employed in the Group.

At 31 December 2016 the Group had 279 (271) employees. For further

information, see note 8.

Environmental information

The Company holds the necessary permits for the operations and production

in Manchester, United Kingdom and Horni Briza, Czech Republic. The

operations manage waste according to applicable regulations.

The Parent Company

The Parent Company’s net revenue amounted to SEK 2.0 (3.8) million,

giving an operating loss of SEK 3.7 (3.1) million.

Cash and cash equivalents at the end of the period amounted to SEK 21.0

(5.0) million.

Proposed distribution of profits

The Board of Directors do not propose any distribution to shareholders

and propose that the loss for the year is transferred to retained earnings.

2016

Share premium account 287,5

Accumulated loss -63,3

Loss for year -4,7

Total available for distribution 219,5

Distributed -

Carried forward 219,5

Other information is available in the following financial statements and

accompanying notes. All amounts are stated in SEK million unless

otherwise stated.


The key performance measures for the past 5 years are shown in the table below

Key figures 2012 2013 2014 2015 2016

Results

Net Sales 162,3 333,8 383,7 431,5 423,6

Operating profit before non-recurring items 33,9 98,8 127,8 151,2 139,8

Operating profit margin, % 20,9 29,6 33,3 35,0 33,0

Adjusted profit before tax 5,0 42,5 76,4 113,5 102,4

Operating cash flow 20,1 112,1 135,3 160,9 115,8

Operating cash conversion, % 91 115 109 106 83

Financial position

Balance sheet total assets 918,2 983,1 1037,1 1139,9 1107,7

Equity attributable to non-controlling interests 16,0 16,4 19,3 22,3 14,0

Equity attributable to Parent Company shareholders 217,5 295,4 365,9 493,3 447,6

Interest-bearing debt 460,1 458,6 530,3 523,5 519,1

Total debt 556,5 537,1 530,3 523,5 519,1

Net debt 461,0 395,7 417,1 329,2 305,9

Capital employed 790,0 848,9 915,5 1039,1 980,7

Net debt ratio, % 197 127 108 64 66

Per share

Adjusted earnings per share -0,05 0,63 1,07 1,67 1,49

Equity per share attributable to Parent Company shareholders 4,25 5,62 6,96 9,38 8,47

Average number of shares (‘000) 39 527 51 840 52 594 52 594 52 741

Number of shares at year end (‘000) 51 210 52 594 52 594 52 594 52 847

For definitions of key figures that are not sourced directly from the financial statements, please see note 29.

0

100

200

300

400

500

2012 2013 2014 2015 2016

333,8383,7

431,5 423,6

163,3

Net Sales

423,6(431,5) MILLION SEK

0

50

100

150

200

33,9

98,8

127,8139,8

2012 2013 2014 2015 2016

151,2

Operating profit

139,8(151,2) MILLION SEK

2012 2013 2014 2016

33,0

2015

Profit margin

33% (35%) PERCENT

5 Year record


Group income statement(MSEK) Note 2015 2016

Net sales 5 431,5 423,6

Cost of goods sold -190,5 -186,0

Gross profit 241,0 237,6

Operating expenses

Sales -52,5 -58,8

Admin -28,6 -29,0

R&D -9,3 -10,0

Other operating income 0,6 -

Operating expenses -89,8 -97,8

Operating profit before non-recurring items 6,7,8 151,2 139,8

Non-recurring items 6 - -0,2

Operating profit 151,2 139,6

Financial items

Financial income 9 0,2 0,1

Financial expenses 9 -37,9 -37,5

Non-recurring financial charges 9 -5,3 38,9

Net financial -43,0 1,5

Profit before income tax 108,2 141,1

Income taxes 10 -18,6 -29,0

Profit for the year 89,6 112,1

Consolidated statement of comprehensive income

Profit for the year 89,6 112,1

Other comprehensive profit/loss for the year

Items that may be returned to the profit and loss statement in future periods

Exchange rate differences 25,8 -109,8

Items that will not be returned to the profit and loss statement in future periods

Actuarial profit/loss, net after tax 17,3 -35,4

Other comprehensive profit/loss for the year 43,1 -145,2

Total comprehensive profit/loss for the year 132,7 -33,1

Profit for the year attributable to:

Parent Company shareholders 86,7 109,6

Non-controlling interests 2,9 2,5

Total 89,6 112,1

Total comprehensive profit/loss attributable to:

Parent Company shareholders 129,5 -36,2


Total 132,7 -33,1

Earnings per share before and after dilution, SEK 28 1,65 2,08

Average number of shares, basic and diluted 21 52 593 751 52 741 387


Group balance sheet(MSEK) Note 2015 2016

ASSETS

Fixed assets

Computer software 11 0,7 0,7

Capitalised development expenditures 11 18,9 12,9

Trademarks 11 157,6 142,0

Goodwill 11 579,1 528,7

Land and buildings 12 43,5 45,6

Machinery 12 24,4 30,7

Office equipment 12 1,4 1,1

Pension assets 20 6,3 -

Total fixed assets 831,9 761,7

Current assets

Inventories 13 30,5 31,1

Accounts receivable 14 64,2 75,1

Current tax assets 1,8 -

Derivative financial instruments 22 - 0,2

Other receivables 15 2,6 2,2

Prepaid expenses and accrued income 0,9 1,6

Restricted cash 17 13,7 22,6

Cash and cash equivalents 17 194,3 213,2

Total current assets 308,0 346,0

TOTAL ASSETS 1 139,9 1 107,7

EQUITY 18

Equity attributable to owners of the Parent

Share 1,1 1,1

Other capital contributions 320,7 324,5

Reserves 133,4 23,0

Earned income 38,1 99,0

Total equity attributable to owners of the Parent 493,3 447,6


Total equity 515,6 461,6

LIABILITIES

Long-term liabilities

Interest-bearing liabilities 19 516,3 495,3

Pension liability 20 - 35,7

Deferred tax liability 10 31,4 20,1

Other non-current financial liabilities 4 6,6 8,9

Total long-term liabilities 554,3 560,0

Current liabilities

Interest-bearing liabilities 19 7,2 23,8

Accrued interest 11,3 11,2

Accounts payable 26,2 26,9

Current tax liabilities 8,2 10,7

Derivative financial instruments 22 1,0 0,1

Other liabilities 23 2,7 2,4

Accrued expenses and deferred income 13,4 11,0

Total current liabilities 70,0 86,1

TOTAL LIABILITIES AND EQUITY 1 139,9 1 107,7


Group changes in equity

(MSEK)

Share

capital

Other capital

contributions Reserves

Earned

Income Total

Non

controlling

interests

Total

equity

Opening balance as per 2016-01-01 1,1 320,7 133,4 38,1 493,3 22,3 515,6

Comprehensive profit

Profit/loss for the year - - - 109,6 109,6 2,5 112,1

Other comprehensive profit

Actuarial loss on defined benefit pension scheme - - - -44,2 -44,2 - -44,2

Tax effect on actuarial loss - - - 8,8 8,8 - 8,8

Exchange rate differences - - -110,4 - -110,4 0,6 -109,8

Total comprehensive profit - - -110,4 74,2 -36,2 3,1 -33,1

Transactions with shareholders

Share issue - 3,8 - - 3,8 - 3,8

Share-based payments - - - 0,4 0,4 - 0,4

Purchase of non-controlling interest - - - -11,4 -11,4 -11,4 -22,8

Revaluation of put option over non-controlling

Interests - - - -2,3 -2,3 - -2,3

Total transactions with shareholders - 3,8 - -13,3 -9,5 -11,4 -20,9

Balance on 2016-12-31 1,1 324,5 23,0 99,0 447,6 14,0 461,6

Opening balance as per 2015-01-01 1,1 320,7 107,9 -63,8 365,9 19,3 385,2


Profit/loss for the year - - - 86,7 86,7 2,9 89,6

Other comprehensive profit

Actuarial profit on defined benefit pension schemes - - - 22,8 22,8 - 22,8

Tax effect on actuarial profit - - - -5,5 -5,5 - -5,5

Exchange rate differences - - 25,5 - 25,5 0,3 25,8

Total comprehensive profit - - 25,5 104,0 129,5 3,2 132,7


Revaluation of put option over non-controlling

Interests - - - -2,1 -2,1 -0,2 -2,3

Total transactions with shareholders - - - -2,1 -2,1 -0,2 -2,3

Balance on 2015-12-31 1,1 320,7 133,4 38,1 493,3 22,3 515,6


Group cash flow(MSEK) Note 2015 2016

Cash flow from operations

Operating profit 151,2 139,6

Adjustments for items not included in cash flow:

Depreciation & amortisation 11,12 11,2 11,0

Share based payment expense - 0,4

Interest received 0,2 0,1

Interest paid -36,1 -35,7

Tax paid -12,9 -22,3

Cash flow from operations before change in working capital 113,6 93,1

Changes in working capital

Increase / decrease in inventories and work in progress -0,9 -1,3

Increase / decrease in accounts receivable 7,2 -14,0

Increase / decrease in other receivables 0,2 -0,5

Increase / decrease in other current liabilities -1,6 -3,3

Increase / decrease in accounts payable 3,6 2,7

Total changes in working capital 8,5 -16,4

Cash flow from operations 122,1 76,7

Cash flow from investment activities

Deferred payments relating to acquisition of subsidiaries 22 -14,4 -

Acquisition of non-controlling interest - -19,0

Transfer of restricted cash relating to acquisition of subsidiaries -5,9 -8,1

Payment to defined benefit pension scheme -2,9 -2,7

Investments in tangible and intangible fixed assets 11,12 -10,0 -18,8

Disposal of marketable securities 16 9,0 -

Total cash flow from investment activities -24,2 -48,6

Free cash flow for the year 97,9 28,1

Cash flow from financial activities

Amortisation of loans -7,4 -7,5

Total cash flow from financial activities -7,4 -7,5

Cash flow for the year 90,5 20,6

Cash and cash equivalents at beginning of year 104,2 194,3

Exchange rate differences -0,4 -1,7

Cash and cash equivalents at end of year 18 194,3 213,2


Parent Company income statement(MSEK) Note 2015 2016

Net sales 27 3,8 2,0

Cost of goods sold - -

Gross profit 3,8 2,0

Operating expenses

Sales -1,8 -1,9

Admin -5,1 -3,6

Operating expenses -6,9 -5,5

Operating loss before non-recurring items 6,7,8 -3,1 -3,5

Non-recurring items 6 - -0,2

Operating loss -3,1 -3,7

Financial Items

Financial income 9 37,7 36,8

Financial expenses 9 -37,4 -37,8

Net financial 0,3 -1,0

Loss before income tax -2,8 -4,7

Income taxes 10 - -

Loss for the year -2,8 -4,7

Parent Company statement of comprehensive income


Other comprehensive profit - -

Other comprehensive profit for the year, net after income tax - -

Total comprehensive loss for the year -2,8 -4,7


Parent Company balance sheet(MSEK) Note 2015 2016

ASSETS

Fixed assets

Tangible fixed assets

Machinery and equipment 12 - -

Total tangible assets - -

Financial assets

Shares in subsidiaries 24 135,8 158,6

Receivables from Group Companies 549,1 550,9

Total financial assets 684,9 709,5

Total fixed assets 684,9 709,5

Current assets

Short-term receivables

Receivables from Group Companies 51,8 12,0

Other receivables 15 0,4 0,2

Total current receivables 52,2 12,2

Cash and cash equivalents 5,0 21,0

Total current assets 57,2 33,2

TOTAL ASSETS 742,1 742,7

EQUITY 18

Restricted equity

Share capital 1,1 1,1

Total restricted equity 1,1 1,1

Unrestricted equity

Share premium account 283,7 287,5

Retained earnings -60,5 -63,3


Total unrestricted equity 220,4 219,5


LIABILITIES

Long-term liabilities

Interest-bearing liabilities 493,6 495,3

Total long-term liabilities 493,6 495,3

Current liabilities

Accrued interest 11,2 11,2

Accounts payable 0,2 0,2

Liabilities to subsidiaries 12,9 13,5

Accrued expenses and deferred income 2,7 1,9

Total current liabilities 27,0 26,8

TOTAL LIABILITIES AND EQUITY 742,1 742,7

There are no pledged assets or contingent liabilities in the Parent Company. See note 25.


Parent Company changes in equity

(MSEK)

Share

capital

Share

premium

Retained

earnings

Profit

for year Total

Opening balance as per 2016-01-01 1,1 283,7 -60,5 -2,8 221,5


Loss for the year - - - -4,7 -4,7


Share issue - 3,8 - - 3,8

Profit allocation as decided at the AGM:

Loss for previous year transferred to retained earnings - - -2,8 2,8 -

Total comprehensive loss - 3,8 -2,8 -1,9 -0,9

Balance on 2016-12-31 1,1 287,5 -63,3 -4,7 220,6

Opening balance as per 2015-01-01 1,1 283,7 -46,6 -13,9 224,3


Loss for the year - - - -2,8 -2,8

Profit allocation as decided at the AGM:

Loss for previous year transferred to retained earnings - - -13,9 13,9 -

Total comprehensive loss - - -13,9 11,1 -2,8

Balance on 2015-12-31 1,1 283,7 -60,5 -2,8 221,5


Parent Company cash flow

(MSEK) Note 2015 2016

Cash flow from operations

Operating loss -3,1 -3,7

Adjustments for items not included in cash flow :

Interest received 35,0 46,0

Interest paid -35,0 -35,0

Cash flow from operations before change in working capital -3,1 7,3

Changes in working capital

Increase / decrease in other receivables 0,1 -

Increase / decrease in receivables from Group Companies -3,0 9,7

Increase / decrease in accounts payable - -0,7

Increase / decrease in other current liabilities -0,9 -

Total changes in working capital -3,8 9,0

Cash flow from operations -6,9 16,3

Cash flow from investment activities

Transfer of restricted cash relating to acquisition of subsidiaries - -19,0

Disposal of marketable securities 16 9,0 -

Total cash flow from investment activities 9,0 -19,0

Free cash flow for the year 2,1 -2,7

Cash flow from financial activities

Cash received from subsidiary company - 18,7

Total cash flow from financial activities - 18,7

Cash flow for the year 2,1 16,0

Cash and cash equivalents at beginning of year 2,9 5,0

Cash and cash equivalents at the end of the year 5,0 21,0


Accounting principles and notesNote 1 - General information

Diamorph AB (publ) and its Subsidiaries (“the Group” or “Diamorph”),

conducts research, development and commercialisation of advanced

materials solutions for especially demanding industrial applications.

The Parent Company is a limited liability Company registered in Sweden and

has its headquarters in Stockholm. The street address of its registered office

is c/o Sdiptech AB (publ), Stureplan 15, SE-111 45 Stockholm, Sweden.

On 28 April 2017 the Board of directors approved these consolidated

financial statements and the annual report for publication. The financial

statements are subject to approval by the Annual General Meeting of the

shareholders on 22 May 2017.

All amounts are in millions of Swedish krona, SEK million, unless otherwise

stated. Figures in brackets relate to the previous year.

Note 2 - Significant accounting policies

2.1 Basis of preparation

The consolidated financial statements for Diamorph have been prepared

in accordance with International Financial Reporting Standards (IFRS)

as adopted by the EU, RFR1 Supplementary Accounting and the Annual

Accounts Act.

The principal accounting policies applied in these financial statements are

set out below. These policies have been consistently applied to all years

presented, unless otherwise stated.

The Parent Company’s financial statements are prepared in accordance

with RFR 2, Accounting for Legal Entities and the Companies Act. In

cases where the Parent Company applies accounting principles other

than those for the Group they are listed separately at the end of this note.

The preparation of financial statements in conformity with IFRS requires the

use of certain critical accounting estimates. It also requires management to

make certain judgments in applying the Group’s accounting policies. The

areas involving a higher degree of judgement or complexity, or areas where

assumptions and estimates are significant to the consolidated financial

statements are reported in note 4.

Existing accounting standards that have become relevant to

Diamorph for the first time during 2016

Following the issue of warrants granted to employees as approved at the

2016 AGM in May, Diamorph is required to apply the requirements of IFRS2

Share-based Payment and those requirements within IAS33 Earnings

per Share that relate to the calculation of diluted earnings per share. The

accounting policies adopted are set out further below and the required

disclosures in respect of the new warrant arrangements are set out in note 21.

New and revised standards applied by the Group in 2016

The Group applied for the first time certain standards and amendments

which are effective for annual periods beginning on or after 1 January

2016. These mainly related to amendments to IFRS 10 Consolidated

Financial Statements, IAS 16 Property, Plant and Equipment and those

changes resulting from the International Accounting Standards Board’s

Annual Improvements 2012-2014 Cycle. Although all newly effective

standards and amendments have been applied for the first time, they did

not have any significant impact on the Group and therefore they have not

been explained in further detail in this note.

Standards, amendments and interpretations to existing

standards that are not yet effective and that have not been early

adopted by Diamorph

The Group has not early adopted any other standard, interpretation or

amendment that has been issued but is not yet effective. An analysis

of the effect of such changes on Diamorph’s future reports is not yet

completed and analysed so only a preliminary indication of the possible

changes is presented below, focused only on those standards and

amendments that are considered most likely to have some potential impact.

IFRS 9 Financial Instruments

The standard is intended to replace IAS 39 Financial Instruments: Recognition

and Measurements, and addresses the classification and measurement

of financial instruments and hedge accounting. The effective date is not

effective until January 1, 2018 and the Group is yet to assess the full impact

of IFRS 9.

IFRS 15 Revenue from Contracts with Customers

This new standard replaces existing revenue recognition standards and

specifies how and when the Group will recognise revenue as well as

requiring the Group to provide users of financial statements with more

informative and relevant disclosures. The effective date is January 1, 2018.

The Group is yet to assess the full impact of IFRS 15.

IFRS 16 Leases

This new standard replaces existing standards that address the accounting

for leases of property and equipment. Existing standards distinguish

between operating type leases and financing type leases. For lessees

operating type leases do not result in any asset being recognised on the

balance sheet whilst financing type leases do together with a financial

obligation. With some exceptions the new standard will require lessees to

recognise more financing type leasing arrangements. The effective date is

January 1, 2019. The Group is yet to assess the full impact of IFRS 16.

2.2 Group reporting

Subsidiaries

Subsidiaries are all entities over which the Group has the power to govern

the financial and operating policies in a way that generally accompanies

a shareholding of more than 50% of the shares (or the voting rights) or in

which the Group contractually exercises a controlling influence. Subsidiaries

are fully consolidated from the date on which control is transferred to the

Group. They are de-consolidated from the date on which control ceases.

The purchase method is used to report the acquisition of subsidiaries.

The cost of an acquisition is measured as the fair value of the assets

transferred, equity instruments issued and liabilities incurred or assumed

at the date of transfer. Costs that are directly attributable to the acquisition

are expensed as incurred. Identifiable assets acquired and liabilities and


contingent liabilities in a business combination are measured initially at

their fair values at the acquisition date, irrespective of the extent of any

minority interest. The excess of the cost of acquisition over the fair value of

the Group’s share of identifiable net assets acquired is recorded as goodwill.

If the cost is less than the fair value of the acquired subsidiary’s assets and

liabilities, any difference is recognised directly in the income statement.

Intercompany transactions, balances and unrealised gains on transactions

between Group companies are eliminated. Unrealised losses are also

eliminated, but any losses are viewed as an indication that an impairment

may exist.

Transactions with minority shareholders (non-controlling interests)

The Group accounts for transactions with non-controlling interests as

transactions with the Group’s shareholders. For purchases from non-

controlling interests, the difference between any consideration paid and

assets is recorded in equity. Gains or losses on disposals to non-controlling

interests are also recorded in equity.

2.3 Segment reporting

Operating segments are reported in a manner consistent with the

internal reporting provided to the chief operating decision maker. The

chief operating decision maker is the function responsible for allocating

resources and assessing performance of the operating segments. In

the Group, this function has been identified as the Board together with

the CEO. Any division into different segments has not occurred and the

Company is assessed to be a one segment Company.

2.4 Translation of foreign currencies

Functional currency and reporting currency

Items included in the financial statements of each of the Group’s entities

are measured using the currency of the primary economic environment

in which the entity operates (the functional currency). The consolidated

financial statements are presented in Swedish kronor (SEK), which is the

Company’s functional and reporting currency.

Transactions and balance sheet items

Foreign currency transactions are translated into the functional currency

using the exchange rates prevailing on the transaction date. Exchange gains

and losses resulting from the settlement of such transactions and from the

translation of monetary assets and liabilities denominated in foreign currencies

at the closing exchange rate are reported in the income statement. Exchange

rate differences on loans and borrowings (including intercompany loans) and

foreign currency cash balances are reported in financial items, while other

exchange differences are included in operating profit.

Subsidiaries

The results and financial position of all the Group entities (none of which

has a hyperinflationary economy as its functional currency) that have a

functional currency different from the presentation currency are translated

into the presentation currency as follows:

• Assets and liabilities for each balance sheet presented are translated

at the closing rate;

• Income and expenses for each income statement are translated

at average exchange rates (unless this average is not a reasonable

approximation of the cumulative effect of the rates prevailing on

the transaction date, otherwise the revenue and expenses are

translated at the rate in force on the transaction date), and

• All resulting exchange differences are recognised in other

comprehensive income.

Goodwill and fair value adjustments arising on the acquisition of a

foreign entity are treated as assets and liabilities of the foreign entity and

translated at the closing rate.

2.5 Intangible assets

Patents

Patents have a finite useful life and are reported at cost less accumulated

amortisation. Amortisation is applied to allocate the cost of patents over

their estimated useful life.

Capitalised expenditure for development of products

Expenditure on research activities is expensed as incurred. Development

costs are also expensed unless it can be shown that they are directly

attributable to the development and testing of identifiable and unique

products controlled by the Group and meet all of the criteria for

capitalisation according to IAS 38.

Technology acquired as part of business combinations is recognised

as capitalised development expenditure at the fair value at the date of

acquisition.

Capitalised development costs are amortised on a straight-line basis over

a period of up to ten years. The capitalised development costs acquired

as part of the acquisition of the Tenmat Group of companies are being

amortised over 7.5 years.

Trademarks

Trademarks acquired through business combinations are recognised

at fair value at the acquisition date. The brands’ longevity has not been

determined why depreciation is not charged, but rather, they are evaluated

for impairment annually together with the associated goodwill and other

assets included in each cash-generating unit.

Goodwill

Goodwill represents the excess of cost over the fair value of the Group’s

share of the acquiree’s identifiable net assets at the acquisition date.

Goodwill on acquisition of subsidiaries is included in intangible assets.

Goodwill is reported as an indefinite useful life intangible asset but is tested

annually for impairment and carried at cost less accumulated impairment

losses. Impairment losses on goodwill are not reversed.

Goodwill is allocated to cash-generating units for the purpose of impairment

testing. The allocation is made to those cash-generating units or groups of

cash-generating units expected to benefit from the business combination

in which the goodwill arose.

Gains or losses on disposal of an entity include the carrying amount of

goodwill relating to the entity sold.

2.6 Tangible fixed assets

All tangible fixed assets are stated at cost less depreciation. Cost includes

expenditure that is directly attributable to the acquisition of the asset,

including costs attributable to bringing the assets to their location and

putting them in the necessary condition for their intended use.


Subsequent costs are added to the asset’s carrying amount or reported

as a separate asset, as appropriate, only when it is probable that future

economic benefits associated with the item will flow to the Group and

the cost of the asset can be measured reliably. The carrying amount of

the replaced part is derecognised. All other repairs and maintenance are

expensed in the income statement in the period in which they arise.

There is no depreciation on land. Depreciation of other assets, in order

to allocate the difference between their cost and their estimated residual

value over their estimated useful lives, is performed on a straight line

basis as follows:

Plant, machinery, tooling 5-15 years

Computers 3-5 years

Office equipment 4-5 years

Buildings 15-40 years

The assets’ residual values and useful lives are reviewed each reporting

date and adjusted if necessary. An asset’s carrying amount is written

down immediately to its recoverable amount if the asset’s carrying amount

exceeds its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds

with the carrying amount at the time of disposal.

2.7 Impairment of non-financial assets

Assets that have an indefinite useful life, such as goodwill and trademarks,

are not amortised but tested annually for impairment. Tangible fixed

assets and intangible assets are assessed for impairment whenever

events or changes in circumstances indicate that the carrying amount

may not be recoverable.

An impairment loss is recognised for the amount by which the assets

carrying amount exceeds its recoverable amount. Recoverable amount is

the higher of an asset’s fair value less costs to sell and its value in use. For

the purposes of assessing impairment, assets are grouped at the lowest

levels for which there are separately identifiable cash flows (cash-generating

units). For tangible and intangible assets previously written down, an

assessment is made at each reporting date of whether reversal is required.

2.8 Financial instruments

The Group classifies its financial instruments in the following categories:

financial assets and liabilities at fair value through profit or loss, loans

and receivables, financial assets available-for-sale and other financial

liabilities. The classification depends on the purpose for which the financial

instruments were acquired. Management determines the classification

of its financial instruments at initial recognition and re-evaluates this

designation at every reporting date.

Classification and measurement

Financial assets and liabilities at fair value through profit or loss

Financial assets and liabilities at fair value through profit or loss are

financial instruments held for trading. A financial asset or a financial liability

is classified in this category if acquired principally for the purpose of being

divested shortly. Derivatives are classified as held for trading unless they

are designated as hedges. Financial instruments in this category are

measured at fair value and changes are recognised in profit or loss, except

for changes in the fair value of the put option over non-controlling interests

explained in note 4 (where changes in value are recognised in equity).

Loans and receivables

Loans and receivables are financial assets that are not derivatives with

fixed or determinable payments that are not quoted in an active market.

They are included in current assets, except for items with maturities

greater than twelve months after the balance sheet date which are

classified as fixed assets. Loans and receivables are measured at

amortised cost using the effective interest method, less any impairment

losses. An impairment of trade receivables is recognised in the income

statement within selling expenses.

Financial assets available for sale

Financial assets available for sale are assets that are not derivatives which

have been identified as available for sale or are not classified in any other

category. They are included in non-current assets unless management

intends to dispose of the asset within twelve months after the reporting

period. These assets are measured at fair value with changes in value

being recognised in other comprehensive income except for impairment

losses which are recognised in profit and loss. When an investment is

derecognised, the cumulative gain or loss in other comprehensive income

is transferred to profit or loss.

Other financial liabilities

Other financial liabilities are measured at amortised cost using the

effective interest method.

Where financial instruments are carried at fair value, the fair values are

assessed using the methods described in section 3.3 below.

The categories allocated to the Group’s assets and liabilities are explained

further in section 3.4 below.

Recognition and de-recognition

Purchases and sales of financial assets are recognised on the trade date - the

date on which the Group commits to purchase or sell the asset or liability.

Financial assets are de-recognised when the rights to receive cash flows

from the investments have expired or have been transferred and the

Group has transferred substantially all risks and rewards associated with

ownership. Financial liabilities are de-recognised when the contractual

obligations have been completed or otherwise terminated.

Impairment of financial assets

The Group assesses at each balance sheet date whether there is objective

evidence of impairment for a financial asset or group of financial assets, such

as the disappearance of an active market, or if it is unlikely that a debtor can

fulfil its commitment. Impairment losses are recognised in profit or loss.

2.9 Inventories

Inventories are stated at the lower of cost and net realisable value.

Cost is determined using the first-in, first-out method (FIFO). The cost of

inventories consists of all costs of purchasing the goods and bringing

them to their location and condition. Borrowing costs are not included.

Inventories consist mainly of raw materials used in own production, work

in progress or finished goods. Work in progress and finished goods

include an appropriate share of manufacturing production overheads

based on normal production capacity.


Net realisable value is the estimated selling price in the ordinary course of

business, less applicable variable selling expenses. Necessary provision

for obsolescence has been made after individual assessment.

2.10 Receivables

Trade receivables are recognised initially at fair value and subsequently

measured at amortised cost using the effective interest method, less

provision for impairment. A provision for impairment of trade receivables is

established when there is objective evidence that the Group will not be able

to collect all amounts due according to the original terms. Provisions for

impairment are measured as the difference between the asset’s carrying

amount and the present value of estimated future cash flows, discounted

at the original effective interest rate. Both impairment losses related to trade

receivables are recognised in selling expenses in the income statement.

The carrying value of trade receivables, less any impairment losses, are

assumed to correspond to their fair value, since they are short-term in nature.

2.11 Cash and cash equivalents

Cash and cash equivalents include cash, bank deposits and short-term

investments with maturities of three months or less.

2.12 Share capital

Ordinary shares are classified as equity. Transaction costs directly

attributable to the issue of new shares are recognised, net of tax, in equity

as a deduction from the proceeds.

2.13 Payables

Trade payables are recognised initially at fair value and subsequently

measured at amortised cost using the effective interest method. The

carrying amount of trade payables are assumed to correspond to their fair

value because they are short-term in nature.

2.14 Borrowings

Borrowings are recognised initially at fair value net of transaction costs.

Borrowings are subsequently stated at amortised cost and any difference

between the proceeds (net of transaction costs) and the redemption value

is recognised in the income statement over the period of the borrowings

using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an

unconditional right to defer settlement of the liability for at least twelve

months after the balance sheet date.

Borrowing costs

General and specific borrowing costs that are directly attributable to the

acquisition, construction or production of qualifying assets, which are

assets that necessarily take a substantial period of time to get ready for

their intended use or sale, are reported as part of such assets.

Capitalisation ceases when all the activities necessary to prepare the

assets for their intended use or sale are substantially completed. All other

borrowing costs are expensed as incurred.

2.15 Current and deferred tax

The current tax expense is calculated on the basis of the tax rates as

at the balance sheet date that are enacted or substantively enacted in

countries where the Company’s subsidiaries operate and generate taxable

income. Management periodically evaluates the positions taken in tax

returns with respect to situations in which applicable tax regulations are

subject to interpretation and when deemed appropriate, makes provisions

for amounts expected to be paid to the tax authorities.

Deferred tax is recognised in full using the liability method on temporary

differences arising between the tax bases of assets and liabilities and their

carrying amounts in the consolidated financial statements. Deferred tax is

not recognised on temporary differences arising from the initial recognition

of goodwill and differences relating to investments in subsidiaries to the

extent they will not reverse in the foreseeable future.

Deferred tax is determined using tax rates (and laws) that have been

enacted or substantively enacted at the balance sheet date and are

expected to apply when the related deferred tax asset is realised or the

deferred tax liability is settled.

Deferred tax assets are only recognised to the extent that it is probable

that future taxable profit will be available against which the temporary

differences can be utilised.

2.16 Compensation to employees

Pension obligations

The Group operates both defined contribution and defined benefit

pension plans.

Defined contribution pensions

For defined contribution plans, the Group pays contributions to publicly or

privately administered pension insurance plans on a mandatory, contractual

or voluntary basis. The Group has no further payment obligations once

the contributions have been paid. The contributions are recognised as an

employee benefit expense when they are due. Prepaid contributions are

recognised as an asset to the extent that a cash refund or a reduction in

future payments is available to the Group.

Defined benefit pensions

Defined benefit plans are characterised by defining an amount of pension

benefit that an employee will receive on retirement, usually dependent on

one or more factors such as age, years of service and salary.

The liability recognised in the balance sheet for defined benefit pension

plans is the present value of the defined benefit obligation at the balance

sheet date less the fair value of plan assets. The defined benefit obligation is

calculated annually by independent actuaries using the projected unit credit

method. The present value of the defined benefit obligation is determined

by discounting the estimated future cash outflows using interest rates of

high quality corporate bonds that are denominated in the same currency

in which the benefits will be paid and with maturities comparable to the

pension liability. The calculation also takes account of assumptions such as

mortality rates and expected future inflationary increases in salaries.

Actuarial gains and losses arising from experience adjustments and

changes in actuarial assumptions are recognised in the statement of other

comprehensive income in the period they occur.

Service costs are recognised immediately in income unless they are

conditional on the employees remaining in service for a specified period of

time (the vesting period). In such cases the cost for service is recognised

on a straight line basis over the vesting period.


Profit-sharing and bonus plans

The Group reports a liability and an expense for bonuses. The Group

recognises a liability when there is a legal obligation or a constructive

obligation as a result of past practices.

2.17 Provisions

Provisions are recognised when the Group has a present legal or constructive

obligation as a result of past events, it is probable that an outflow of resources

will be required to settle the obligation and the amount can be estimated

reliably. Provisions are not recognised for future operating losses.

Provisions are measured at the fair value of the amount expected to be

required to settle the obligation. A discount rate before tax is used that

reflects current market assessments of the time value of money and the

risks specific to the obligation. Increases in provisions due to the passage

of time are recognised as interest expenses (referred to as ‘unwinding of

discount charges’).

2.18 Revenue reporting

Sale of goods

The Group’s income is predominantly generated from the sale of products

developed and manufactured within the Group.

Revenue comprises the fair value of the consideration received or

receivable for goods sold in the Group’s operating activities. Revenues are

reported net after deduction of value added tax, returns and discounts.

The Group recognises revenue when the significant risks and rewards of

ownership have been transferred to the buyer which takes into account,

inter alia, whether the amount receivable can be measured reliably and it

is probable that future economic benefits will flow to the Group. In most

circumstances, this date coincides with the delivery of the goods to the

customer.

Interest income

Interest income is recognised on a time proportioned basis using the

effective interest method.

Government grants

Grants from the government are recognised at fair value when there is

reasonable assurance that the grant will be received and the Group will

comply with the conditions attached to the grant. Government grants

relating to costs are deferred and recognised as income over the periods

the costs are intended to cover.

2.19 Leasing

Leases in which a significant portion of the risks and rewards of ownership

are retained by the lessor are classified as operating leases. Payments

made under operating leases (net of any incentives received from the

lessor) are charged to the income statement over the lease period.

Leases of fixed assets where the Group has substantially all the risks and

rewards of ownership are classified as finance leases. At lease inception,

the finance leases are capitalised at the lower of the leased asset’s fair value

and the present value of the minimum lease payments. Each lease payment

is allocated between the liability and finance charges to achieve a constant

rate of interest on the liability. Corresponding payment obligations, net

of finance charges, are included in the balance sheet item. The interest

element of the finance cost is recognised in the income statement over the

lease period. Fixed assets held under finance leases are depreciated over

the shorter of the asset useful life and the lease term.

2.20 Dividends

Dividends paid to Parent Company shareholders are recognised as

liabilities in the consolidated financial statements in the period in which the

dividends are approved by the Company’s shareholders.

2.21 Share-based payments

Following approval of a long-term incentive programme at the AGM in

2016, certain employees of the Group have been issued with warrants.

These are accounted for as a form of share-based payment transaction,

whereby employees render services in exchange for shares or rights

over shares. Although there are specific circumstances in which the

company may become obligated to repurchase the warrants for cash

consideration, this is not assessed to be a probable outcome and hence

the share-based payment transactions are accounted for as “equity-

settled transactions”.

The cost of equity-settled transactions with employees is measured at

fair value at the date at which they are granted and then expensed on a

straight-line basis over the vesting period based on the Group’s estimate

of shares that will eventually vest. The estimate of the number of awards

likely to vest is reviewed at each balance sheet date up to the vesting date,

at which point the estimate is adjusted to reflect the actual outcome of

awards which have vested. No adjustment is made to the fair value after

the vesting date even if the awards are forfeited or not exercised.

2.22 Earnings per share

Basic earnings per share are calculated based on the profit for the year

attributable to the owners of the Parent Company and the basic weighted

average number of shares in issue and outstanding.

Diluted earnings per share are calculated based on the profit for the year

attributable to the owners of the Parent Company and the basic weighted

average number of shares in issue and outstanding but adjusted for the

effects of dilutive warrants.

2.23 Parent Company accounting policies

Aside from presentational differences in the format of the income

statement and balance sheet, the Parent Company applies accounting

principles other than the Group in the cases listed below.

Shares in subsidiaries

Shares in subsidiaries are carried at cost less any impairment losses.

Transaction costs incurred in connection with a business combination are

accounted for as part of the acquisition costs and are not expensed.

Dividends received are recognised as income when the right to receive

payment is established. Thereafter, an impairment test of the investment

to which the dividend relates is performed.

When there is an indication that the investments in subsidiaries might be

impaired, an estimate of recoverable amount is made. If this is lower than the

carrying amount, an impairment loss is recognised in the income statement.

Shareholders' contributions

Shareholder contributions are recognised as an increase in the value of

investment in Group companies. An assessment is then made of whether

there is a need for impairment of the value of the investment in question.


Note 3 - Financial risk management3.1 Financial risk factors

The Group’s activities expose it to various financial risks: market risk

(currency risk and interest rate risk), credit risk and liquidity risk. The Group’s

overall risk management program focuses on the unpredictability of financial

markets and seeks to minimise potential adverse effects on the Group’s

financial results.

Risk management is handled by the CEO and CFO in accordance with

policies established by the Board.

a) Market risk

(i) Currency risks

The Group operates and sells in various geographic markets and, therefore,

undertakes transactions in foreign currencies. The Group’s main exposures

arise on the following currencies: Euro (EUR), US Dollars (USD), British Pounds

(GBP) and Czech Koruna (CZK). The proportion of the Group’s sales and

operating expenses arising in these currencies is disclosed in notes 5 and 6.

As can be seen from this data, very little of the Group's sales and operating

expenses arise in SEK and therefore a 1% change in the SEK exchange rate

has the potential to increase or decrease operating profit by close to 1%.

The exposures to changes in foreign exchange rates can be separated

between translation exposures and transaction exposures. These are

explained further below.

Translation exposure

Diamorph prepares its financial statements in Swedish kronor (SEK) so

there is an exposure arising when consolidating the results of foreign

subsidiaries and reporting the financial statements in SEK. Translation

exposures arise both on the consolidation of the balance sheet of the

foreign subsidiaries and their income statements. The Group does not

seek to hedge these exposures.

Transaction exposure

The foreign subsidiaries themselves are exposed to changes in exchange

rates on their sales and purchases transactions. For the Tenmat operations

in the UK, sales are made predominantly in GBP, EUR and USD whilst most

costs are incurred in GBP with some costs incurred in USD and EUR. For

the Hob Certec operations in the Czech Republic, sales are predominantly

in EUR whilst costs are incurred mostly in EUR and CZK. A further

transactional exposure arises in the UK subsidiaries on SEK denominated

intercompany loans (and interest charges) with the Parent Company.

The Group’s general policy for managing transactional exposures is to

match the foreign currency cash inflows and outflows where possible.

Strategies to manage the remaining net exposures are continually

reviewed but presently forward exchange contracts are selectively used to

mitigate the potential short term impact from changes in exchange rates.

Typically a proportion of the expected foreign cash flows are hedged using

forward exchange contracts looking at a period up to 12 months’ forward.

The value of the Group’s forward exchange contracts is set out in note 22.

Parent Company

The Parent Company is mainly exposed to the risk of changes in value of

its investments in foreign subsidiaries since its funding is denominated in

SEK. These exposures are not hedged.

(ii) Interest rate risk

The Group’s revenues and cash flows from operating activities are

substantially independent of changes in market interest rates.

The Group’s borrowings mainly comprise a bond issued by Diamorph AB

and a bank loan taken out by the Hob Certec subsidiary company in the

Czech Republic. To manage exposures to changes in interest rates, the

bond carries a fixed interest coupon and a proportion of the interest rate

exposure on the bank loan in the Czech Republic has been eliminated by

a swap that fixes the interest rate incurred.

The Group operates a defined benefit pension scheme and the valuation

of the Group’s pension obligations is influenced, inter alia, by changes in

market interest rates. Detailed information relating to the pension scheme,

including the sensitivity of the valuation of the pension obligation to

changes in interest rates, is set out in note 20.

Further information on the Group’s borrowings is set out in note 19. The

value of the Group’s interest rate swap is set out in note 22.

b) Credit risk

Credit risk arises on deposits with banks and financial institutions as well

as credit exposures to the Group’s customers, including outstanding

receivables and committed transactions.

In assessing which banks and financial institutions to deposit funds

with and in assessing which customers to extend credit to, the Group

has regard to ratings from independent rating agencies. For customers

where no credit assessment exists, a risk assessment of the customers’

creditworthiness is made by considering their financial position taking

into account previous experience in dealings with that customer. Credit

insurance is taken where it is deemed to be cost effective. Credit exposures

and the credit limits afforded to customers are regularly monitored.

The maximum credit exposure is the book value of the exposed assets

recognised in the balance sheet. Further information on the Group’s credit

exposures on trade receivables is set out in note 14.

c) Liquidity risk

The Group’s liquidity risk is the risk that the Group could lack cash for

payment of its obligations due to poor market liquidity.

The Group prepares financial forecasts and on the basis of these an

assessment is made as to the necessary minimum level of liquidity, that it

is prudent to hold either through existing cash resources or via committed

credit facilities. Cash deposits in excess of the minimum requirements may

be invested in marketable securities that provide a higher rate of return on

investment.

At 31 December 2016 the Group had cash and cash equivalents of SEK

213.2 (194.3) million.

The maturity profile of the undiscounted value of the Group and Parent

Company’s financial liabilities (all liabilities excluding pension liabilities and

deferred tax liabilities adjusted to include all interest commitments) is set

out in the table on page 33.


3.2 Management of capital risk

Prior to 2011, the Group was entirely funded through equity. In 2011 a

bank loan was taken out to partially fund the acquisition of the Hob Certec

business in the Czech Republic. In 2012, a bond was issued to partially

fund the acquisition of the Tenmat Group in the United Kingdom and this

bond was subsequently refinanced in 2014.

There are no external capital requirements placed on the Group. The

Group’s policy is to adopt a capital structure that safeguards the Group’s

ability to continue its operations, so that it can continue to provide returns

for shareholders and benefits for other stakeholders. In doing so, the

intention is to support future development of the business and maintain a

capital structure that has an appropriate cost of capital.

The net debt ratio (see definitions in note 29) at 31 December 2016 is shown

in the table below and shows a small increase during the year to 66% (64%).

Net debt ratio 2015 2016

Total interest-bearing liabilities (Note 19) 523,5 519,1

Less: cash and cash equivalents (Note 17) -194,3 -213,2

Net debt 329,2 305,9


Net debt ratio (%) 64% 66%

3.3 Fair value

In the balance sheet financial instruments are carried either at fair value or at

amortised cost depending on the classification of the financial instrument.

Companies classify fair value measurement methods using a hierarchy

that reflects the reliability of the inputs used in making the valuations. The

fair value hierarchy has the following levels:

Level 1: This method uses quoted prices (unadjusted) in active markets for

identical assets or liabilities

Level 2: This method uses inputs, other than quoted prices that are

observable for the asset or liability, either directly (i.e. as prices) or

indirectly (i.e. derived from prices). Examples of observable data

include market interest rates or exchange rates.

Level 3: This method uses inputs for the asset or liability that are not based

on observable information. Fair values are determined using

valuation models where significant elements of the valuation are

not observable in the market.

At 31 December 2016, the Level 2 method was used to value the Group’s

forward exchange contracts and interest rate swap and the Level 3 method

was used to value the put option held by non-controlling interests.

3.4 Financial instruments per category

In 2016, the Group has classified its financial instruments in the following

categories.

Derivative financial instruments are classified as financial assets and

liabilities at fair value through profit or loss.

Cash balances, trade and other receivables are classified as loans and

receivables.

The Group classifies its financial liabilities, including trade payables and

interest-bearing liabilities, as other financial liabilities.

Hedge accounting has not been applied in preparing these financial

statements.

The Group Total

Less than

1 year

Between 1

and 2 years

Between 2

and 5 years

More than

5 years

As of 31 December 2016

Interest-bearing liabilities (including interest) 629,0 59,0 35,0 535,0 -

Derivative financial instruments 0,1 0,1 - - -

Other liabilities and provisions 22,0 22,0 - - -

Accounts payable and accruals 37,9 37,9 - - -

Total 689,0 119,0 35,0 535,0 -



Derivative financial instruments 1,0 1,0 - - -

Other liabilities and provisions 17,5 10,9 6,6 - -

Accounts payable and accruals 39,6 39,6 - - -

Total 728,8 94,1 64,7 570,0 -

Parent Company



Other liabilities including trade payables and accruals 15,5 15,5 - - -

Total 620,5 50,5 35,0 535,0 -



Other liabilities including trade payables and accruals 15,8 15,8 - - -

Total 655,8 50,8 35,0 570,0 -


Note 4 - Significant estimates and judgments

The preparation of financial statements requires management to make

estimates and judgments that affect the amounts reported in the financial

statements. Estimates and judgments are continually evaluated and are

based on historical experience and other factors, including expectations of

future events that are believed to be reasonable under the circumstances.

Significant estimates and assumptions for accounting purposes

The Group makes estimates and assumptions concerning the future. The

resulting accounting estimates that result from these will, by definition,

seldom equal the related actual results. The estimates and assumptions

that have a significant risk of material adjustments to the carrying values of

assets and liabilities within the next financial year are outlined below.

Impairment tests for goodwill

Diamorph assesses if there is any impairment of goodwill in accordance with

the accounting policy described in Note 2.7 Impairment of non-financial

assets. Recoverable amounts of cash generating units have been determined

by calculating the value in use. These calculations require the use of

estimates (see note 11).

It has been assessed that there is no impairment of goodwill and the

carrying values at the balance sheet date for goodwill allocated to cash-

generating units are shown in note 11.

Valuation of loss carry-forwards

The Group tests annually whether any impairment exists for deferred tax

assets for tax loss carry-forwards. In addition, the Group assesses the

ability to recognise new deferred tax assets for the year’s tax losses, if it is

applicable. Deferred tax assets are only recognised when it is probable that

future taxable profit will be available against which the temporary differences

can be utilised. Due to the history of losses in the entities that have tax

loss carry-forwards, no deferred tax assets have been recognised for the

calculated loss carry-forwards. The value of potential deferred tax assets

not recognised are set out in note 10.

Put option held by non-controlling interests (minority interests)

A minority shareholder who subscribed for 10% of the equity in the

subsidiary Diamorph Bearings AB at the time of the acquisition of the Hob

Certec business in the Czech Republic in 2011 has since held an option

to redeem for cash their shares in Diamorph Bearings AB. The exercise

of the put option was subject to certain conditions and the exercise price

was linked to the earnings of Hob Certec during the 5 year period. At 31

December 2016, the fair value of the put option has been assessed as

being SEK 8.9 (6.6) million and this has been recognised in the Group

balance sheet as a non-current financial liability. The change in the fair value

of the option has been recognised within equity.

In February 2017 Diamorph acquired this final 10% minority interest for cash

consideration of SEK 32.0 million. The purchase price has been calculated

consistent with the arrangements agreed at the time of acquisition of Hob

Certec in 2011. The purchase will be accounted for as a transaction with

non-controlling interests within equity and the value of the put option liability

will be derecognised through equity in 2017.

Significant judgments

Accounting for defined benefit pension scheme

Pensions and other post-employment obligations are dependent on

the assumptions established by management and used by actuaries in

calculating such amounts. The key assumptions include discount rates,

inflation, future salary increases and mortality rates.

The actuarial assumptions are reviewed on an annual basis and are

changed when it is deemed appropriate. However, the valuation of the

Groups defined benefit pension scheme can be volatile in its nature and

small changes in assumptions can trigger the net pension obligation to

change significantly from period to period.

At 31 December 2016, the Group had a net pension liability of SEK 35.7

(asset of SEK 6.3) million before recognising tax effects. This is reported in

the Group balance sheet and the change in the value is recognised within

equity. The key assumptions used in the valuation are set out in note 20.

Functional currency of subsidiary company

In connection with acquisition of the Tenmat Group of companies in 2012, a

new wholly owned holding Company in the UK was created for administrative

purposes (Diamorph UK Ltd). From an accounting perspective, this has been

treated as an extension of the Parent Company and so the functional

currency in Diamorph UK Ltd has been assessed to be SEK.

Note 5 - Geographic sales

All sales relate to sales of products. Net sales are distributed in the following

geographical markets:

Group 2015 2016

Sweden 3,3 5,5

Rest of Europe 246,8 240,0

USA 117,9 105,9

Rest of World 63,5 72,2

Total 431,5 423,6

The Group has no single customer representing more than 10% of

annual turnover in either 2015 or 2016.

The Group’s net sales principally arise in the following currencies: GBP 31%

(36%) of total, EUR 38% (34%) , USD 30% (29%) and 1% CZK (1%).

Since the group’s main operations are in the United Kingdom and the

Czech Republic, all significant assets are located in Europe.

Note 6 - Operating profit

Operating profit is stated after charging or crediting the following items:

Group 2015 2016

Grants received 0,6 -

Profit on sale of tangible fixed assets 0,2 -

Net foreign exchange gains/losses 2,9 -1,2

Operating lease expenses -0,9 -0,9


Total operating expenses and cost of goods sold are analysed by cost

type as follows:

Group 2015 2016

Raw materials and consumables 87,2 77,9

Employee benefits (note 8) 108,1 104,3

Depreciation and amortisation (notes 11, 12) 11,2 11,0

Other expenses 73,8 90,6

Total 280,3 283,8

The Group’s total operating expenses arise principally in the following

currencies: GBP 64% (68%) of total, EUR 16% (15%), CZK 11% (8%),

USD 7% (7%) and SEK 2% (2%).

Non-recurring items have been presented separately in the Group income

statement to better show the underlying operating profit performance.

Non-recurring expenses of SEK 0.2 (-) million were incurred in 2016 relating

to legal expenses on the acquisition of 10% of Diamorph Bearings AB from

two minority shareholders. No non-recurring operating costs arose in 2015.

Note 7 - Remuneration to auditors

Audit assignments refer to reviewing the annual report and accounts, the

Board and the CEO’s management as well as other tasks incumbent on

the Company’s auditors and advice or other assistance resulting from

observations made during the audit or performance of such tasks. All

other assignments are referred to as other assignments.

Group 2015 2016

Ernst & Young

Audit assignments 0,9 1,1

Tax advice 0,3 0,2

Total 1,2 1,3

Parent Company

Ernst & Young

Audit assignments 0,3 0,5

Total Parent Company 0,3 0,5

Note 8 - Remuneration to employeesGroup 2015 2016

Salaries and benefits 92,6 89,2

Social costs 12,1 11,1

Pension costs - defined contribution plans 3,4 3,6

Equity-settled share-based payment expense - 0,4

Total Group 108,1 104,3

Group

2015 2016

Wages and

Salaries Pension costs

Wages and

Salaries Pension costs

Board members, CEO and other senior executives 10,9 0,5 7,9 0,3

Other employees 81,7 2,9 81,3 3,3

Total Group 92,6 3,4 89,2 3,6

Parent Company

Board and CEO 1,5 0,2 0,6 -

Other employees 0,7 0,1 0,9 0,1

Total Parent Company 2,2 0,3 1,5 0,1

Information on the average number of employees: 2015 2016

Parent Company

Total

employees Men Women

Total

employees Men Women

Sweden 2 2 - 2 2 -

Total Parent Company 2 2 - 2 2 -

Subsidiaries

United Kingdom 203 181 22 211 188 23

Czech Republic 45 40 5 47 43 4

Others 10 6 4 12 8 4

Total subsidiaries 258 227 31 270 239 31

Total Group 260 229 31 272 241 31


Gender breakdown for directors and other senior executives:2015 2016

Group

Total

number on

closing date Men Women

Total

number on

closing date Men Women

Members of the Board 5 5 - 5 5 -

Chief Executive Officer 1 1 - 1 1 -

Other senior executives 4 4 - 4 4 -

Total Group 10 10 - 10 10 -

Parent Company

Members of the Board 5 5 - 5 5 -

Chief Executive Officer - - - - - -

Total Parent Company 5 5 - 5 5 -

Remuneration to senior executives:

Group (SEK)

Salary/

board fee Bonus

Other

benefits

Pension

costs Total

2016

Chairman Ashkan Pouya 200 000 - - - 200 000

Board member Saeid Esmaeilzadeh 100 000 - - - 100 000

Board member Anthony Moore* 172 394 - 16 100 - 188 494

Board member Anders Mörck 100 000 - - - 100 000

Board member Ola Ringdahl 100 000 - - - 100 000

CEO Gordon MacLeman 1 665 057 - 13 035 166 505 1 844 597

Other senior executives 5 103 060 212 582 260 378 122 831 5 698 851

Total 7 440 511 212 582 289 513 289 336 8 231 942

Group (SEK)

Salary/

board fee Bonus

Other

benefits

Pension

costs Total

2015

Chairman Ashkan Pouya 200 000 - - - 200 000

Board member Saeid Esmaeilzadeh 100 000 - - - 100 000

Board member Anthony Moore* 1 449 968 - 12 889 - 1 462 857

Board member Anders Mörck 100 000 - - - 100 000

Board member Ola Ringdahl (from June 2015) 58 333 - - - 58 333

CEO Gordon MacLeman (since September 2015) 558 506 96 665 44 680 55 851 755 702

CEO Fredrik Svedberg (9 months) 1 046 960 - - 212 477 1 259 437

Other senior executives 6 122 481 786 756 362 458 275 762 7 547 457

Total 9 636 248 883 421 420 027 544 090 11 483 786*Includes remuneration from subsidiary company


Note 9 - Financial items

Non-recurring financial items have been presented separately in the Group income statement to better show the underlying financial income and expenses.

Group 2015 2016

Financial income

Interest income 0,2 0,1

Total financial income 0,2 0,1

Financial expenses

Interest expense

- bond -35,0 -35,0

- bank borrowings -1,0 -0,7

- other -0,1 -

Amortisation of arrangement fees -1,8 -1,8

Total financial expenses -37,9 -37,5

Non-recurring financial items

Foreign exchange losses/gains -5,9 37,8

Changes in fair value of derivative financial instruments 1,2 0,8

Interest expense/income on defined benefit pension scheme -0,6 0,3

Total non-recurring financial items -5,3 38,9

Net financial -43,0 1,5

Non-recurring financial income of SEK 38.9 (expenses of 5.3) million was reported, mainly comprise exchange gains and losses on third party and

intercompany financing balances. Significant gains arose in 2016 on intercompany balances as GBP weakened against SEK in early 2016 both in the

run up to and subsequent to the UK referendum on EU membership. In 2015, a smaller opposite exchange rate movement was experienced.

Parent Company 2015 2016

Financial income

Interest income on loans to subsidiaries 35,8 35,0

Foreign exchange gains 0,1 -

Other financial income - subsidiary companies 1,8 1,8

Total financial income 37,7 36,8

Financial expenses

Interest expense

- bond -35,0 -35,0

- loans from subsidiaries -0,6 -0,6

Amortisation of arrangement fees -1,8 -1,8

Foreign exchange losses - -0,4

Total financial expenses -37,4 -37,8

Net financial 0,3 -1,0

No borrowing costs have been capitalised in 2015 or 2016.


Note 10 - Income TaxGroup 2015 2016

Current tax -21,4 -29,6

Deferred tax 2,8 0,6

Income taxes -18,6 -29,0

The differences between the reported tax expense and an estimated tax based on current tax rate is as follows:

Group 2015 2016

Profit/loss before tax 108,2 141,1

Income tax calculated in accordance with the current weighted average tax rate -24,0 -29,8

Non-deductible expenses -0,3 -0,8

Revaluation of deferred taxes due to change in tax rate 3,3 1,7

Tax losses for which no deferred tax assets were recognised -0,9 -1,0

Adjustment for current tax of previous periods -4,0 -0,3

Adjustment for deferred tax of previous periods 4,9 -0,1

Other 2,4 1,3

Income tax -18,6 -29,0


Loss before tax -2,8 -4,7

Income tax calculated in accordance with the current tax rate 0,6 1,0

Tax losses for which no deferred tax assets were recognised -0,6 -1,0

Income tax - -

At the end of 2016 the Group had unrecognised potential deferred tax assets of SEK 20.3 (19.7) million relating to brought forward tax losses which

are mainly attributable to the Group’s Swedish companies. No deferred tax asset has been recognised due to the history of losses but the tax losses

are not limited in time when they can be utilised.

Deferred tax liabilities at 31 December 2016, amounted to SEK 20.1 (31.4) million and principally relate to the deferred tax liabilities arising on

intangible assets acquired through the Tenmat and Hob Certec business of SEK 26.6 (32.0) million.


Note 11 - Intangible assets

Group 2016-12-31

Computer

Software

Capitalised

development

expenditures Patents

Trade

marks Goodwill Total

Opening acquisition value 0,8 34,8 0,2 157,6 579,1 772,5

Additions 0,2 - - - - 0,2

Exchange rate differences - -3,5 - -15,6 -50,4 -69,5

Closing acquisition value 1,0 31,3 0,2 142,0 528,7 703,2

Opening depreciation -0,1 -15,9 -0,2 - - -16,2

Depreciation for the year -0,2 -4,3 - - - -4,5

Exchange rate differences - 1,8 - - - 1,8

Closing depreciation -0,3 -18,4 -0,2 - - -18,9

Opening net carrying value 0,7 18,9 - 157,6 579,1 756,3

Closing net carrying value 0,7 12,9 - 142,0 528,7 684,3

Group 2015-12-31

Computer

Software

Capitalised

development

expenditures Patents

Trade

marks Goodwill Total

Opening acquisition value 0,4 33,8 0,2 153,3 565,3 753,0

Additions 0,4 - - - - 0,4

Exchange rate differences - 1,0 - 4,3 13,8 19,1

Closing acquisition value 0,8 34,8 0,2 157,6 579,1 772,5

Opening depreciation - -10,9 -0,2 - - -11,1

Depreciation for the year -0,1 -4,8 - - - -4,9

Exchange rate differences - -0,2 - - - -0,2

Closing depreciation -0,1 -15,9 -0,2 - - -16,2

Opening net carrying value 0,4 22,9 - 153,3 565,3 741,9

Closing net carrying value 0,7 18,9 - 157,6 579,1 756,3

Impairment testing of goodwill and trademarks

Impairment tests have been performed during the year in respect of goodwill, SEK 528,7 (579,1) million and trademarks, SEK 142,0 (157,6) million and

capitalised development expenditures, SEK 12,9 (18,9) million. In the Impairment test, a pre-tax discount rate of 14.0% (14.0%) was used. The average

sales growth rate during the budget period (1-5 years) is 4.0% (4.0%) and the average growth rate used to extrapolate cash flows beyond the budget

period is estimated at 2.0% (2.0%). The projected cash flows (years 1-5) include capital expenditures of approximately 3% (3%) of sales, except in year

1 where they are budgeted to be higher as a result of a decision to expand capacity in our Hob Certec business, and assume that working capital

levels will be maintained as a percentage of sales. Assets have been allocated to two cash generating units which are the business units in the United

Kingdom and the Czech Republic, with goodwill allocated of SEK 479,5 (532,0) million and SEK 49,2 (47,1) million respectively.

Parent Company 2015-12-31 and 2016-12-31 Patents

Opening acquisition value 0,2

Closing acquisition value 0,2

Opening depreciation -0,2

Closing depreciation -0,2

Opening net carrying value -

Closing net carrying value -


Note 12 - Tangible fixed assets

Group 2016-12-31 Land Buildings Machinery

Office

equipment Total

Opening acquisition value 16,6 46,2 133,5 15,5 211,8

Additions - 5,6 13,0 - 18,6

Disposals - - -0,4 - -0,4

Exchange rate differences - -3,1 -6,0 -0,9 -10,0

Closing acquisition value 16,6 48,7 140,1 14,6 220,0

Opening depreciation - -19,3 -109,1 -14,1 -142,5

Depreciation for the year - -1,3 -5,0 -0,2 -6,5

Depreciation on disposals - - 0,4 - 0,4

Exchange rate differences - 0,9 4,3 0,8 6,0

Closing depreciation - -19,7 -109,4 -13,5 -142,6

Opening net carrying value 16,6 26,9 24,4 1,4 69,3

Closing net carrying value 16,6 29,0 30,7 1,1 77,4

Group 2015-12-31 Land Buildings Machinery

Office

equipment Total

Opening acquisition value 16,6 45,0 123,6 14,6 199,8

Additions - 0,5 9,1 0,5 10,1

Exchange rate differences - 0,7 0,8 0,4 1,9

Closing acquisition value 16,6 46,2 133,5 15,5 211,8

Opening depreciation - -17,9 -103,5 -13,3 -134,7

Depreciation for the year - -1,2 -4,6 -0,5 -6,3

Exchange rate differences - -0,2 -1,0 -0,3 -1,5

Closing depreciation - -19,3 -109,1 -14,1 -142,5

Opening net carrying value 16,6 27,1 20,1 1,3 65,1

Closing net carrying value 16,6 26,9 24,4 1,4 69,3

There is no financial leasing within the Group.

Parent Company 2016-12-31 Machinery

Office

equipment Total

Opening acquisition value - 2,5 2,5

Closing acquisition value - 2,5 2,5

Opening depreciation - -2,5 -2,5

Closing depreciation - -2,5 -2,5

Opening net carrying value - - -

Closing net carrying value - - -

Parent Company 2015-12-31 Machinery

Office

equipment Total

Opening acquisition value 5,3 2,5 7,8

Disposals -5,3 - -5,3

Closing acquisition value - 2,5 2,5

Opening depreciation -5,3 -2,5 -7,8

Disposals 5,3 - 5,3

Closing depreciation - -2,5 -2,5

Opening net carrying value - - -

Closing net carrying value - - -


Note 13 - InventoriesGroup 2015 2016

Raw materials 10,5 11,5

Work in progress 6,5 6,4

Finished goods (at lower of cost and net realisable value) 13,5 13,2

Total inventories 30,5 31,1

During 2016, SEK 1.9 (2015: nil) was recognised as an expense for inventories carried at net realisable value. This is recognised in cost of sales.

Note 14 - Accounts receivableGroup 2015 2016

Trade receivables 66,8 77,7

Provision for doubtful debts -2,6 -2,6

Trade receivables-net 64,2 75,1

Trade receivables by currency:Group 2015 2016

GBP 19,7 32,5

CZK 0,4 2,0

EUR 19,1 28,1

USD 24,9 12,0

Other currencies 0,1 0,5

Total 64,2 75,1

The fair value of the Group’s trade receivables is consistent with the reported value. As at the balance sheet date, trade receivables amounting to

SEK 8,0 (15,5) million were overdue without any impairment being considered necessary. These relate to a number of independent customers that

have not had payment difficulties. The aging analysis of these trade receivables is as follows:

Analysis of credit risk exposure in trade receivables 2015 2016

Trade receivables that are neither overdue nor impaired 48,7 67,1

Overdue:

- Less than 2 months 15,1 7,2

- 3-6 months 0,4 0,1

- 7-12 months - 0,7

Total overdue 15,5 8,0

Book value of trade receivables 64,2 75,1

Amounts reported in the allowance account are usually written off when the Group does not expect to recover additional cash. The maximum

exposure to credit risk on trade receivables comprise the book value at the balance sheet date. The Group has no collateral as security.

Note 15 - Other receivablesGroup 2015 2016

Value added tax 1,7 1,7

Other receivables 0,9 0,5

Total 2,6 2,2


Value added tax 0,3 0,1

Other receivables 0,1 0,1

Total 0,4 0,2

Note 16 - Investments in marketable securities

During 2015, the Group disposed of SEK 9,0 million in securities held in a money market fund managed by Nordea Investment Management but held

no such securities at 31 December 2015 or 31 December 2016.


Note 17 - CashGroup 2015 2016

Cash at bank and on hand 194,3 213,2

Restricted cash 13,7 22,6

Total 208,0 235,8

For the purposes of the Group cash flow statement, cash and cash equivalents comprise only the cash at banks and on hand of SEK 213,2 (194,3) million.

Restricted cash relates to cash that the Group has pledged under an agreement with a minority shareholder of Diamorph Bearings AB, see note 4 for

further details. Since the end of the year, this pledge has been released, see note 27 for further details.

Note 18 - Share capital, other paid-in capital and reserves

Specification of changes in equity is included in the statement of changes in equity which follows immediately after the balance sheet.Number of shares Share capital Other capital contributions Total

Opening balance at 2016-01-01 52 593 751 1,1 320,7 321,8

Share issue (15 SEK/share) 253 090 – 3,8 3,8

Closing balance at 2016-12-31 52 846 841 1,1 324,5 325,6

Number of shares Share capital Other capital contributions Total

Opening balance at 2015-01-01 52 593 751 1,1 320,7 321,8

Closing balance at 2015-12-31 52 593 751 1,1 320,7 321,8

The shares have a quota value of SEK 0.0209 per share. Each share corresponds to one vote. All balance sheet date registered shares are fully paid.

The number of shares reflect the current quota value. Information on the share issue in 2016 is included on page 14.

Analysis of reserves Exchange rate differences Total

Opening balance at 2016-01-01 133,4 133,4

Exchange rate differences -110,4 -110,4

Closing balance at 2016-12-31 23,0 23,0

Analysis of reserves Exchange rate differences Total

Opening balance at 2015-01-01 107,9 107,9

Exchange rate differences 25,5 25,5

Closing balance at 2015-12-31 133,4 133,4

Note 19 - Interest-bearing liabilitiesGroup 2015 2016

Long-term

Bank loans 22,8 -

Bond 500,0 500,0

Capitalised borrowing costs -6,5 -4,7

Total long-term interest-bearing liabilities 516,3 495,3

Short term

Bank loans 7,2 23,8

Total short-term interest-bearing liabilities 7,2 23,8

Total interest-bearing liabilities 523,5 519,1


The currency denomination of the Group’s borrowings are as follows:

Group 2015 2016

Borrowing in SEK 493,6 495,3

Borrowing in EUR 29,9 23,8

Total 523,5 519,1

The bond carries a fixed interest coupon of 7% (7%) and is repayable on September 5, 2019. Interest payments are due every 6 months falling on

5th March and 5th September each year. The bond is not subject to any maintenance covenants but is secured on the shares in certain Group

companies and a SEK 500 million intercompany loan. The bond is listed on NASDAQ OMX Nordic with ISIN SE0006028221. The bond’s fair value is

SEK 472 (476) million and is categorised with Level 1.

The bank loan has been taken by Diamorph Hob Certec s.r.o. in the Czech Republic and is secured on the assets in that Company. It is denominated

in Euro, repayable in quarterly instalments of € 196,000 with a final balloon payment of € 2,094,000 in August 2017. The bank loan carries floating

rate interest based on 3 month Euribor plus a margin of 1.75% giving a total effective rate of 1.437% (1.682%) at 31 December 2016. The 3 month

Euribor interest on a proportion of the loan has been swapped onto a fixed rate of 1.31% giving a total effective rate of 3.06% (3.06%). The average

proportion of the loan swapped onto a fixed rate basis is 38% (38%) in 2017. The bank loan includes maintenance covenants in respect of debt cover,

interest cover and liquidity ratio. The covenants are continuously monitored and were complied with as at 31 December 2016.

The maturity profile of the interest-bearing liabilities is set out in the table at the bottom of page 33.


Long–term

Bond 500,0 500,0

Capitalised borrowing costs -6,4 -4,7

Total long-term interest-bearing liabilities 493,6 495,3

Note 20 - Pension obligations

Within the Group there is one defined benefit pension plan related to Modular Stock Ltd and its subsidiary, Tenmat Ltd. Pension obligations are volatile in

nature and this is an accounting area that is the subject of critical judgments and estimates. See note 4 Significant estimates and judgments.

All liabilities and assets in the scheme are denominated in GBP and so the figures below in SEK have been translated at appropriate exchange rates.

With effect from January 2010, the pension scheme was closed to future pension accruals, so there are no current or expected ongoing service costs.

Group 2015 2016

Present value of funded obligations -340,5 -397,8

Fair value of plan assets 346,8 362,1

Net asset/liability in balance sheet 6,3 -35,7

The changes in the defined benefit obligation are as follows:

Group 2015 2016

At beginning of year 350,2 340,5

Items reported in profit and loss statement

- interest 13,5 12,2

Items reported in other comprehensive income:

- revaluations -22,3 87,0

- exchange rate differences 10,6 -36,3

Benefit payments -11,5 -5,6

At end of year 340,5 397,8


The change in the fair value of the plan assets are as follows:

Group 2015 2016

At beginning of year 332,7 346,8

Items reported in profit and loss statement

- expected return on plan assets (interest) 12,9 12,5

Items reported in other comprehensive income:

- revaluations 0,5 41,4

- exchange rate differences 9,3 -35,7

Cash contribution from Group company 2,9 2,7

Benefit payments -11,5 -5,6

At end of year 346,8 362,1

Revenues and expenses reported in the income statement are as follows:

Group 2015 2016

Net interest income -0,6 0,3

Total -0,6 0,3

Effects recognised in other comprehensive income relate to the revaluation of investment assets and the obligations for post-employment benefits

and amount to:

Group 2015 2016

Return on plan assets (excluding interest) 0,5 41,4

Gain/loss arising from changes in financial assumptions 14,6 -95,0

Experience gains 7,7 8,0

Total profit/loss included in other comprehensive income 22,8 -45,6

The expected return on plan assets is set in line with the discount rate used to estimate the value of the liability for post-employment benefits. The discount

rate is set based on high quality corporate bonds in the geographic market (the United Kingdom) where the employees covered by the plan are active.

In total there are 206 (209) employees covered by the plan being 183 men and 23 women (187 men and 22 women). Of these people, 140 (141)

individuals have not retired. The mean age of the persons who have not reached retirement age is 56 (56) years.

The assumptions used in the valuation can affect the net asset/liability substantially. In the calculation of the obligation and the value of the plan

assets, a best estimate has been made. The following shows the main assumptions and how a reasonably possible change would affect the

Group’s obligations for post-employment benefits (pensions).

Main assumptions:

Group 2015 2016

Discount rate, % 3,90% 2,75%

Inflation, % 2,35% 2,65%

Assumptions regarding longevity are based on statistics for employees in the United Kingdom. The table below shows the expected number of

remaining years of life after age 65. The life expectancy after age 65 for members who are currently aged 45 is approximately 1,9 (1,9) years longer

than the amounts shown in the table below:

Group 2015 2016

Men 22,3 22,1

Women 24,7 24,5

Sensitivity analysis

The discount rate is the assumption that has the greatest impact on pension obligations. A 1 percentage point change in the discount rate changes

commitments by about 19% (20%).

Mortality rates also affects the calculation. If the life expectancy is extended by one year, the commitment would increase by about 3% (3%).


Plan assets

Plan assets consist of equity instruments, interest-bearing debt instruments and cash deposits. All asset values are based on quoted market prices.

The allocation of assets is as follows:

Group 2015 2016

Equities 261,2 256,3

Interest bearing securities 46,8 103,4


Total plan assets 346,8 362,1

Triennial valuation

The information set out above relates to the accounting valuation of the defined benefit pension scheme and disclosures required under IAS 19.

Separate actuarial valuations are required by the UK Pension Regulatory every 3 years and the method used is different to that used under IAS 19.

The most recent such triennial valuation of the pension plan was finalised during 2014 and determined a deficit (as at 3 August 2013 the valuation

date) of GBP 794,000. The Pension Trustees of the scheme accepted that this deficit would be eliminated by annual cash payments of GBP 230,000

over 4 years, with the first payment made in March 2015. A new actuarial valuation as at 3 August 2016 is currently in the process of being prepared

by the scheme actuary but has not yet been finalised.

Note 21 – Share optionsWarrants

At the 2016 AGM, an issue of a maximum of 980 000 warrants was approved. These warrants have subsequently been issued to a number of

senior executives and employees of the Group for no consideration as a form of long-term incentive programme. Each warrant entitles the holder to

subscribe for one new share in the Company at a subscription price of SEK 15. Warrants can only be exercised during the period from 1 September

2020 up to and including 31 December 2022, or up to and including an earlier date that follows from the complete terms and conditions of the warrants.

The warrants are accounted for as a form of share-based payment transaction, whereby employees render services in exchange for shares or

rights over shares. Although there are specific circumstances in which the company may become obligated to repurchase the warrants for cash

consideration, this is not assessed to be a probable outcome and hence the share-based payment transactions are accounted for as “equity-settled

transactions”. The total charge to the income statement in 2016 of MSEK 0.4 was therefore credited to equity.

The warrants have been valued using an option pricing model. The average share price at the date of grant was deemed to be equivalent to the

exercise price of SEK 15 and the option pricing model assumes no dividends, a risk free rate of 0% and expected volatility of 30%. The warrants

were issued in three tranches with 720 000 warrants issued in June 2016, 130 000 in September 2016 and 130 000 in January 2017 giving an

expected life of 4.33, 4.00 and 3.67 years respectively, and a fair value per warrant of 3.68 SEK, 3.54 SEK and 3.39 respectively. The cost of each

warrant has been expensed on a straight-line basis over the vesting period based on the Group’s estimate of shares that will eventually vest. At 31

December 2016, it has been assumed that all warrants will eventually vest. The estimate of the number of awards likely to vest will be reviewed at

each future balance sheet date up to the vesting date (to take account, for example, of leavers) at which point the estimate will be adjusted to reflect

the actual number of warrants which have vested.

At 31 December 2016, the warrants do not have any dilutive effect on earnings per share on the basis that it is assessed that there is currently no

material difference between the number of shares that would be issued at market value from the proceeds of dilutive options and the number of

shares that will be issued if all warrants are exercised.

Note 22 - Derivative financial instrumentsGroup 2015 2016

Forward exchange contracts -0,6 0,2

Interest rate swap -0,4 -0,1

Total -1,0 0,1

No hedge accounting has been applied to the derivative financial instruments and so the change in value has been recognised in the income statement.

The forward exchange contracts partially hedge the exposure to sales denominated in USD and EUR and also partially hedge the Group’s liabilities

to interest payments denominated in SEK. The interest rate swap relates to a hedge of the exposure to changes in 3 month Euribor interest rates for

the bank loan taken out by the Hob Certec business in the Czech Republic, see note 19.

Note 23 - Other liabilitiesGroup 2015 2016

Liabilities to customers 2,7 2,4

Total other liabilities 2,7 2,4


Note 24 - Shares in Group companiesParent Company 2015 2016

Opening acquisition value 135,8 135,8

Acquistion of shares in Diamorph Bearings AB - 22,8

Closing book value 135,8 158,6

The Parent Company holds interests in the following subsidiaries:

Corp reg number

Book value

Name Place Stake 2015 2016

Diamorph Bearings AB 556667-0989 Sweden 90% 43,9 66,7

Diamorph Ceramics AB 556848-2433 Sweden 100% 0,1 0,1

Diamorph Services AB 556899-3082 Sweden 100% 0,1 0,1

Diamorph UK Ltd 8071521 United Kingdom 100% 91,7 91,7

Closing book value 135,8 158,6

The Group holds indirectly through its subsidiary Diamorph Bearings AB shares in the following companies:

Name Corp reg number Place Stake

KHP Marketing GmbH Switzerland 90%

Diamorph hob Certec s.r.o 278 644 64 Czech Republic 90%

The Group holds indirectly through its subsidiary Diamorph UK Ltd the following wholly owned subsidiaries:

Name Corp reg number Place Stake

Modular Stock Ltd 3342312 United Kingdom 100%

Tenmat Ltd 3342498 United Kingdom 100%

Tenmat Overseas Ltd 3342311 United Kingdom 100%

Golden Heights Ltd 3385590 United Kingdom 100%

Railko Ltd 5773671 United Kingdom 100%

Tenmat Holdings Inc USA 100%

Tenmat Inc USA 100%

Note 25 - Pledged assets, contingent liabilities and commitments

As described in note 19, the SEK 500 million bond is secured on the shares in certain Group companies, specifically Diamorph UK Ltd, Modular

Stock Ltd and Diamorph Bearings AB. In addition, the Group has pledged the assets set out in the table below.

Group 2015 2016

For own liabilities and provisions


Tangible fixed assets 21,1 24,9

Accounts receivable 13,9 18,8

Stocks 6,7 7,0

Total 74,7 89,6

Pledged assets relate to assets in Diamorph Hob Certec s.r.o. that are secured on the bank loan in this subsidiary, see note 19. In addition, SEK 22,6

(13.7) million of cash is pledged in Diamorph Bearings AB, see note 17.

As described in note 19, a SEK 500 million intercompany loan in the Parent Company is secured on the SEK 500 million bond.

Contingent liabilities

There are no contingent liabilities in the Group or Parent Company.

Commitments for operating leases

Future lease payments under non-cancellable leases are payable as follows:

Group 2015 2016

Within one year 0,4 1,2

After one year but within five years 0,9 1,2

Total 1,3 2,4

There are no operating lease commitments in the Parent Company.


Note 26 - Transactions with related parties

Income from related parties:Parent Company 2015 2016

Diamorph UK Ltd - Financing income 37,6 36,8

Diamorph UK Ltd - Management services 2,6 -

Tenmat Ltd - Other services 1,2 1,9

Tenmat Ltd - Royalty income - 0,1

Total 41,4 38,8

Charges from related parties:Group 2015 2016

Senior executives - Financing charges 0,7 -

Substantial shareholder - Financing charges - 10,0

Total 0,7 10,0


Modular Stock Ltd - Management services 1,8 1,2

Diamorph Bearings AB - Financing charges 0,6 0,6

Total 2,4 1,8

Receivables from related parties:Parent Company 2015 2016

Diamorph UK Ltd 600,9 562,0

Tenmat Ltd - 0,9

Total 600,9 562,9

Liabilities to related parties:Group 2015 2016

Substantial shareholder - 144,0

Senior executives 10,0 -

Total 10,0 144,0


Diamorph Bearings AB 12,9 13,5

Total 12,9 13,5

In addition to the transactions noted above, the share issue in kind described on page 14 was with Serendipity Ixora AB which is a significant

shareholder of Diamorph AB (publ).

Transactions with related parties primarily relate to financing activities. The Parent Company has made an intercompany loan of SEK 500 (500) million

to Diamorph UK Ltd which mirrors the arrangements in place with the bond issued by Diamorph AB. The loan carries a fixed interest coupon of 7%

(7%) and is repayable in September 2019. Arrangement fees relating to the bond have been charged to Diamorph UK Ltd and are recognised as

income over the period of the bond term. Other costs relating to the refinancing of the bond during 2014 were also been charged to Diamorph UK

Ltd. The Parent Company has other smaller intercompany balances with Diamorph UK Ltd which do not bear interest.

During 2016, Latour-Gruppen AB, a significant shareholder of Diamorph AB (publ), acquired SEK 144 million of bonds issued by Diamorph AB

(publ) by making purchases of bonds in the open market. At 31 December 2016, Diamorph AB (publ) therefore had liabilities of SEK 144 million to

Latour-Gruppen AB. Consequently, Diamorph AB (publ) also paid interest of SEK 10.1 million to Latour-Gruppen AB during the course of 2016.

The liabilities to senior executives reported at 31 December 2015 arose as part of the financing arrangements for the acquisition of the Tenmat Group

of companies in 2012 when senior executives acquired interests in the bond issued by Diamorph AB (publ). These interests were entirely disposed of

by those executives during 2016 and therefore there were no outstanding liabilities to senior executives at 31 December 2016.

Information relating to the remuneration of senior executives is set out in note 8, Remuneration to employees.


Note 27 - Events after the year end

In January 2017, KHP Marketing Gmbh, a subsidiary company paid SEK 5.9 million of withholding tax to the Swiss tax administration under a

process to liquidate this subsidiary company. This payment was not recognised as a liability in the balance sheet at 31 December 2016 as the

payment was not committed at that date.

In January 2017, Diamorph AB (publ) gave notice to its bondholders that it was exercising its option for voluntary partial repayment of SEK 50 million out

of the total SEK 500 million outstanding bonds. The repayment was made on 6 March 2017 from surplus cash resources at a premium of 102% of the

nominal amount (SEK 1 million).

In February 2017, Diamorph AB (publ) acquired the remaining 10% of Diamorph Bearings AB from the remaining minority shareholder for cash consideration

of SEK 32.0 million. The consideration was calculated consistent with the arrangements agreed with the minority shareholder at the time of the acquisition

of the Hob Certec business in 2011. The put option relating to these arrangements (as described in note 4 of the Annual Report for 2015) was valued at

SEK 8.9 million in the balance sheet at 31 December 2016 and this liability will be derecognised through equity in 2017. Diamorph AB (publ) therefore now

controls 100% of Diamorph Bearings AB.

As described in the Risks section on page 17 the Group can from time to time be involved in legal actions to defend its intellectual property rights.

In April 2017 Railko Ltd, a subsidiary company, has reached a settlement with a third party relating to alleged infringements of the company’s

trademarks by that third party. Diamorph will therefore recognise MSEK 5.0 of non-recurring operating income in its second quarter results of 2017

relating to the settlement and recovery of legal expenses.

Note 28 - Adjusted key performance measures

In order to better show the underlying performance of the business, management use adjusted figures for key performance measures in addition to those

reported under IFRS. The Group operating profit performance and finance income and expense before non-recurring items are presented in the income

statement on page 19. Reconciliations of adjusted profits before tax and adjusted earnings per share are shown below.

Non-recurring items are items which management do not consider reflect the underlying performance of the business. Non-recurring items within

operating profit are explained in note 6. Non-recurring financing items are explained in note 9. Non-recurring tax items are analysed below and

include both the tax effect of non-recurring operating and financing items, as well as non-recurring tax items such as the impact on the Group's

deferred tax balances from expected future changes in the UK tax rate.

Group 2015 2016

Profit before tax as reported under IFRS 108,2 141,1

Adjusted for:

Non-recurring expense within operating profit (see note 6) - 0,2

Non-recurring items within net financing items (see note 9) 5,3 -38,9

Profit before tax on adjusted basis 113,5 102,4

Group 2015 2016

Tax charge as reported under IFRS -18,6 -29,0

Tax (credit)/charge on non-recurring items within net financing items -0,3 9,3

Other non-recurring tax items -3,3 -1,7

Tax charge on adjusted basis -22,2 -21,4

Group 2015 2016

Profit after tax attributable to Parent Company shareholders as reported under IFRS 86,7 109,6

Adjusted for (excluding amounts attributable to non-controlling interests where applicable*):

Non-recurring expense within operating profit - 0,2

Non-recurring items within net financing items* 4,7 -39,0

Tax effect of the above and other non-recurring tax items -3,6 7,6

Profit after tax attributable to Parent Company shareholders on adjusted basis 87,8 78,4

Average number of shares 52 593 751 52 741 387

Basic earnings per share as reported under IFRS 1,65 2,08

Adjusted earnings per share 1,67 1,49


Note 29 - Definitions

Sales growth adjusted to fixed exchange rates Weighted average sales growth of the Tenmat and Hob Certec businesses using a

fixed exchange rate conversion into SEK for both periods being compared

Total debt Total interest-bearing liabilities and non-interest bearing deferred payment liabilities

relating to acquisitions. Total debt excludes defined benefit pension scheme liabilities.

Net debt Total debt less investments in marketable securities and cash and cash equivalents

(excluding restricted cash)

Capital employed Total equity (as reported in the consolidated balance sheet) plus total debt

Net debt ratio, % Net debt divided by total equity (as reported in the consolidated balance sheet)

Gross profit margin, % Gross profit divided by net sales

Operating profit margin, % Operating profit before non-recurring items divided by net sales

Operating cash flow Cash flow from operating activities less investments in tangible fixed assets,

excluding interest and tax paid/received

Operating cash conversion, % Operating cash flow divided by operating profit

Underlying net finance charges Finance income and expense excluding non-recurring financial items

Underlying tax charges Tax charges excluding non-recurring tax items

Non-recurring items See explanation in note 28

Note 30 - Proposed distribution of profits

The Board of Directors do not propose any distribution to shareholders and propose that the loss for the year is transferred to retained earnings.

2016

Share premium account 287,5

Accumulated loss -63,3

Loss for year -4,7

Total available for distribution 219,5

Distributed -

Carried forward 219,5


The undersigned certify that the consolidated accounts and the annual report have been prepared in accordance with International Financing Reporting

Standards ("IFRS"), as adopted by the European Union, and generally accepted accounting principles, respectively, and give a true and fair view of the

financial position and earnings of the Group and the Company, and that the Administration Report gives a fair review of the development of the operations,

financial position and earnings of the Group and the Company and describes substantial risks and uncertainties that the Group companies face.


Diamorph AB (publ)

Ashkan Pouya

Chairman

Gordon MacLeman

CEO

Saeid Esmaeilzadeh

Board Member

Anthony Moore

Board Member

Anders Mörck

Board Member

Ola Ringdahl

Board Member


Ernst & Young AB


Auditor's reportTo the annual meeting of the shareholders of Diamorph AB (publ), corporate identity number 556647-5371

Report on the annual accounts and consolidated accounts

Opinions

We have audited the annual accounts and consolidated accounts of

Diamorph AB (publ) for the year 2016 (the financial year 2016-01-01–

2016-12-31). The annual accounts and consolidated accounts of the

company are included on pages 14 to 50 in this document.

In our opinion, the annual accounts have been prepared in accordance

with the Annual Accounts Act and present fairly, in all material respects,

the financial position of the parent company as of 31 December 2016

and its financial performance and cash flow for the year then ended in

accordance with the Annual Accounts Act. The consolidated accounts

have been prepared in accordance with the Annual Accounts Act and

present fairly, in all material respects, the financial position of the group

as of 31 December 2016 and their financial performance and cash

flow for the year then ended in accordance with International Financial

Reporting Standards (IFRS), as adopted by the EU, and the Annual

Accounts Act. The statutory administration report is consistent with the

other parts of the annual accounts and consolidated accounts.

We therefore recommend that the general meeting of shareholders

adopts the income statement and balance sheet for the parent company

and the group.

Basis for Opinions

We conducted our audit in accordance with International Standards on

Auditing (ISA) and generally accepted auditing standards in Sweden.

Our responsibilities under those standards are further described in the

Auditor’s Responsibilities section. We are independent of the parent

company and the group in accordance with professional ethics for

accountants in Sweden and have otherwise fulfilled our ethical responsi-

bilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and

appropriate to provide a basis for our opinions.

Key Audit Matters

Key audit matters of the audit are those matters that, in our professional

judgment, were of most significance in our audit of the annual accounts

and consolidated accounts of the current period. These matters were

addressed in the context of our audit of, and in forming our opinion

thereon, the annual accounts and consolidated accounts as a whole,

but we do not provide a separate opinion on these matters.

Sales of goods

Sales revenue for 2016 amounts to MSEK 423.6. Sales are generated mainly

by sales of products and are recognised as income when the customer

receives the goods. Revenue recognition connected to compensation from

customers requires the company to assess the need to reserve for bad

debts, why we assess this as a key audit matter.

Accounting principles for revenue recognition are shown in note 2.18 and

how sales revenues are distributed between geographical markets is shown

in note 5.

We have reviewed the revenue accounting. We have for instance

performed an analytical review, review of agreements and spot checks of

accruals in connection with the review of the year-end financial statement

to assess the relevance in the accounting of revenues. We have focused

our review on more complex agreements and on new agreements.

We have reviewed procedures for collection of account receivables and the

assessment of bad debts. We have assessed judgments and calculations

made by the company regarding revenue estimations connected to quality

parameters and risks of different kinds of revenue reductions. We have

assessed whether the information disclosed in the annual report is

appropriate.

Goodwill

Goodwill amounts to MSEK 528.7 as of 31 December 2016. The company

revaluates Goodwill yearly and if there is an indication of impairment that the

amounted value exceeds recovery values of these assets. Recovery values

are set by present value estimates on future cash flow in cash generating

units and is based on expected outcome of different factors that are based

on the company’s business plans and forecasts.

The company’s impairment test of 2016 did not result in any impairment.

Changed assumptions by the company related to recovery value

of future cash flows, growth and discount rates could lead to an

impairment situation. A description of the impairment test is shown in

note 11 and in the chapter “Important judgements and assessments”

in note 4. We have deemed this to be a key audit matter due to these

assumptions, which forms the basis for the impairment test, are based

on the company’s assessment of the future.

In our audit, we have assessed and tested the company's process

of performing the impairment test, for instance by evaluating prior

year’s outcome of forecasts and assumptions. We have also made

comparisons against other companies and industries in order to

evaluate the reasonability in assessments of future cash flow and

growth assumptions. Further, we have evaluated the company's

valuation methods and calculation models. The reasonableness of the

assumptions and sensitivity analysis of changes in the assumptions

have been reviewed with the support from our valuation specialists

and comparisons to historical results, and the precision of previous

forecasts. Furthermore, we have evaluated the reasonability in used

discount rates and long-term growth for each unit by comparison to

other companies within the same industry sector. We have assessed

whether the information disclosed in the annual report are appropriate.

Other Information than the annual accounts and consolidated accounts

This document also contains other information than the annual accounts

and consolidated accounts and is found on pages 6 to 13. The Board

of Directors and the Managing Director are responsible for this other

information.


Our opinion on the annual accounts and consolidated accounts does

not cover this other information and we do not express any form of

assurance conclusion regarding this other information.

In connection with our audit of the annual accounts and consolidated

accounts, our responsibility is to read the information identified above and

consider whether the information is materially inconsistent with the annual

accounts and consolidated accounts. In this procedure we also take

into account our knowledge otherwise obtained in the audit and assess

whether the information otherwise appears to be materially misstated.

If we, based on the work performed concerning this information, 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.

Responsibilities of the Board of Directors and the Managing Director

The Board of Directors and the Managing Director are responsible for

the preparation of the annual accounts and consolidated accounts and that

they give a fair presentation in accordance with the Annual Accounts Act

and, concerning the consolidated accounts, in accordance with IFRS as

adopted by the EU. The Board of Directors and the Managing Director are

also responsible for such internal control as they determine is necessary

to enable the preparation of annual accounts and consolidated accounts

that are free from material misstatement, whether due to fraud or error.

In preparing the annual accounts and consolidated accounts, The Board

of Directors and the Managing Director are responsible for the assessment

of the company’s and the group’s ability to continue as a going concern.

They disclose, as applicable, matters related to going concern and using the

going concern basis of accounting. The going concern basis of accounting

is however not applied if the Board of Directors and the Managing Director

intends to liquidate the company, to cease operations, or has no realistic

alternative but to do so.

Auditor’s responsibility

Our objectives are to obtain reasonable assurance about whether the

annual accounts and consolidated accounts as a whole are free from

material misstatement, whether due to fraud or error, and to issue an

auditor’s report that includes our opinions. Reasonable assurance is a

high level of assurance, but is not a guarantee that an audit conducted

in accordance with ISAs and generally accepted auditing standards

in Sweden 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

annual accounts and consolidated accounts.

As part of an audit in accordance with ISAs, we exercise professional

judgment and maintain professional scepticism throughout the audit.

We also:

• Identify and assess the risks of material misstatement of the annual

accounts and consolidated accounts, whether due to fraud or

error, design and perform audit procedures responsive to those

risks, and obtain audit evidence that is sufficient and appropriate to

provide a basis for our opinions. The risk of not detecting a material

misstatement resulting from fraud is higher than for one resulting

from error, as fraud may involve collusion, forgery, intentional

omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of the company’s internal control relevant

to our audit in order to design audit procedures that are appropriate

in the circumstances, but not for the purpose of expressing an

opinion on the effectiveness of the company’s internal control.

• Evaluate the appropriateness of accounting policies used and the

reasonableness of accounting estimates and related disclosures

made by the Board of Directors and the Managing Director.

• Conclude on the appropriateness of the Board of Directors’ and the

Managing Director’s use of the going concern basis of accounting

in preparing the annual accounts and consolidated accounts. We

also draw a conclusion, based on the audit evidence obtained,

as to whether any material uncertainty exists related to events or

conditions that may cast significant doubt on the company’s and

the group’s ability to continue as a going concern. If we conclude

that a material uncertainty exists, we are required to draw attention

in our auditor’s report to the related disclosures in the annual

accounts and consolidated accounts or, if such disclosures are

inadequate, to modify our opinion about the annual accounts and

consolidated accounts. Our conclusions are based on the audit

evidence obtained up to the date of our auditor’s report. However,

future events or conditions may cause a company and a group to

cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the

annual accounts and consolidated accounts, including the

disclosures, and whether the annual accounts and consolidated

accounts represent the underlying transactions and events in a

manner that achieves fair presentation.

• Obtain sufficient and appropriate audit evidence regarding the

financial information of the entities or business activities within the

group to express an opinion on the consolidated accounts. We are

responsible for the direction, supervision and performance of the

group audit. We remain solely responsible for our opinions.

We must inform the Board of Directors of, among other matters, the

planned scope and timing of the audit. We must also inform of significant

audit findings during our audit, including any significant deficiencies in

internal control that we identified.

We must also provide the Board of Directors with a statement that

we have complied with relevant ethical requirements regarding

independence, and to communicate with them all relationships and other

matters that may reasonably be thought to bear on our independence,

and where applicable, related safeguards.

From the matters communicated with the Board of Directors, we

determine those matters that were of most significance in the audit of

the annual accounts and consolidated accounts, including the most

important assessed risks for material misstatement, and are therefore

the key audit matters. We describe these matters in the auditor’s report

unless law or regulation precludes disclosure about the matter or when,

in extremely rare circumstances, we determine that a matter should

not be communicated in the auditor’s report because the adverse

consequences of doing so would reasonably be expected to outweigh

the public interest benefits of such communication.


Report on other legal and regulatory requirements

Opinions

In addition to our audit of the annual accounts and consolidated accounts,

we have also audited the administration of the Board of Directors and the

Managing Director of Diamorph AB (publ) for the year 2016 (the financial

year 2016-01-01–2016-12-31) and the proposed appropriations of the

company’s profit or loss.

We recommend to the general meeting of shareholders that the profit be

appropriated in accordance with the proposal in the statutory administration

report and that the members of the Board of Directors and the Managing

Director be discharged from liability for the financial year.

Basis for Opinions

We conducted the audit in accordance with generally accepted auditing

standards in Sweden. Our responsibilities under those standards are

further described in the Auditor’s Responsibilities section. We are

independent of the parent company and the group in accordance with

professional ethics for accountants in Sweden and have otherwise fulfilled

our 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 opinions.

Responsibilities of the Board of Directors and the Managing Director

The Board of Directors is responsible for the proposal for appropriations

of the company’s profit or loss. At the proposal of a dividend, this includes

an assessment of whether the dividend is justifiable considering the

requirements which the company's and the group’s type of operations, size

and risks place on the size of the parent company's and the group’s equity,

consolidation requirements, liquidity and position in general.

The Board of Directors is responsible for the company’s organisation and

the administration of the company’s affairs. This includes among other

things continuous assessment of the company’s and the group’s financial

situation and ensuring that the company's organisation is designed so that

the accounting, management of assets and the company’s financial affairs

otherwise are controlled in a reassuring manner. The Managing Director shall

manage the ongoing administration according to the Board of Directors’

guidelines and instructions and among other matters take measures that are

necessary to fulfill the company’s accounting in accordance with law and

handle the management of assets in a reassuring manner.

Auditor’s responsibility

Our objective concerning the audit of the administration, and thereby

our opinion about discharge from liability, is to obtain audit evidence to

assess with a reasonable degree of assurance whether any member of

the Board of Directors or the Managing Director in any material respect:

• has undertaken any action or been guilty of any omission which can

give rise to liability to the company, or

• in any other way has acted in contravention of the Companies Act,

the Annual Accounts Act or the Articles of Association.

Our objective concerning the audit of the proposed appropriations of

the company’s profit or loss, and thereby our opinion about this, is to

assess with reasonable degree of assurance whether the proposal is in

accordance with the Companies Act.

Reasonable assurance is a high level of assurance, but is not a guarantee

that an audit conducted in accordance with generally accepted auditing

standards in Sweden will always detect actions or omissions that can give

rise to liability to the company, or that the proposed appropriations of the

company’s profit or loss are not in accordance with the Companies Act.

As part of an audit in accordance with generally accepted auditing

standards in Sweden, we exercise professional judgment and maintain

professional scepticism throughout the audit. The examination of the

administration and the proposed appropriations of the company’s

profit or loss is based primarily on the audit of the accounts. Additional

audit procedures performed are based on our professional judgment

with starting point in risk and materiality. This means that we focus the

examination on such actions, areas and relationships that are material for

the operations and where deviations and violations would have particular

importance for the company’s situation. We examine and test decisions

undertaken, support for decisions, actions taken and other circumstances

that are relevant to our opinion concerning discharge from liability. As a

basis for our opinion on the Board of Directors’ proposed appropriations

of the company’s profit or loss we examined whether the proposal is in

accordance with the Companies Act.


Ernst & Young AB


Authorised Public Accountant


Board of Directors and management

Board of Directors

Ashkan Pouya I Ashkan Pouya is Chairman of the Board since 2014.

Ashkan Pouya has a business degree from Uppsala University. He was previously Director of Innovation at Lund University

and has been involved in the construction of several companies in both executive and non-executive positions.

Holdings in Diamorph at 31 December 2016: 15 273 716 (12 632 940) shares (representing Serendipity Ixora/Group AB)

Saeid Esmaeilzadeh I Saeid Esmaeilzadeh is a Board Member since 2012.

Saeid Esmaeilzadeh is Adjunct Professor of Materials Chemistry at Stockholm University where he received his doctorate

in 2000. He has received numerous awards for his research and his work as an entrepreneur. Saeid has participated in the

development of several research-based companies.

Holdings in Diamorph at 31 December 2016: 15 273 716 (12 632 940) shares (representing Serendipity Ixora/Group AB)

Anthony Moore I Anthony Moore is a Board Member since 2012.

Anthony Moore has a chemistry degree from the University of Manchester. He created Tenmat by merging the operations of

another Company. Anthony led Tenmat since 1986, before stepping down as its Managing Director in 2015.

Holdings in Diamorph at 31 December 2016: 654 558 (2 088 757) shares

Anders Mörck I Anders Mörck is a Board Member since 2014.

Anders Mörck has a master's degree in Economics and Business Administration from Växjö University. He has extensive

experience in leadership positions in different industries. He is currently CFO of Investment AB Latour, and board member

in Swegon AB, Hultafors Group AB, Nord-Lock International AB, Latour Industries AB and HMS Networks AB.

Holdings in Diamorph at 31 December 2016: 13 923 571 (11 098 270 shares) (representing Latour-Gruppen AB)

Ola Ringdahl I Ola Ringdahl is a Board Member since 2015.

Ola Ringdahl has a Master’s degree in Finance and Business Administration from the Stockholm School of Economics. He

is currently CEO of Nord-Lock Group, specialists in secure bolting solutions, with subsidiaries in 20 countries. He is a board

member in Hultafors Group AB.

Holdings in Diamorph at 31 December 2016: 13 923 571 (11 098 270 shares) (representing Latour-Gruppen AB)


Management

Gordon MacLeman I Diamorph AB Group CEO since September 2015 (joined the Group in November 2014)

Gordon has a degree in Finance from Glasgow University and has spent 31 years in the coatings and chemicals industry,

working for Courtaulds plc and Akzo Nobel. He held various senior leadership positions in Akzo Nobel, most recently as

Managing Director of one of its European performance coatings businesses.

Holdings in Diamorph at 31 December 2016: 0 (0) shares, 250 000 (0) warrants

Mark Hutchison I Diamorph AB Group CFO since April 2014

Mark has a degree in Natural Sciences from Cambridge University. He trained with KPMG and is a qualified chartered

accountant in the UK. He has held senior finance leadership positions within Spectris plc, a UK listed engineering

Company, most recently as divisional CFO for its business in Switzerland.


Heinz Pöhlmann I Diamorph Hob Certec Joint Managing Director since 1995 (joined the Group in December 2011)

Heinz has a commercial and technical engineering background and has worked for more than 15 years as manager at

Hoechst CeramTec Germany, one of the largest ceramic companies in the world. He spent 5 years at Hoechst in Japan,

where he built up a new ceramic department. Heinz Pöhlmann has successfully led the Diamorph Hob Certec team to a

world market leader in quality and innovation.

Holdings in Diamorph at 31 December 2016: 0 (0) shares in Diamorph AB, 159 (159) shares in Diamorph Bearings AB

Jan Roubal I Diamorph Hob Certec Joint Managing Director since 2012.

Jan has a lean manufacturing and technical engineering academic background. For 7 years prior to joining the Group

he worked for Automotive Lighting, part of Fiat Group, one of the biggest and the most innovative lighting technology

producers for the car industry. He held managerial positions in production and maintenance and also fulfilled a role as

technical director. He joined Diamorph Hob Certec in October 2012.


Dr Kapil Chopra I Tenmat Operations Director since April 2015 (joined the Group in 2008)

Kapil joined the business early on in his career within our research and development team and is now responsible for

leading the operations within Tenmat. He has a PhD in Bone Implants and a Master’s degree in Biomedical Material

Sciences from Manchester University. His educational background and varied experience within Tenmat means he is

adept with the business innovation and production strategies.



Calendar

Annual General Meeting 2017 22 May 2017

Q1 Report 2017 23 May 2017

The AGM of Diamorph 2017 will be held at 18.00 on May 22

in IVA Konferenscenter, Grev Turegatan 16, in Stockholm.

DISCLOSURE UNDER SWEDISH LAW

Diamorph AB (publ) discloses this information pursuant to the

Swedish Securities Market Act and/or the Swedish Act on

Trading in Financial Instruments. The information was submitted

for publication on 28 April 2017, at 08:00.

Diamorph AB (publ)

Telephone: 08- 612 68 50

e-mail: [email protected] Internet: www.diamorph.com

Visiting address: c/o Sdiptech AB (publ), Stureplan 15, 111 45 Stockholm, Sweden

Registered office: Stockholm Registration number: 556647-5371

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