RNS Number:2726Z
Arthro Kinetics plc
29 June 2007
Arthro Kinetics plc
FRIDAY, 29 June 2007 - Preliminary Results for the financial year ended 31
December 2006
Chief Executive's Statement
Summary and Highlights
2006, following incorporation of the Company on 30 January 2006, was Arthro
Kinetics Plc's initial period as a public company and one which presented a
number of challenges. Whilst the Group achieved a number of positive steps in
2006 - which are detailed below - revenue growth was below plan and the Group
was unable to achieve the planned timing of new product introductions.
* AIM admission on 2 March 2006 raised gross proceeds of Euro9.0m
* Appointed PLUS Orthopedics as sole distributor for CaReS(R) in the
United Kingdom
* Established agreements with local partners for the manufacture of CaReS
(R) in China and Australia
* Achieved the milestone of the 1,000th patient successfully treated with
CaReS(R)
* First CaReS(R) implantation in the United States as part of a safety
evaluation conducted in 10 patients at the Cleveland Clinic Foundation
* US FDA approval of the endoscopic suite of spine surgery instrumentation
range
* Initiated a nucleus replacement research program in collaboration with
Manchester University
Background
Arthro Kinetics Plc was admitted to AIM on 2 March 2006 immediately following
the reverse acquisition of Arthro Kinetics AG (formerly known as Ars Arthro AG)
of Germany and the acquisition of Arthro Kinetics UK Limited (formerly known as
Endospine Kinetics Limited) of the UK. The goal of the merger was to create one
company with a suite of products, a solid pipeline and a vision to restore
natural joint tissue function through regenerative approaches. This vision
remains our focus however the delivery in commercial terms was weak in 2006.
The Group's pipeline of biological implants are all based on a proprietary
collagen type 1 matrix which provides a three-dimensional environment for the
growth of a patient's own cells and the restoration of natural tissue function.
The bulk of the Group's revenues in 2006 were derived from sales of CaReS(R),
its first biological cartilage repair product for treatment of cartilage defects
of the knee.
In addition, the Group markets an Endoscopic Spine Surgery (ESS) instrumentation
system for minimally invasive spinal access and surgical intervention and
generates revenue from the processing of allograft bone material in its Good
Manufacturing Practice (GMP) approved facility in Austria for provision to
tissue banks.
Having initially joined as a non-executive director at the time of the Group's
admission to AIM, Dr. Loveridge was appointed Chief Executive in November 2006
following the resignation of Mr. Guilleaume.
Trading
CaReS(R) remains the Group's only marketed biological implant and the main
source of revenue, amounting to Euro1.3m in 2006. In an effort to sustain the
growth in sales of CaReS(R) the Group invested in local infrastructure to serve
the German market, entered into supply and licence agreements for Turkey and
Australia, initiated a joint venture agreement for China and established
distribution agreements for the UK, The Netherlands, Switzerland, Greece and
Italy.
Subsequent to a notification from the German Ministry of Health with respect to
the implementation of the European Directives 2004/23/EC in Germany, the Group
was obliged on 28 November 2006 to advise its client hospitals in Germany that
they should no longer take patient biopsies for inclusion in CaReS(R), resulting
in a temporary cessation of sales in the Group's main market. Across the rest of
Europe sales were not immediately forthcoming from distributor relationships,
and the time and cost associated with initiating these relationships, investing
in manufacturing capacity ahead of demand and the education and training of
local country personnel were significant.
Sales of spinal surgical instruments amounting to Euro0.3m were disappointing due
primarily to the speed with which regulatory approvals of a sub-set of our
instrument set could be gained in key territories such as the US, Korea and
Taiwan. The full product range is CE marked and is therefore available for sale
in Europe although it was only in the latter half of 2006 that the Group
recruited a dedicated European sales manager. Across Asia regulatory
requirements are country specific and the Group has approvals for some of its
products in some countries and continues to pursue approvals where appropriate.
In the US the Group gained Food and Drug Administration (FDA) approval for its
endoscopic instrumentation in August 2006, but was not in a position to submit
filings to the FDA for the radio frequency unit or the shaver system until April
2007.
End user sales of allograft material amounted to less than Euro0.2m for the year as
a result of a lack of raw material supply and a dynamic and opaque regulatory
environment.
The loss for the year of Euro18.5m included a number of non-cash charges relating
to the accounting treatment of the business combination and impairment charges
flowing from a review of the assets of the business. The initial business
combination was treated as a reverse acquisition as detailed in note 6 and
subsequently gave rise to Euro5.0m of intellectual property and Euro2.7m of goodwill
relating to the acquisition of Arthro Kinetics UK Limited. Both of these assets
were subsequently impaired through the consolidated income statement in 2006.
Also, a charge to cost of sales in the income statement of Euro307k was made
against the year end inventory value of the ESS equipment.
As detailed below, the strategic review of the business late in the year
resulted in a restructuring of the business with charges to the income statement
in 2006 of Euro497k.
Strategic Review
Following the appointment of Jason Loveridge as Chief Executive, a strategic
review of the business was initiated with the intent of focusing the management
team on a reduced set of objectives and setting clear priorities for the
remainder of 2006 and into 2007. These include;
* Securing a regulatory pathway for German hospitals to recommence patient
biopsies for use in CaReS(R)
* Significantly reducing the European sales and marketing effort with a
focus on servicing a reduced number of higher volume hospitals at a higher
margin
* Narrowing the breadth of the R&D activity with a consequential reduction
in headcount and expenditure
* Identifying means to reduce the gross cost of manufacture of our
collagen based products
* Gaining US regulatory approval for the remaining items of the ESS
equipment range
All these items received initial attention before the end of 2006, combined with
a Group-wide reduction in headcount from the peak reached in November 2006 as a
consequence of business combinations and the addition of new personnel.
The combination of poor revenue growth in all three geographies placed a
substantial burden on the Group's cash resources and consequently, coupled with
the strategic review, the Group began exploring routes to locate additional
funding during the fourth quarter of 2006. To this end a loan of Euro2.0m from the
Company's largest shareholder, Heidelberg Innovation, was agreed in December
2006.
R&D
The Group's R&D effort has been directed at exploiting its core collagen matrix
technology. In early 2006 the Group had twelve projects aimed at introducing
product candidates to the US, Europe, Australia and a number of Asian countries
including Korea and Taiwan. This was a substantial task in terms of time and
cost and the challenges associated with the different and dynamic regulatory
environments. As a consequence of the strategic review, the Group decided to
concentrate its efforts on fewer projects where the risks could be better
managed and there is a more certain return on the R&D investment spend.
One such example is research the Group has conducted on developing an acellular
version of CaReS(R). One major hurdle to the widespread use of articular
cartilage implants (ACI) such as CaReS(R) is the need for the surgeon to take a
biopsy to provide cells from which the final implant is manufactured. This step
means that all implants must be patient specific and manufactured on demand,
with a multi-week delay whilst the patient's cells grow to sufficient numbers in
the laboratory.
Recent research on the use of a novel version of our proprietary matrix in an
animal model demonstrated that this matrix could be actively repopulated by
cartilage producing cells in-situ and did not require the addition of autologous
cells in order to regenerate and repair local cartilage defects. When we couple
this with the idea that this new version of our matrix could be prepared sterile
and blister-packed ready for use, we believe this offers the potential to market
an efficacious cell free implant that is an off the shelf medical device,
requiring no biopsy or cell culturing and which could be implanted in a single
surgical procedure.
US Clinical Trials
Arthro Kinetics AG has been in discussion with the US FDA since 2003 for the
approval of CaReS(R) for the treatment of patients with cartilage defects of the
knee in the US and in September 2005 initiated a pilot study in order to
demonstrate safety and efficacy in ten patients. The study was planned to be
completed in early 2006, but due to delays in patient recruitment the final
implantation was not conducted until December 2006. In light of developments
with the acellular programme the Group is assessing the most appropriate route
for the US market and will aim to open discussions with the FDA as to the
requirements for a phase III trial for CaReS(R) and a biological licence
application (BLA) and/or a pre-marketing approval route (PMA) for an acellular
matrix as a medical device.
Competition
The Group's primary source of revenue in 2006 was from the sales of CaReS(R) in
Germany. The regulatory issue detailed above resulted in the immediate cessation
of revenue for CaReS(R) in the Group's primary market of Germany. The Group
competes with a number of European companies for ACI treatments in Germany and
across the rest of Europe that include; TeTec, Genzyme and Co.don. Anecdotal
evidence suggests the Group and TeTec share the majority of the market in
Germany. An absence from the German market for a period of two months,
coinciding with the Group stating it needed to secure additional funding,
provided an open opportunity for our competitors.
Employees
2006 was clearly a year of significant change for employees of the Group as they
took on the challenge of the business combination and flotation, the subsequent
integration activities, a change of CEO and a restructuring of the business.
Both I and the other members of the Board would like to thank all the Group's
personnel for their efforts in 2006 as we continue to build towards a more
positive 2007.
Post Balance Sheet Events
Having secured the loan facility with Heidelberg Innovation in December 2006 the
Group subsequently effected a subscription and placing in March 2007 raising
gross proceeds of Euro9.0m.
In January 2007, the Group announced authorisation of the first German hospital,
through a different regulatory route, for the procurement of cartilage cell and
tissue for the production of CaReS(R). As the Group re-establishes itself in the
German market it remains to be seen what the consequences are in terms of market
share and competition, but we expect this will impact at least the first half
sales of CaReS(R) in 2007.
Outlook
The period since November 2006 has focused on the ongoing restructuring of the
business and the successful completion of the Euro9.0m fundraise. Whilst 2007 is a
challenging year, the business is operating on a more solid foundation with
clearly defined key performance indicators.
In terms of new products, the cell free implant is the priority development
objective for the Group in 2007 and in this regard matters are progressing such
that we aim to conduct the first human implantations in 2007 enabling the
receipt of CE approval in the fourth quarter of 2007.
With respect to our current revenue drivers ESS and CaReS(R), we have worked
hard and with some success to regain access for German patients to CaReS(R).
Following our initial success in January 2007, we are focusing our sales effort
on expanding the number of hospitals operating under our new quality management
system where we have more stable pricing and improved gross margins. Outside of
Germany, our expectations for significant sales growth in countries such as
Italy and Greece is low, however we are more positive about the UK where surgeon
interest is high and hospital ethics committee approvals and reimbursement are
progressing. Outside of Europe, we expect the businesses in Turkey and possibly
Australia to come on line in 2007 enabling some initial sales of collagen.
Licences for CaReS(R) manufacture in China and Japan have also been initiated
with the potential to generate initial revenues in 2007.
With ESS we see the US as our key sales target in 2007. To fully exploit this,
however, will require regulatory approvals for our full ESS instrumentation set
in the US. In this respect we filed the two outstanding 510(k) applications in
April 2007, enabling us to progress to appoint and train distributors for our
products and prepare for a concerted sales effort in the US in the second half
of 2007. The timely completion of the 510(k)'s will therefore be the key
determinant for achieving forecast ESS sales in 2007.
Overall, the restructuring of our business is on time and budget. A difficult
2006 is now behind us; we have successfully refinanced the Group and are in a
position to pursue our targets for 2007.
Jason Loveridge Michel Lendvai
Chief Executive Officer Chairman
29 June 2007
Financial Review
Trading
Trading in 2006 was significantly below plan with the Group reporting
consolidated revenues of Euro1.8m. Against this the Group reported a negative gross
margin (Euro0.2m) as a consequence of the lack of product throughput at the Group's
manufacturing facility in Austria and a provision of Euro307k against the year end
ESS inventory position.
The restructuring following the strategic review impacted the business primarily
in Europe with the intent to significantly reduce the cost base of the business
in 2007. Actions were initiated ahead of the year end with staff consultations
following the various market announcements in November 2006 and the
restructuring programme was completed in May 2007. Charges of Euro497k were taken
to the 2006 income statement against the restructuring of the business. Total
headcount was reduced from 58 in December 2006 to 38 in May 2007, across sales
and marketing in Germany, manufacturing in Austria, R&D in Germany and the
closure of the UK office.
The operating loss of Euro17.1m before finance costs includes intellectual property
and goodwill impairment charges of Euro7.7m explained in the Chief Executive's
statement and the balance sheet section below.
In July 2006 Arthro Kinetics Plc entered into an export production agreement and
a manufacturing and distribution agreement with Australian Biotechnologies Pty
Limited relating to the manufacture and distribution of CaReS(R) in Australia
and parts of Asia. The Company additionally entered into a convertible cash loan
facility to the value of AUS$1.65m (Euro1.0m) in favour of Australian
Biotechnologies Pty Limited. Interest is payable at 9.5 per cent per year and
the term of the agreement expires in January 2008. The facility may be drawn
down in four tranches and drawn down funds are repayable in July 2007 and
January 2008. As at year end AUS$1.0m (Euro604k) of the facility had been drawn
down and these monies are repayable on 10 July 2007. Australian Biotechnologies
Pty Limited has indicated that it has initiated an equity fund raise in 2007 to
support the continued development of the business and to ensure there are
available funds to repay funds drawn down against the loan facility with the
Company. In the absence of certainty that this fundraise will be successfully
completed the directors have decided to take a provision against the full value
of the outstanding loan balance of Euro604k with this charge included within the
operating loss as part of other operating expenses.
Australian Biotechnologies Pty Limited is required to confirm at the date of any
drawdown that they have complied with all the conditions precedent including
confirmation that there are no events or potential events of default. Should the
initial repayment of Euro604k due in July 2007 not be forthcoming Australian
Biotechnologies Pty Limited will have triggered an event of default and the
remaining facility funds will not be made available. The Company has entered
into a deed of charge with Australian Biotechnologies regarding the repayment of
any loaned monies.
Net finance costs of Euro1.4m include a charge of Euro1.5m related to the conversion
of preference shares at the date of the business combination. There was no cash
outflow related to this charge.
The Group reported a loss for the year of Euro18.5m.
Working Capital
The plan for 2006 was reliant on a strong second half to the year due to the
contributing factors of; the IPO fundraising transaction not being completing
until March 2006, the planned time to invest and see a return on sales and
marketing expenditure, and the anticipated timings on product regulatory
approvals.
The Group raised gross proceeds of Euro9.0m through its admission to AIM in March
2006 but the combined efforts of a parallel merger and flotation resulted in an
expensive transaction with associated costs of Euro2.2m.
During the third quarter it became clear that revenue projections were going to
fall significantly short of the plan and the Group began to consider new funding
routes since there would be insufficient cash to support the significant cost
base of the business. Net cash deployed in operating activities across the
course of 2006 amounted to Euro7.7m. In December 2006 the Group agreed a Euro2.0m loan
with its largest shareholder Heidelberg Innovation and initiated a wider fund
raising programme. In March 2007 the Group concluded a subscription and placing
for gross proceeds of Euro9.0m, a transaction that was ratified by shareholders at
an EGM on 22 March 2007 and the shares were admitted to trading on AIM on 23
March 2007.
The Euro9.0m of gross proceeds secured through the placing and subscription will
support planned operating expenditure and working capital requirements through
2007 and 2008, assuming the Group is able to meet its revenue forecasts.
Balance Sheet
The Group recognised Euro2.7m of goodwill and Euro5.0m of intellectual property
through the acquisition of the spinal business Arthro Kinetics UK Limited. With
the delays incurred during 2006 with regard to spinal instrumentation sales and
regulatory approvals an impairment review against this value and the plan for
2007 and 2008 highlighted that there was insufficient substance to support
carrying a goodwill value of this magnitude. Consequently the entire balance of
Euro2.7m has been written off in the 2006 income statement. As a consequence of the
goodwill write off the directors also considered the inventory position of ESS
instrumentation. Having assessed the sales forecasts for the first half of 2007
the directors decided to write down the carrying value of the inventory by 50%.
Consequently a charge of Euro307k was taken to the income statement.
The Euro5.0m value attributable to intellectual property related to the nucleus
replacement spinal disc project and this asset was recognised following the
acquisition of Arthro Kinetics UK Limited, the components of which were spinal
know-how, polymer technology, and stem cell technology (in association with
Manchester University). Progress on the projects in 2006 was limited; with the
development agreement with Manchester University commencing, albeit later than
planned and the memory polymer work put on hold pending further assessment work.
The timetable to market for a nucleus replacement has been extended to 2010 for
a European launch. Following the strategic review in November 2006 the R&D
efforts with regard to nucleus replacement are focusing on the use of the matrix
with and without the addition of autologous cells. Additionally the Group will
continue its work in collaboration with Manchester University. With the reliance
on the matrix technology the impairment review attempted to separate the
technology components of the project but with the prominence of the matrix this
was difficult. Consequently the intellectual property value Euro5.0m has been fully
impaired with a charge taken to the income statement.
Foreign Exchange
The presentational currency of the Group is Euros as Europe is the principle
trading region of the Group. The functional currencies used in other trading
regions are Sterling, the US Dollar and Australian Dollar. The Group is
therefore exposed to exchange differences arising from the translation of these
regional financial statements to the Group's presentational currency of Euros.
Changes in the value of the Euro relative to the Group's other trading
currencies have had a number of translation effects on the financial statements
in 2006, none of which have been material. The Group's main exchange rate
exposure rests in the US where revenues are generated in US Dollars against a
cost of sale incurred in Euros although the operating cost base for the US is
incurred in US Dollars. The Group covered its forward US Dollar requirement by
spot purchases during the course of the year and benefited from a weakening US
Dollar with minimal revenues generated in US Dollars.
It is the Group's policy to seek to minimise the level of assets and/or
liabilities held in currencies other than the functional currency of the entity
to which such assets and liabilities relate.
Doug Quinn
Chief Financial Officer
Consolidated Income Statement
for the year ended 31 December 2006
In thousands of Euro Note 2006 2005
Revenue 4 1,801 1,400
Cost of sales 5 (2,009) (977)
Gross (loss)/profit (208) 423
Distribution expenses (1,986) (1,539)
Administration expenses (6,778) (2,386)
Other operating income 7 649 286
Other operating expenses
Intellectual property 13 (5,000) -
impairment
Goodwill impairment 13 (2,680) -
Other 8 (1,053) -
Total other operating expenses (8,733) -
Operating loss before finance (17,056) (3,216)
costs
Financial income 10 204 555
Financial expenses 10 (1,651) (7,956)
Net financing costs (1,447) (7,401)
Loss before taxation (18,503) (10,617)
Income tax expense 11 (4) (4)
Loss for the year attributable
to equity holders of the parent
(18,507) (10,621)
Basic loss per share (EUR) 18 (0.79) (0.58)
All activities were in respect of continuing activities.
Consolidated Balance Sheet
as at 31 December 2006
+---------------------+-----+-----------+----+-----------+
|In thousands of Euro | Note| 2006| | 2005|
+---------------------+-----+-----------+----+-----------+
|Assets | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Non current | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Property, plant & | 12| 680| | 609|
|equipment | | | | |
+---------------------+-----+-----------+----+-----------+
|Intangible assets | 13| 872| | 968|
+---------------------+-----+-----------+----+-----------+
|Other non current | | 70| | 291|
|assets | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Total non current | | 1,622| | 1,868|
|assets | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Current assets | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Inventories | 14| 675| | 143|
+---------------------+-----+-----------+----+-----------+
|Trade and other | 15| 764| | 1,085|
|receivables | | | | |
+---------------------+-----+-----------+----+-----------+
|Current tax assets | | 142| | 65|
+---------------------+-----+-----------+----+-----------+
|Cash and cash | 16| 3,199| | 3,825|
|equivalents | | | | |
+---------------------+-----+-----------+----+-----------+
|Total current assets | | 4,780| | 5,118|
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Total assets | | 6,402| | 6,986|
| | | | | |
+---------------------+-----+-----------+----+-----------+
| | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Equity and | | | | |
|liabilities | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Capital and reserves | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Ordinary share | 17| 8,106| | 28|
|capital | | | | |
+---------------------+-----+-----------+----+-----------+
|Share premium | 17| 5,284| | 120|
+---------------------+-----+-----------+----+-----------+
|Merger reserve | | 30,753| | -|
+---------------------+-----+-----------+----+-----------+
|Currency translation | | 112| | -|
|reserve | | | | |
+---------------------+-----+-----------+----+-----------+
|Accumulated losses | | (41,867)| | (23,960)|
+---------------------+-----+-----------+----+-----------+
|Total equity | | 2,388| | (23,812)|
|attributable to | | | | |
|equity holders of the| | | | |
|parent | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
| | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Non current | | | | |
|liabilities | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Interest bearing | 19| 397| | 1,632|
|loans and borrowings | | | | |
+---------------------+-----+-----------+----+-----------+
|Redeemable preference| 19| -| | 27,262|
|shares | | | | |
+---------------------+-----+-----------+----+-----------+
|Total non current | | 397| | 28,894|
|liabilities | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Current liabilities | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Interest bearing | 19| 1,307| | 206|
|loans and borrowings | | | | |
+---------------------+-----+-----------+----+-----------+
|Trade and other | 21| 1,739| | 1,422|
|payables | | | | |
+---------------------+-----+-----------+----+-----------+
|Current tax | | 65| | 32|
|liabilities | | | | |
+---------------------+-----+-----------+----+-----------+
|Provisions | 22| 506| | 244|
+---------------------+-----+-----------+----+-----------+
|Total current | | 3,617| | 1,904|
|liabilities | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
|Total equity and | | 6,402| | 6,986|
|liabilities | | | | |
| | | | | |
+---------------------+-----+-----------+----+-----------+
Consolidated Statement of Cash Flows
for the year ended 31 December 2006
In thousands of Euro Note 2006 2005
Cash flows from operating
activities:
Loss for the period (18,507) (10,621)
Adjustments for:
Depreciation and amortisation 12, 13 432 263
Intellectual property 13 5,000 -
impairment
Goodwill impairment 13 2,680 -
Finance income 10 (204) (548)
Finance expenses 10 1,651 7,822
Income tax expenses 11 4 -
Increase in inventories (478) (62)
Decrease/(increase) in trade 1,281 (660)
and other receivables
Increase in trade and other 130 612
payables
Equity settled share based 334 -
payment transactions
Cash used in operations (7,677) (3,194)
Interest paid (193) -
Interest received 204 -
Taxes paid (4) -
Net cash used in operating (7,670) (3,194)
activities
Cash flows from investing
activities
Payments of disposals of 25 -
tangible assets
Purchase of property, plant and 12 (393) (36)
equipment
Purchase of intangibles 13 (3) (2)
Cash acquired with acquisitions 37 (37)
Net cash used in investing (334) (75)
activities
Cash flow from financing
activities
Proceeds from issue of ordinary 6,782 3,508
shares (net of costs)
Proceeds from issue of - 3,105
convertible notes
Proceeds from loans 1,340 -
Issue of loans to third parties (604) -
Payment of finance lease (249) (222)
liabilities
Net cash generated from finance 7,269 6,391
activities
Net (decrease)/increase in cash (735) 3,122
and cash equivalents
Consolidated Statement of Cash Flows continued
for the year ended 31 December 2006
Cash and cash equivalents at 3,795 673
beginning of year
Currency translation 139 -
Cash and cash equivalents at 3,199 3,795
end of year
Consisting of:
Cash at bank 3,199 3,825
Bank overdraft - (30)
3,199 3,795
Consolidated Statement of Changes in Equity
for the year ended 31 December 2006
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|In thousands of Euro | Ordinary| | | | | |
| | | | | | | |
| | Share| Share| Merger| Currency|Accumulated| |
| | | | | | | |
| | capital| Premium| Reserve|Translation| losses| Total|
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Balance at 31 December 2004 | 28| 120| -| -| (13,339)|(13,191)|
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Loss for the period | -| -| -| -| (10,621)|(10,621)|
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Balance at 31 December 2005 | 28| 120| -| -| (23,960)|(23,812)|
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Net loss for the year | -| -| | -| (18,507)|(18,507)|
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Currency translation reserve| -| -| -| 112| -| 112|
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Total recognised income and | -| -| -| 112| (18,507)|(18,395)|
|expense | | | | | | |
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Conversion of preferred | 225| 28,541| -| -| -| 28,766|
|shares | | | | | | |
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Conversion of loan | 9| 905| -| -| -| 914|
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Shares in consideration for | 1,255| 6,278| -| -| -| 7,533|
|acquisition of Arthro | | | | | | |
|Kinetics UK Limited | | | | | | |
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Reflecting the equity | 5,091|(35,844)| 30,753| -| -| -|
|structure of Arthro Kinetics| | | | | | |
|Plc | | | | | | |
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Net proceeds from flotation | 1,498| 5,284| -| -| -| 6,782|
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Share based payments | -| -| -| -| 334| 334|
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Derecognition of derivative | -| -| -| -| 266| 266|
|liabilities | | | | | | |
+----------------------------+---------+--------+--------+-----------+-----------+--------+
|Balance at 31 December 2006 | 8,106| 5,284| 30,753| 112| (41,867)| 2,388|
+----------------------------+---------+--------+--------+-----------+-----------+--------+
Notes to the Consolidated Financial Statements
1. Reporting Entity
Arthro Kinetics Plc ("the Company") is a company incorporated in the UK. The
Group is engaged in the development, manufacture and sale of orthopedic
products. The Group was formed on 24 February 2006 through the reverse
acquisition of Arthro Kinetics Plc by Arthro Kinetics AG (formerly known as Ars
Arthro AG) and the acquisition by Arthro Kinetics Plc of Arthro Kinetics UK
Limited (formerly known as Endospine Kinetics Limited). The Group financial
statements consolidate those of the Company and its subsidiaries (together
referred to as the "Group").
The address of the Company's registered office is Meadowside, Mountbatten Way,
Congleton, Cheshire, UK.
2. Basis of Preparation
a) Statement of Compliance
The financial information has been prepared and approved by the directors in
accordance with International Financial Reporting Standards as adopted by the EU
("Adopted IFRSs").
b) Basis of Consolidation
Arthro Kinetics Plc acquired all the equity and financial instruments of Arthro
Kinetics AG and Arthro Kinetics UK Limited on 24 February 2006. Arthro Kinetics
AG was the significantly larger partner and in line with IFRS 3 is deemed to be
the acquirer. Consequently, the business combination has been accounted for
using reverse acquisition accounting principles. Subsequent to the reverse
acquisition, Arthro Kinetics Plc acquired Arthro Kinetics UK Limited.
In accordance with IFRS 3:
The pre-combination results are those of Arthro Kinetics AG and subsidiaries.
The accumulated loss of the Group is based on the pre-combination reserves of
Arthro Kinetics AG and subsidiaries and the post combination reserves of all
Group companies.
Arthro Kinetics Plc and Arthro Kinetics UK Limited have been consolidated from
the date of acquisition at the fair values as at that date.
c) Accounting Period
The consolidated financial statements of the Group have been prepared for the
year ended 31 December 2006.
The comparative results are the consolidated results for the 12 month period to
31 December 2005 for Arthro Kinetics AG (formerly Ars Arthro AG) in line with
the basis of consolidation note detailed below. Arthro Kinetics AG has
previously reported in accordance with Adopted IFRSs.
d) Going Concern
The financial statements are prepared on a going concern basis which the
directors believe to be appropriate for the following reasons. Following the
strategic review detailed in the Chief Executive's Statement, the Group
initiated a placing and subscription in 2007 to support the ongoing working
capital requirements of the business. The directors identified the successful
introduction of an acellular implant as a key priority of the fundraising event
and planned certain expenditure with regard to this product. Additionally the
directors agreed revenue plans across its geographical segments in 2007 and 2008
significantly higher than the Group revenue of Euro1.8m achieved in 2006. Based on
these assumptions the directors identified Euro9.0m as the funding requirement to
support the business in 2007 and 2008. Additionally the Company issued warrants
attached to the placing and subscription with the intent of raising a further
Euro9.0m by the end of 2008. The warrant proceeds were not assumed in the working
capital requirements of the business in 2007 and 2008. Assuming expenditure is
in line with plan the Group needs to achieve its revenue targets for 2007 and
2008 for the Euro9.0m currently available funding to be sufficient for the Group's
needs through 2007 and 2008. In light of the above and their assessment of the
business the directors have prepared the financial statements on the basis of
going concern. A significant deviation from the Group's budgets may cast doubt
on the Group's ability to continue as a going concern. The Group may, therefore,
be unable to continue realising its assets and discharging its liabilities in
the normal course of business but the financial statements do not include any
adjustments that would result.
3. Basis of Preliminary Announcement
The preliminary consolidated financial statements for the financial year ended
31 December 2006 were approved by the board of directors on 29 June 2007. The
financial information set out above does not constitute the Company's statutory
accounts for the financial year ended 31 December 2006. The statutory accounts
for 2006 will be finalised on the basis of the financial information presented
in this preliminary announcement and will be delivered to the registrar of
companies in due course. We anticipate that the auditor's report in relation to
the 2006 statutory accounts will be (i) unqualified, (ii) draw attention by way
of emphasis of matter to the uncertainty relating to the availability of funding
to allow the Group to continue as a going concern as explained in note 2,
without qualifying their report, and (iii) will not contain statements under
section 237(2) or (3) of the Companies Act 1985.
4. Segmental Reporting
Segment information is presented in respect of the Group's business and
geographical segments. The primary format, geographic segments, is based on the
Group's management and internal reporting structure.
Segment results, assets and liabilities include items directly attributable to a
segment as well as those that can be allocated on a reasonable basis.
Unallocated items comprise mainly investments, loans and borrowings and related
expenses, corporate assets and head office expenses and income tax assets and
liabilities.
Geographic Segments
The Group operates in three geographical areas: Asia Pacific, North and Latin
America, and Europe. In Europe manufacturing and distribution facilities are
located in Austria and Germany respectively. The Group has sales and marketing
operations in Germany, the UK, Australia and the United States covering the
geographical areas noted above.
In presenting information on the basis of geographic segments, segment revenue
is based on the geographic location of customers. Segment assets are based on
the geographic location of the assets.
Business Segments
The Group operates in the following three business segments
1. Biological - the research, development and manufacture of biological
implants.
2. Surgical - the sale of surgical spinal instruments for use in orthopedic
surgery.
3. Allografts - a bone processing service to produce allograft material.
Primary Reporting Format - Geographic Segments
+--------------------------+----------+------------+-------------+-----------+
|In thousands of Euro | | |North & Latin| |
| | | | | |
| | Europe|Asia Pacific| America| Group|
+--------------------------+----------+------------+-------------+-----------+
|2006 | | | | |
+--------------------------+----------+------------+-------------+-----------+
|Revenue | 1,528| 273| -| 1,801|
+--------------------------+----------+------------+-------------+-----------+
|Segment result and | (15,901)| (313)| (842)| (17,056)|
|operating loss | | | | |
+--------------------------+----------+------------+-------------+-----------+
|Financial income | | | | 204|
+--------------------------+----------+------------+-------------+-----------+
|Financial expense | | | | (1,651)|
+--------------------------+----------+------------+-------------+-----------+
|Loss before tax | | | | (18,503)|
+--------------------------+----------+------------+-------------+-----------+
| | | | | |
+--------------------------+----------+------------+-------------+-----------+
|Segment assets | 3,135| 187| 158| 3,480|
+--------------------------+----------+------------+-------------+-----------+
|Unallocated assets | | | | 2,922|
+--------------------------+----------+------------+-------------+-----------+
|Group assets | | | | 6,402|
+--------------------------+----------+------------+-------------+-----------+
|Segment liabilities | 1,573| 118| 290| 1,981|
+--------------------------+----------+------------+-------------+-----------+
|Unallocated liabilities | | | | 2,033|
+--------------------------+----------+------------+-------------+-----------+
|Group liabilities | | | | 4,014|
+--------------------------+----------+------------+-------------+-----------+
| | | | | |
+--------------------------+----------+------------+-------------+-----------+
|Capital expenditure | 357| 39| -| 396|
+--------------------------+----------+------------+-------------+-----------+
|Depreciation & | 425| 7| -| 432|
|amortisation | | | | |
+--------------------------+----------+------------+-------------+-----------+
Unallocated assets consist of cash and other centrally held assets. Unallocated
liabilities include financial loans and liabilities as detailed in note 19.
Capital expenditure excludes balances arising from business combinations.
+---------------------------+----------+------------+
|In thousands of Euro | Europe| Group|
+---------------------------+----------+------------+
|2005 | | |
+---------------------------+----------+------------+
|Revenue | 1,400| 1,400|
+---------------------------+----------+------------+
|Segment result and | (3,216)| (3,216)|
|operating loss | | |
+---------------------------+----------+------------+
|Financial income | | 555|
+---------------------------+----------+------------+
|Financial expense | | (7,956)|
+---------------------------+----------+------------+
|Loss before tax | | (10,617)|
+---------------------------+----------+------------+
| | | |
+---------------------------+----------+------------+
|Segment assets | 3,161| 3,161|
+---------------------------+----------+------------+
|Unallocated assets | | 3,825|
+---------------------------+----------+------------+
|Group assets | | 6,986|
+---------------------------+----------+------------+
|Segment liabilities | 2,076| 2,076|
+---------------------------+----------+------------+
|Unallocated liabilities | | 28,722|
+---------------------------+----------+------------+
|Group liabilities | | 30,798|
+---------------------------+----------+------------+
| | | |
+---------------------------+----------+------------+
|Capital expenditure | 38| 38|
+---------------------------+----------+------------+
|Depreciation & amortisation| 263| 263|
+---------------------------+----------+------------+
Unallocated assets consist of cash and other centrally held assets. Unallocated
liabilities include redeemable preference shares, derivative liabilities and
liabilities as detailed in note 19.
Capital expenditure excludes balances arising from business combinations.
Secondary Reporting Format - Business Segments
+-----------+-------------------------------+-------------------------------+
|In | Revenue | Segment Assets |
|thousands | | |
|of Euro | | |
+-----------+---------------+---------------+---------------+---------------+
| | 31 December| 31 December| 31 December| 31 December|
| | | | | |
| | 2006| 2005| 2006| 2005|
+-----------+---------------+---------------+---------------+---------------+
|Biological | 1,339| 1,124| 1,717| 1,695|
+-----------+---------------+---------------+---------------+---------------+
|Allograft | 164| 276| 131| 91|
+-----------+---------------+---------------+---------------+---------------+
|Surgical | 298| -| 439| -|
+-----------+---------------+---------------+---------------+---------------+
|Unallocated| -| -| 4,115| 5,200|
+-----------+---------------+---------------+---------------+---------------+
| | 1,801| 1,400| 6,402| 6,986|
+-----------+---------------+---------------+---------------+---------------+
+---------------------------------------------------------------------------+
| Capital Expenditure |
+-----------+-------------------------------+-------------------------------+
|In | Tangible assets | Intangible assets |
|thousands | | |
|of Euro | | |
+-----------+---------------+---------------+---------------+---------------+
| | 31 December| 31 December| 31 December| 31 December|
| | | | | |
| | 2006| 2005| 2006| 2005|
+-----------+---------------+---------------+---------------+---------------+
|Biological | 67| 36| 3| 2|
+-----------+---------------+---------------+---------------+---------------+
|Surgical | 127| -| -| -|
+-----------+---------------+---------------+---------------+---------------+
|Unallocated| 199| -| -| -|
+-----------+---------------+---------------+---------------+---------------+
| | 393| 36| 3| 2|
+-----------+---------------+---------------+---------------+---------------+
Unallocated assets consist of cash and other centrally held assets and
liabilities.
5. Cost of Sales
As part of the impairment review detailed in note 13 an assessment was made of
the ESS inventories position at 31 December 2006 against the planned sales
forecast in the first half of 2007. Consequently Euro307k was charged to the income
statement against cost of sale being 50% of the year end inventories balance.
6. Business Combinations
On 24 February 2006, Arthro Kinetics AG completed the reverse acquisition of
Arthro Kinetics Plc through an exchange of equity interests. Prior to the
transaction there were no assets held by Arthro Kinetics Plc and the two
subscriber shares issued to Mr. Douglas Quinn and Mr. Robert Guilleaume were
converted to redeemable shares and following the transaction were redeemed in
full and cancelled. Subsequent to the reverse acquisition, Arthro Kinetics Plc
acquired Arthro Kinetics UK Limited. The share consideration was satisfied by
the issue of shares in Arthro Kinetics Plc to the shareholders of both
companies. Arthro Kinetics AG shareholders received 18,225,000 shares (81%) and
Arthro Kinetics UK Limited shareholders received 4,275,000 shares (19%).
Goodwill arose on the acquisition of Arthro Kinetics UK Limited as a consequence
of the difference between the total consideration on a fair value basis, the
value of the acquired assets and the value attributed to intellectual property.
Goodwill represents the technical experience of the workforce and industry
relationships. The fair value of the consideration under the share exchange
agreement was based on the issue of 4,275,000 shares to the former shareholders
of the company with a fair value of Euro1.76 (the Euro equivalent of the admission
price per share to AIM of #1.20). The impairment charges relating to goodwill
and intellectual property are explained in note 13.
The trading results for Arthro Kinetics UK Limited and its subsidiaries since
acquisition show revenue of Euro322k and operating profits of Euro91k. Results for the
period 1 January 2006 - 28 February 2006 have not been disclosed in the Group
statements as it was not practical to separate this period within the different
accounting periods of these companies.
Acquisition of Arthro Kinetics UK Limited
+--------------------------------------+---+------------+
|In thousands of Euro | | |
+--------------------------------------+---+------------+
|Trade and other receivables | | (147)|
+--------------------------------------+---+------------+
|Intellectual property | | 5,000|
+--------------------------------------+---+------------+
| | | 4,853|
+--------------------------------------+---+------------+
|Goodwill on acquisition | | 2,680|
+--------------------------------------+---+------------+
|Consideration in shares in Arthro | | 7,533|
|Kinetics Plc | | |
+--------------------------------------+---+------------+
The business of GFZO Arthro GmbH, a 100% subsidiary of Arthro Kinetics AG
holding intellectual property, was merged into Arthro Kinetics AG on 13
September 2006.
On 5 August 2005 Arthro Kinetics Biotechnologie GmbH, Austria acquired all
shares of the Cell and Tissue Bank Austria (CTBA), a not for profit company, and
subsequently sold the shares to the CTBA not for profit association on 12
November 2005. As the CTBA remained a special purpose entity throughout the
reporting period the results were consolidated in the Group statements for 2006.
7. Other Operating Income
+------------------------------+---+----------------+---+----------------+
|In thousands of Euro | |31 December 2006| |31 December 2005|
+------------------------------+---+----------------+---+----------------+
|Derecognition of liabilities | | 124| | -|
+------------------------------+---+----------------+---+----------------+
|Government grants (relating to| | 464| | 250|
|R&D) | | | | |
+------------------------------+---+----------------+---+----------------+
|Other | | 61| | 36|
+------------------------------+---+----------------+---+----------------+
| | | 649| | 286|
+------------------------------+---+----------------+---+----------------+
The Group receives government grants for various research and development
programs, subsidised by the German government and European Union. Government
grants for directly incurred research and development expenditure are recorded
as other operating income and matched with the associated costs. For as long as
the Group can confirm the intended use of the received funds there is no
obligation to repay the money.
The derecognition of liabilities relates to liabilities the Group had in 2005
where there is no longer an obligation to make payment.
8. Expenses and Auditors' Remuneration
Included in the income statement are the following charges;
+------------------------------------+------+---------------+---------------+
|In thousands of Euro | | 31 December| 31 December|
| | | | |
| | Note| 2006| 2005|
+------------------------------------+------+---------------+---------------+
|Impairment charge on loan | 15| 604| -|
|recoverability | | | |
+------------------------------------+------+---------------+---------------+
|Research and development expenditure| | 1,587| 1,360|
+------------------------------------+------+---------------+---------------+
|Restructuring costs | 22| 497| -|
+------------------------------------+------+---------------+---------------+
|Operating lease charges | | 382| 314|
+------------------------------------+------+---------------+---------------+
|Auditors\' remuneration (see below) | | 148| 45|
+------------------------------------+------+---------------+---------------+
Auditors' remuneration;
+------------------------------------+------+---------------+---------------+
|In thousands of Euro | | 31 December| 31 December|
| | | | |
| | | 2006| 2005|
+------------------------------------+------+---------------+---------------+
|Audit of these financial statements | | 59| 41|
+------------------------------------+------+---------------+---------------+
|Amounts received by auditors and | | | |
|their associates in respect of: | | | |
+------------------------------------+------+---------------+---------------+
|Audit of financial statements of | | 46| 4|
|subsidiaries pursuant to legislation| | | |
+------------------------------------+------+---------------+---------------+
|Other services relating to taxation | | 7| -|
+------------------------------------+------+---------------+---------------+
|Other services relating to interim | | 36| -|
|reporting | | | |
+------------------------------------+------+---------------+---------------+
| | | 148| 45|
+------------------------------------+------+---------------+---------------+
In addition to the amounts above, Euro373k has been charged against the share
premium account in 2006 for remuneration in relation to the business combination
and IPO (2005: nil).
9. Personnel Headcount and Expenses
The average number of persons employed by the Group (including directors) during
the year, analysed by category, was as follows;
Number of employees 31 December 2006 31 December 2005
Directors & senior managers 9 9
Sales & marketing 9 5
Customer service 7 4
Manufacturing 13 9
Research & development 5 4
Finance & administration 7 3
Regulatory affairs 1 -
51 34
The aggregate payroll costs of these persons (including directors) were as
follows;
In thousands of Euro 31 December 2006 31 December 2005
Wages and salaries 3,515 1,557
Compulsory social security 544 270
contributions
4,059 1,827
10. Financial Income and Expenses
In thousands of Euro 31 December 31 December
2006 2005
Financial Income
Changes in fair value of - 548
derivative financial
instruments
Bank interest 181 -
Others 23 7
204 555
Financial Expenses
Accretion of preferred shares 1,503 5,432
Interest on finance lease 21 38
obligations
Loss on conversion of - 2,070
convertible bonds
Other financial costs 127 416
1,651 7,956
Accretion of Preferred Shares
The holders of Arthro Kinetics AG preference shares, as detailed in note 19,
converted their holdings into ordinary shares in Arthro Kinetics Plc on 24
February 2006. The early redemption of the preference shares gave rise to an
effective interest charge of 26% as a result of the capital reduction in Arthro
Kinetics AG.
11. Income Tax Expense in the Income Statement
Analysis of the Tax Expense
The tax expense on the loss on ordinary activities for the year was as follows:
In thousands of Euro 31 December 2006 31 December 2005
Current and total tax 4 4
expense
The tax expense for the year is higher than the standard rate of corporation
tax. The difference is explained below:
In thousands of Euro 31 December 2006 31 December 2005
Loss for the period before (18,503) (10,617)
income tax
Income tax using the UK (5,551) (4,247)
corporation tax rate of
30% (2005: German tax rate
of 40%)
Effects of:
Tax effect of expenses - (6)
that are not deductible
for tax purposes
Effect of different tax (334) 174
rates in group locations
Permanent differences
accretion in preferred 451 2,173
shares
cost of planned capital - (317)
increase
embedded derivatives - 219
interest on converted - 53
bonds
loan impairment 182 -
intellectual property 1,500 -
impairment
goodwill impairment 804 -
loss of non profit group 72 34
company
Consolidation adjustments (249) -
Losses carried forward not 3,135 1,827
recognised
Other effects (6) 94
Total tax expense 4 4
Deferred Tax
The group has deferred tax losses of Euro124k as at 31 December 2006 relating to
leased assets which have been offset with deferred tax assets of Euro140k relating
to Group unrealized profit in inventory.
The Group had losses carry-forward for income tax purposes of approximately Euro20m
(2005:Euro14m) allocated across Group companies. Due to the uncertainty of the
timing and location of future Group profits no deferred tax asset in regard to
the loss-carry forward has been recognised.
12. Property, plant and equipment
+-------------------------------------------------------------------------------+
| Group |
+-----------------------+---+------------+-----------+-------------+------------+
|In thousands of Euro | | Laboratory| Office| Leasehold| |
| | | | | | |
| | | Equipment| Equipment| Improvements| Total|
+-----------------------+---+------------+-----------+-------------+------------+
|Cost | | | | | |
+-----------------------+---+------------+-----------+-------------+------------+
|Balance at 1 January | | 760| 250| -| 1,010|
|2005 | | | | | |
+-----------------------+---+------------+-----------+-------------+------------+
|Business combinations | | 22| 3| 11| 36|
+-----------------------+---+------------+-----------+-------------+------------+
|Additions | | -| 36| -| 36|
+-----------------------+---+------------+-----------+-------------+------------+
|Disposals | | -| (1)| -| (1)|
+-----------------------+---+------------+-----------+-------------+------------+
|Balance at 31 December | | 782| 288| 11| 1,081|
|2005 | | | | | |
+-----------------------+---+------------+-----------+-------------+------------+
| | | | | | |
+-----------------------+---+------------+-----------+-------------+------------+
|Balance at 1 January | | 782| 288| 11| 1,081|
|2006 | | | | | |
+-----------------------+---+------------+-----------+-------------+------------+
|Business combinations | | 60| 20| -| 80|
+-----------------------+---+------------+-----------+-------------+------------+
|Additions | | 87| 306| -| 393|
+-----------------------+---+------------+-----------+-------------+------------+
|Disposals | | -| (85)| -| (85)|
+-----------------------+---+------------+-----------+-------------+------------+
|Currency translation | | 1| 1| -| 2|
+-----------------------+---+------------+-----------+-------------+------------+
|Balance at 31 December | | 930| 530| 11| 1,471|
|2006 | | | | | |
+-----------------------+---+------------+-----------+-------------+------------+
+----------------------+---+-----------+-----------+------------+-----------+
|In thousands of Euro | | Laboratory| Office| Leasehold| |
| | | | | | |
| | | Equipment| Equipment|Improvements| Total|
+----------------------+---+-----------+-----------+------------+-----------+
|Depreciation | | | | | |
+----------------------+---+-----------+-----------+------------+-----------+
|Balance at 1 January | | 181| 127| -| 308|
|2005 | | | | | |
+----------------------+---+-----------+-----------+------------+-----------+
|Business combinations | | 7| 2| 2| 11|
+----------------------+---+-----------+-----------+------------+-----------+
|Charge in year | | 97| 57| -| 154|
+----------------------+---+-----------+-----------+------------+-----------+
|Disposals | | -| (1)| -| (1)|
+----------------------+---+-----------+-----------+------------+-----------+
|Balance at 31 December| | 285| 185| 2| 472|
|2005 | | | | | |
+----------------------+---+-----------+-----------+------------+-----------+
| | | | | | |
+----------------------+---+-----------+-----------+------------+-----------+
|Balance at 1 January | | 285| 185| 2| 472|
|2006 | | | | | |
+----------------------+---+-----------+-----------+------------+-----------+
|Business combinations | | 37| 9| -| 46|
+----------------------+---+-----------+-----------+------------+-----------+
|Charge in year | | 165| 167| 1| 333|
+----------------------+---+-----------+-----------+------------+-----------+
|Disposals | | -| (60)| -| (60)|
+----------------------+---+-----------+-----------+------------+-----------+
|Currency translation | | 2| (2)| -| -|
+----------------------+---+-----------+-----------+------------+-----------+
|Balance at 31 December| | 489| 299| 3| 791|
|2006 | | | | | |
+----------------------+---+-----------+-----------+------------+-----------+
+----------------------+---+-----------+-----------+------------+-----------+
|In thousands of Euro | | Laboratory| Office| Leasehold| |
| | | | | | |
| | | Equipment| Equipment|Improvements| Total|
+----------------------+---+-----------+-----------+------------+-----------+
|Carrying amounts | | | | | |
+----------------------+---+-----------+-----------+------------+-----------+
|At 31 December 2004 | | 579| 123| -| 702|
+----------------------+---+-----------+-----------+------------+-----------+
|At 31 December 2005 | | 497| 103| 9| 609|
+----------------------+---+-----------+-----------+------------+-----------+
|At 31 December 2006 | | 441| 231| 8| 680|
+----------------------+---+-----------+-----------+------------+-----------+
13. Intangible assets
+---------------------------------------------------------------------------+
| Group |
+---------------------+---+------------+-----------+-----------+------------+
|In thousands of Euro | |Intellectual| | | |
| | | | | | |
| | | Property| Goodwill| Licenses| Total|
+---------------------+---+------------+-----------+-----------+------------+
|Cost | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
|Balance at 1 January | | -| -| 1,367| 1,367|
|2005 | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
|Business combinations| | -| -| 20| 20|
+---------------------+---+------------+-----------+-----------+------------+
|Additions | | -| -| 2| 2|
+---------------------+---+------------+-----------+-----------+------------+
|Balance at 31 | | -| -| 1,389| 1,389|
|December 2005 | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
| | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
|Balance at 1 January | | -| -| 1,389| 1,389|
|2006 | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
|Business combinations| | 5,000| 2,680| -| 7,680|
+---------------------+---+------------+-----------+-----------+------------+
|Additions | | -| -| 3| 3|
+---------------------+---+------------+-----------+-----------+------------+
|Balance at 31 | | 5,000| 2,680| 1,392| 9,072|
|December 2006 | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
+---------------------+---+------------+-----------+-----------+------------+
|In thousands of Euro | |Intellectual| | | |
| | | | | | |
| | | Property| Goodwill| Licenses| Total|
+---------------------+---+------------+-----------+-----------+------------+
|Amortisation and | | | | | |
|impairment losses | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
|Balance at 1 January | | -| -| 312| 312|
|2005 | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
|Charge for the year | | -| -| 109| 109|
+---------------------+---+------------+-----------+-----------+------------+
|Balance at 31 | | -| -| 421| 421|
|December 2005 | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
| | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
|Balance at 1 January | | -| -| 421| 421|
|2006 | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
|Charge for the year | | 5,000| 2,680| 99| 7,779|
+---------------------+---+------------+-----------+-----------+------------+
|Balance at 31 | | 5,000| 2,680| 520| 8,200|
|December 2006 | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
+---------------------+---+------------+-----------+-----------+------------+
|In thousands of Euro | |Intellectual| | | |
| | | | | | |
| | | Property| Goodwill| Licenses| Total|
+---------------------+---+------------+-----------+-----------+------------+
|Carrying amounts | | | | | |
+---------------------+---+------------+-----------+-----------+------------+
|At 31 December 2004 | | -| -| 1,055| 1,055|
+---------------------+---+------------+-----------+-----------+------------+
|At 31 December 2005 | | -| -| 968| 968|
+---------------------+---+------------+-----------+-----------+------------+
|At 31 December 2006 | | -| -| 872| 872|
+---------------------+---+------------+-----------+-----------+------------+
Goodwill on the acquisition of Arthro Kinetics UK Limited has been calculated
based on the share capital in the combined group allocated to the former
shareholders of Arthro Kinetics UK Limited under a share exchange agreement
dated 24 February 2006.
During the year, the restructuring of the Group triggered an impairment review
of the surgical cash generating unit, to which goodwill is allocated. The
recoverable amount of the surgical cash generating unit has been referenced with
regard to its value in use. The calculation was based on a four year forecast
period recognising delays in the regulatory approval for equipment in the US and
weaker than expected sales in other geographical regions. A discount rate of 30%
was applied. This assessment led to a decision to fully impair the remaining
goodwill of Euro2.7m and the impairment provision has been charged to other
operating expenses in the surgical unit cash generating unit within the European
primary reporting segment.
The value attributable to intellectual property relates to the nucleus
replacement spinal disc project, also within the surgical cash generating unit.
The fair value has been determined by a review of the discounted estimated
future cash flows from the asset. The Group had intended to combine the projects
from Arthro Kinetics UK Limited (a polymer stent and stem cell work) with the
biological matrix technology and develop a range of nucleus replacement
products. During 2006 there was no progress on the polymer project and delays in
initiating the stem cell project. As a consequence of the strategic review and
work on an acellular implant the Group has narrowed its short term focus with a
greater reliance on the biological matrix technology than the polymer and stem
cell projects recognised in the acquired goodwill. The impairment review
attempted to separate out the components of the technology on a value in use
basis over a period of 8 years and assumed a discount rate of 35%. With no
terminal growth assumption a 95% discount was applied as the project is not yet
in clinical trials. Subsequently the board decided to fully impair the Euro5.0m
value of intellectual property and this has been charged to other operating
expenditure in the European primary reporting segment.
Intangible assets include licenses purchased by Arthro Kinetics AG relating to
the research projects for human joint cartilage replacements within the
biologics business. License fee amortisation of Euro99k has been charged to general
and administrative expenses. Amortisation charges in 2005 of Euro109k were included
in cost of sales (Euro62k), distribution expenses (Euro4k), research and development
expenses (Euro38k) and general and administrative expenses (Euro5k).
14. Inventories
In thousands of Euro 31 December 2006 31 December 2005
Raw materials, consumables 114 82
and supplies
Work in progress 136 -
Finished goods 425 61
675 143
Raw materials, consumables and supplies consist of laboratory materials.
Finished goods consist of inventories manufactured and purchased measured at
cost in accordance with the lower of cost or market principle.
The ESS inventories held at 31 December 2006 was assessed against the planned
forecast sales in the first half of 2007. Whilst the directors believe there is
little risk of stock becoming obsolete, in assessing only the forecast sales for
the first half of 2007 the analysis suggests a requirement for 50% of the held
inventory. Consequently a charge to cost of sale of Euro307k for the remaining 50%
was taken at 31 December 2006. Euro200k of the charge was against the European
primary segment and Euro107k against the North & Latin America primary segment.
15. Trade and other receivables
In thousands of Euro 31 December 2006 31 December 2005
Trade receivables 317 169
Prepayments and accrued 447 -
income
Other receivables - 916
764 1,085
All receivables fall due within one year.
In July 2006 Arthro Kinetics Plc entered into an export production agreement and
a manufacturing and distribution agreement with Australian Biotechnologies Pty
Limited relating to the manufacture and distribution of CaReS(R) in Australia
and parts of Asia. The Company additionally entered into a convertible cash loan
facility to the value of AUS$1.65m (Euro1m) in favour of Australian Biotechnologies
Pty Limited. Interest is payable at 9.5 per cent a year and the term of the
agreement expires in January 2008. The facility may be drawn down in four
tranches and drawn down funds are repayable in July 2007 and January 2008. As at
31 December AUS$1m (Euro604k) of the facility has been drawn down and these monies
are repayable on 10 July 2007.
Repayment of the loan and associated interest is secured by a first-ranking
fixed and floating charge over the assets and undertakings of Australian
Biotechnologies Pty Limited. The Company has a right to convert any amounts due
and unpaid at a fixed conversion percentage into issued shares in the share
capital of Australian Biotechnologies Pty Limited.
Australian Biotechnologies Pty Limited has indicated they have initiated an
equity fund raise in 2007 to support the continued development of the business
and ensure there are available funds to repay funds drawn down against the loan
facility with the Company. In the absence of certainty that this fundraise will
be successfully completed the directors have decided to take a provision against
the full value of the loan outstanding at 31 December 2006 of Euro604k.
Australian Biotechnologies are required to confirm at the date of any drawdown
that there are no events or potential events of default. Should the initial
repayment due in July 2007 not be forthcoming Australian Biotechnologies Pty
Limited will have triggered an event of default and the remaining facility funds
will not be made available.
16. Cash and Cash Equivalents
In thousands of Euro 31 December 2006 31 December 2005
Bank balances 3,199 3,825
17. Capital and Reserves
Share Capital and Share Premium
+----------------------------------+---+---------------+
|In thousands of shares | |Ordinary Shares|
| | | |
| | | |
+----------------------------------+---+---------------+
|On issue at January 2006 | | 28|
| | | |
| | | |
+----------------------------------+---+---------------+
|Redeemed under share exchange | | (28)|
|agreement | | |
| | | |
+----------------------------------+---+---------------+
|Issued for cash | | 5,100|
| | | |
| | | |
+----------------------------------+---+---------------+
|Issued under share exchange | | 22,500|
|agreements | | |
| | | |
+----------------------------------+---+---------------+
|On issue at 31 December 2006 | | 27,600|
| | | |
| | | |
+----------------------------------+---+---------------+
Following the reverse acquisition of Arthro Kinetics Plc by Arthro Kinetics AG
and the acquisition of Arthro Kinetics UK Limited on 24 February 2006 the share
capital of Arthro Kinetics AG was redeemed and the shares substituted with
ordinary shares in Arthro Kinetics Plc. The share consideration was satisfied by
the issue of 18,225,000 and 4,275,000 shares in Arthro Kinetics Plc to the
former shareholders of Arthro Kinetics AG and Arthro Kinetics UK Limited
respectively. The value of the shares issued was based upon a negotiated
valuation of Arthro Kinetics AG and Arthro Kinetics UK Limited at the
acquisition date.
A further 5,100,481 were issued to investors through the Company's admission to
AIM raising gross proceeds of Euro9.0m.
The authorised share capital of the Company for the period 24 February to 31
December 2006 remained #10,000,000 comprising 50,000,000 shares with a nominal
value of #0.20.
The issued share capital of the Company at 31 December 2006 was #5,520k
(Euro8,106k) comprising 27,600,481 shares with a nominal value of #0.20.
The share premium of the Company at 31 December 2006 was #3,598k (Euro5,284k)
comprising 5,100,481 shares issued at a premium of #1.00 (#5,100k) less
transaction costs (#1,502k).
The holders of ordinary shares are entitled to dividends as declared from time
to time and to attend and cast one vote per share at meetings of the Company.
Ordinary shares rank equally with respect to the residual net assets of the
Company on a winding up.
Within the authorised and unallocated share capital the Company has set aside
2,773,332 ordinary shares with an aggregate nominal value of #554,666 for the
issue of shares under the Company's share option scheme.
A capital restructuring was approved by shareholders on 22 March 2007, as
detailed in note 27.
Translation reserve
The translation reserve comprises all foreign exchange differences arising from
the translation of the financial statements of foreign operations.
Share capital in Arthro Kinetics AG
Immediately prior to the business combinations Arthro Kinetics AG had in issue
the following shares;
+---------------------------+--+------------+------------+
| | | | Number of|
| | | | |
| | | | Shares|
+---------------------------+--+------------+------------+
|Common shares | | | 28,231|
+---------------------------+--+------------+------------+
|Preferred Shares - A | | 38,386| |
+---------------------------+--+------------+------------+
|Preferred Shares - B | | 186,211| |
+---------------------------+--+------------+------------+
|Total Preferred Shares | | | 224,597|
+---------------------------+--+------------+------------+
Of the 186,211 B preference shares 33,531 were agreed to be issued at an
extraordinary meeting of the shareholders meeting of Arthro Kinetics AG on 23
December 2005. The increase in capital was entered into the commercial register
of Arthro Kinetics AG on 6 February 2006. The subscribed amount of Euro3.5m paid in
2005 in relation to these shares is shown as redeemable preferred shares as at
31 December 2005.
During 2005 Arthro Kinetics AG issued Euro3.1m of convertible bonds with an
interest rate of 5% per annum in 2005. On 21 December 2005 the issued
convertible bonds were converted into preferred B shares in Arthro Kinetics AG.
In addition to the common shares and preferred shares there were 18,902 notional
shares allocated to a number of selling shareholders within Arthro Kinetics AG.
Through the share and purchase agreement with Arthro Kinetics Plc these
shareholders released the company from its obligation to issue shares to them in
consideration for shares in Arthro Kinetics Plc. The combined total of common
shares, preferred shares and notional shares were exchanged by the shareholders
of Arthro Kinetics AG for 18,225,000 shares in Arthro Kinetics Plc.
18. Loss per Share
In thousands of shares 31 December 2006 31 December 2005
Net loss for the year (Euro'000) (18,507) (10,621)
Weighted average no. of shares in 23,446 18,225
issue (Basic)
Basic loss per share (EUR per (0.79) (0.58)
share)
The effect of the full exercise of share options in the money is anti-dilutive
as the Group made a loss in both periods.
No adjustment to the loss per share calculation has been made for events
happening after 31 December 2006 as these are anti-dilutive.
19. Interest Bearing Loans and Borrowings
This note provides information about the contractual terms of the Group's
interest bearing loans and borrowings. For more information about the Group's
exposure to interest rate and foreign currency risk, see note 23.
Non Current liabilities
In thousands of Euro 31 December 31 December
2006 2005
Finance lease liabilities - 73
Unsecured loans 364 1,293
Secured loans 33 -
Derivative financial liabilities - 266
Redeemable preference shares - 27,262
397 28,894
Finance Lease Liabilities
Finance lease liabilities outstanding at 31 December 2005 were settled in full
during 2006 ahead of the lease end dates.
Unsecured Loans
Through an agreement dated 26 March 2003, Arthro Kinetics AG and Life Science
Fonds Esslingen GmbH & Co. KG (LSFE) established a dormant partnership. Under
the agreement, LSFE was obliged to provide Euro250k to Arthro Kinetics AG. The term
of the dormant partnership ends on 1 April 2008. The contribution has been paid
in full.
LSFE receives a minimum payment of 8.0% p.a. of its contribution, regardless of
the net income/loss of Arthro Kinetics AG for the year. The Lender also receives
a total of 3.0% for all participations from the annual profits generated by
Arthro Kinetics AG. The maximum payment p.a. is 15.0% of the contribution. The
bond as to the reporting date is measured by using the effective interest
method. The effective interest rate is 8.0%. Carrying amount and fair value do
not diverge materially.
Through an agreement dated 4 December 2003, Arthro Kinetics AG and
Technologie-Beteiligungs-Gesellschaft mbH (TBG) established a dormant
partnership whereby TBG provided Euro750k to Arthro Kinetics AG. TBG receives 8.0%
p.a. of its contribution and is entitled to 12.0% for all participations from
the annual profits generated by Arthro Kinetics AG. Additional fees are due to
TBG at the end of the investment period, amounting to 30.0% of the invested
amount if the agreement is terminated within the first five years.
In February 2006 TBG were entitled to Euro982k for termination of the silent
partnership and 24 February 2006 TBG were issued 565,388 ordinary shares in
Arthro Kinetics Plc in lieu of this payment. The shares issued to TBG comprised
part of the 18,225,000 consideration shares issued to the former shareholders of
Arthro Kinetics AG as detailed in note 6.
In 2004 the CTBA secured funding from the Government of Lower Austria with a
facility of Euro120k. There is no interest payable, no security and no fixed
repayment date. At 31 December 2006 the balance on the facility was Euro99k (2005:
Euro99k).
Secured Loans
In August and October 2006 Arthro Kinetics GmbH of Austria secured loans of Euro35k
with Raiffeisenbank in Austria. A loan of Euro10k extends until February 2009 with
an effective interest rate of 5.5%. A loan of Euro25k extends until December 2008
with an effective interest rate of 6.25%. At 31 December 2006 the balance
outstanding on the loans was Euro33k. The loans were agreed to support alterations
to the manufacturing facility. Security is provided by way of a charge over the
assets.
Redeemable Preference Shares
Arthro Kinetics AG had in issue 224,597 A and B preference shares prior to their
exchange for shares in Arthro Kinetics Plc pursuant to the sale and purchase
agreement of 24 February 2006.
There is no automatic entitlement to a dividend on the preferred shares.
Instead, any dividends declared at the discretion of the directors shall be
allocated first to holders of preferred shares B until they have received the
full preference amount they are entitled to under the liquidation agreement (see
below), and second to holders of preferred shares A until they too have received
the full preference amount they are entitled to under the liquidation agreement.
The preferred shares contracts include embedded derivatives that have to be
separated from the host contract and accounted for as derivatives: Preferred
shares A and B include additional rights for the respective shareholders to
avoid dilution of their equity position. If a shareholder meeting resolves a
capital increase at a price below Euro163.93 (preferred shares A) and Euro82.31
(preferred shares B) respectively the respective shareholders obtain the right
to participate in an additional (adjusting) capital increase at par value. The
extent of this capital increase is calculated such that the equity ratio of the
respective shareholders after the capital increase is equal to the equity ratio
they would have had if the original capital increase was calculated on the
current share price.
The preferred shares B contracts also include two milestone agreements.
The first milestone agreement gives the shareholders of the preferred shares B
the right to participate in an adjusting capital increase without share premium
if the revenue of Arthro Kinetics AG in the period from 1 January to 31 December
is below Euro3,150k. The maximum volume of the capital increase is limited to
15,905 shares.
The second milestone agreement imposes the obligation to the shareholders of the
preferred shares B to pay additional amounts into the capital reserve of Arthro
Kinetics AG. The additional amounts are grouped into three installments: first
installment: Euro400k, second installment: Euro300k and third installment Euro326k. The
installments become due if and only if the following criteria are met:
The first installment comes due if the revenue of Arthro Kinetics AG with the
product CaReS(R) exceeds Euro170k in the period from 1 January to 31 March 2004 and
the total revenue exceeds Euro370k in this period, or the criteria of the second
installment are met.
The second installment comes due if the revenue of Arthro Kinetics AG with the
product CaReS(R) exceeds Euro305k in the period from 1 April to 30 June 2004 and
the revenue of Arthro Kinetics AG with the product CaReS(R) exceeds Euro475k in the
period from 1 January to 30 June 2004 and the total revenue of Arthro Kinetics
AG exceeds Euro605k in the period from 1 April to 30 June 2004 and the total
revenue of Arthro Kinetics AG exceeds Euro975k in the period from 1 January to 30
June 2004 or the criteria of the third installment are met.
The third installment comes due if the revenue of Arthro Kinetics AG with the
product CaReS(R) exceeds Euro240k in the period from 1 July to 30 September 2004
and the revenue of Arthro Kinetics AG with the product CaReS(R) exceeds Euro715k in
the period from 1 January to 30 September 2004 and the total revenue of Arthro
Kinetics AG exceeds Euro640k in the period from 1 July to 30 September 2004 and the
total revenue of Arthro Kinetics AG exceeds Euro1,615k in the period from 1 January
to 30 September 2004.
Current Liabilities
In thousands of Euro 31 December 2006 31 December 2005
Liabilities to banks - 30
Current portion of - 176
finance lease
obligations
Unsecured loans 1,307 -
1,307 206
On 21 December 2006 the Company entered into a loan agreement with Heidelberg
Innovation GmbH pursuant to which Heidelberg Innovation agreed to lend Euro2.0m
(#1.35m) to the Company. Interest is payable at 20% per annum. The loan is
repayable on the expiry of five months from the date of each relevant draw down
date. Default interest is at an annual rate of 25% per annum. No security was
provided against the loan. The money was drawn down as to Euro1.3m on 22 December
2006, Euro300k on 8 January 2007 and Euro400k on 23 January 2007. The loans were given
in order to provide the necessary short time finance to support the Company
ahead of an anticipated placing and subscription.
Finance Lease Liabilities
Finance lease liabilities outstanding as at 31 December are payable as follows:
+---------------+--+---------+---------+---------+---------+---------+---------+
|In thousands of| | Minimum| | | Minimum| | |
|Euro | | | | | | | |
| | | lease| | | lease| | |
| | | | | | | | |
| | | payments| Interest|Principal| payments| Interest|Principal|
+---------------+--+---------+---------+---------+---------+---------+---------+
| | | 2006| 2006| 2006| 2005| 2005| 2005|
+---------------+--+---------+---------+---------+---------+---------+---------+
|Less than one | | -| -| -| 192| 16| 176|
|year | | | | | | | |
+---------------+--+---------+---------+---------+---------+---------+---------+
|Between one and| | -| -| -| 79| 6| 73|
|five years | | | | | | | |
+---------------+--+---------+---------+---------+---------+---------+---------+
| | | -| -| -| 271| 22| 249|
+---------------+--+---------+---------+---------+---------+---------+---------+
20. Share Based Payments
The Group established a share option scheme that will award shares in the
Company to directors and key management personnel. All options are to be settled
by physical delivery of shares, the terms and conditions of the grants are as
follows:
+-----------------+--------------+-----------------------+------------------+
| Grant date/ | Number of | | Contractual life |
| | | | |
| Employees | instruments | Vesting conditions | of options |
| entitled | | | |
+-----------------+--------------+-----------------------+------------------+
| Option grant to | 695,877 |Completion of the first| Unlimited but |
|Directors and key| |human implantation of a|likely within two |
| management | | nucleus implant in a | years of grant |
| personnel on 24 | |clinical study approved| |
| February 2006 | | by a competent | |
| | | regulatory agency. | |
+-----------------+--------------+-----------------------+------------------+
There is a single exercise price of the share options of #0.20. No share options
have been exercised in the period.
The fair value of services received in return for share options granted is based
on the fair value of share options granted, measured using a Black-Scholes
model, with the following inputs:
+----------------------------------------+------------------+
|Fair value of share options and | 2006|
|assumptions | |
+----------------------------------------+------------------+
| | |
+----------------------------------------+------------------+
|Fair value at grant date | #1.06|
+----------------------------------------+------------------+
|Share price | #1.24|
+----------------------------------------+------------------+
|Exercise price | #0.20|
+----------------------------------------+------------------+
|Expected volatility | 39.5%|
+----------------------------------------+------------------+
|Vesting period | 2 years|
+----------------------------------------+------------------+
|Risk free rate of return (based on | 4.74%|
|government bonds) | |
+----------------------------------------+------------------+
The expected volatility is based on the volatility of the Company's competitors
share price over the period since August 2004 to date of grant. The expected
option life is based on the estimated period to exercise. The total fair value
of options is amortised to the income statement over the vesting period.
Employee Expenses
+----------------------------------------+------------------+
|In thousands of euro | 2006|
+----------------------------------------+------------------+
|Share options granted | 334|
+----------------------------------------+------------------+
21. Trade and Other Payables
In thousands of Euro 31 December 2006 31 December 2005
Trade payables 721 971
Other taxation and 77 -
social security
Accruals 904 390
Other payables 37 61
1,739 1,422
22. Provisions
+----------------------+--+--------------+--------+---------------+
|In thousands of Euro | | | | 31 December|
| | | | | 2006|
| | | Restructuring| Other| |
+----------------------+--+--------------+--------+---------------+
|Balance at 1 January | | -| 244| 244|
| | | | | |
| | | | | |
+----------------------+--+--------------+--------+---------------+
|Provisions made during| | 497| 9| 506|
|the period | | | | |
| | | | | |
+----------------------+--+--------------+--------+---------------+
|Provisions used during| | -| (244)| (244)|
|the period | | | | |
| | | | | |
+----------------------+--+--------------+--------+---------------+
|Balance at 31 December| | 497| 9| 506|
| | | | | |
| | | | | |
+----------------------+--+--------------+--------+---------------+
| | | | | |
| | | | | |
| | | | | |
+----------------------+--+--------------+--------+---------------+
|Current | | 497| 9| 506|
| | | | | |
| | | | | |
+----------------------+--+--------------+--------+---------------+
|Total | | 497| 9| 506|
| | | | | |
| | | | | |
+----------------------+--+--------------+--------+---------------+
Restructuring
Following the strategic review in November 2006 the Group announced a
restructuring plan on 30 November 2006 committing to significantly downsize the
scale of its operations. Other provisions used during the period related to
legal and advisory costs.
23. Financial Instruments
Financial Instrument Policy
All instruments utilised by the Group are for financing purposes. The Group
finances its operations predominantly through the use of subscribed equity
together with a small amount of debt finance. The day-to-day financial
management and treasury operations are controlled centrally.
Interest Rate and Cash Deposit Risk
The Group invests surplus cash at floating rates of interest based upon bank
base rate. All surplus cash is held in accounts of the Company placed with HSBC
bank.
Details of financial instruments and their maturity profile are as follows:
In thousands of Euro Effective 1 to 2 More than 2
interest years years
rate Total
2006
Cash and cash
equivalents
Sterling denominated 4.0% 944 944 -
floating rate financial
assets
Euro denominated 2.0% 1,993 1,993 -
floating rate financial
assets
US dollar denominated Nil 216 216 -
floating rate financial
assets
Australian dollar Nil 46 46 -
denominated floating
rate financial assets
Interest Bearing Loans
and Borrowings
Unsecured loans 21.9% 1,671 1,572 99
Secured loans 6.2% 33 - -
2005
Cash and cash
equivalents
Euro denominated 2.0% 3,825 -
floating rate financial
assets 3,825
Interest Bearing Loans
and Borrowings
Unsecured loans 10.7% 1,293 944 349
Liabilities to banks 6.0% 30 30 -
Finance lease 8.8% 249 249 -
liabilities
Derivative financial 25.0% 266 266 -
liabilities
Redeemable preference 25.0% 27,262 27,262 -
shares
There were no material differences between the fair values and carrying values
of financial assets and liabilities.
Liquidity Risk
The Group's operations are loss making and cash consumption is high. In March
2007 the Company completed a placing and subscription raising gross proceeds of
Euro9.0m which the directors believe sufficient to support the Group operations
through 2007 and 2008.
Credit Risk
As at 31 December 2006, the Group had a material credit risk in respect of
Australian Biotechnologies Pty Limited. In July 2006 the Company entered into a
convertible cash loan facility to the value of AUS$1.65m (Euro1.0m) in favour of
Australian Biotechnologies Pty Limited. Interest is payable at 9.5 per cent a
year and the term of the agreement expires in January 2008. The facility may be
drawn down in four tranches and drawn down funds are repayable in July 2007 and
January 2008. As at 31 December AUS$1.0m (Euro604k) of the facility has been drawn
down and these monies are repayable on 10 July 2007. Australian Biotechnologies
Pty Limited has indicated they have initiated an equity fund raise in 2007 to
support the continued development of the business and ensure there are available
funds to repay funds drawn down against the loan facility with the Company. In
the event of default the loan agreement provides for the Arthro Kinetics Plc to
convert its loan into equity of Australia Biotechnologies Pty Limited.
The Group monitors the level of credit extended to individual customers on an
ongoing basis.
Currency Exposure
At 31 December 2006 the Group had no material currency exposures in relation to
trading activities. Arthro Kinetics Plc had exposure to the Australian dollar as
a result of the loan granted to Australia Biotechnologies Pty Limited. The
Company has not taken action to hedge this exposure.
Sensitivity Analysis
In managing interest rate and currency risks the Group aims to reduce the impact
of short-term fluctuations on the Group's earnings. Over the longer-term,
however, permanent changes in foreign exchange and interest rates will have an
impact on profit.
At 31 December 2006 it is estimated that a general decrease of one percentage
point in interest rates would decrease the Group's profit before income tax by
approximately Euro45k (2005: increase in the Group's profit before income tax by
approximately Euro10k). Interest rate swaps have been included in this calculation.
It is estimated that a general increase of one percentage point in the value of
the euro against other foreign currencies would have increased the Group's loss
before income tax by approximately Euro31k for the year ended 31 December 2006
(2005: nil).
24. Other Financial Commitments and Contingent Liabilities
Non-cancellable operating lease rentals are payable as follows:
+---------------+--+------------------------------------------------------+
|In thousands of| | 31 December 2006 |
|Euro | | |
| | | |
+---------------+--+---------------+----------------+---------------------+
| | | Operating| Rental| Total|
| | | Leases| Agreements| |
| | | | | |
+---------------+--+---------------+----------------+---------------------+
|Less than one | | 63| 294| 357|
|year | | | | |
| | | | | |
+---------------+--+---------------+----------------+---------------------+
|Between one and| | 88| 98| 186|
|five years | | | | |
| | | | | |
+---------------+--+---------------+----------------+---------------------+
+---------------+-+-------------------------------------------------------+
|In thousands of| | 31 December 2005 |
|Euro | | |
| | | |
+---------------+-+---------------+---------------+----------+------------+
| | | Operating| Rental| Other| Total|
| | | Leases| Agreements| | |
| | | | | | |
+---------------+-+---------------+---------------+----------+------------+
|Less than one | | 54| 246| 8| 308|
|year | | | | | |
| | | | | | |
+---------------+-+---------------+---------------+----------+------------+
|Between one and| | 90| 441| 17| 548|
|five years | | | | | |
| | | | | | |
+---------------+-+---------------+---------------+----------+------------+
There are no contingent liabilities not provided for at the end of the financial
year.
There are no differences between the fair value and carry value of the Group's
assets and liabilities.
There are no capital commitments authorised by directors and not provided for in
the financial statements.
25. Related Party Transactions
Group Companies
The Company has related party transactions with its subsidiary undertakings
detailed in note 26. All such transactions with subsidiaries are eliminated on
consolidation.
Parent and Ultimate Controlling Party
At 31 December 2006 Heidelberg Innovation BioScience Venture II GmbH & Co. KG,
Heidelberg Innovation Parallel-Beteiligungs GmbH & Co. KGaA and Heidelberg
Innovation Fonds Management GmbH (collectively "Heidelberg") held 26% of the
shares in the Company through nominee accounts. 19% of the shares were held by
employees or former employees and advisors of the Company who were unable to
dispose of their shares as a result of being party to lock in agreements.
Subsequent to the year end Heidelberg and its related concert parties became the
ultimate controlling party of the Group, see note 27.
On 21 December 2006 the Company entered into a loan agreement with Heidelberg
Innovation GmbH pursuant to which Heidelberg Innovation agreed to lend Euro2
million (#1.35m) to the Company. Interest is payable at 20% per annum. The loan
is repayable on the expiry of five months from the date of each relevant draw
down date. Default interest is at an annual rate of 25% per annum. No security
was provided against the loan, see note 19.
Key Management Personnel Compensation
In addition to their salaries, directors' and executive officers also
participate in the Group's share option scheme, see note 20.
Key management personnel compensation, including the remuneration of the
directors, is as follows:
+---------------------------------+----------------+--+------------------+
|In thousands of Euro | December 2006| | 31 December 2005|
+---------------------------------+----------------+--+------------------+
| | | | |
+---------------------------------+----------------+--+------------------+
|Remuneration | 903| | 486|
+---------------------------------+----------------+--+------------------+
|Termination benefits | 110| | -|
+---------------------------------+----------------+--+------------------+
|Total | 1,013| | 486|
+---------------------------------+----------------+--+------------------+
Transactions with Directors
Wayside Technologies Limited was appointed under a letter of appointment dated
14 February 2006 for the provision of services of Dr. John Yianni as a
non-executive director of Arthro Kinetics Plc. The letter of appointment
provides for Wayside Technologies Limited to receive an annual fee of #24,000
(Euro35,000) for the services and the appointment continues until terminated on
three months' notice by either side.
The Company entered into an agreement with Dr. Jason Loveridge and Warambi Sarl
(a company controlled by Dr. Loveridge) dated 13 December 2006 for the provision
of services of the Chief Executive Officer for an annual fee of Euro240,000. The
agreement continues until terminated by either party on 365 days notice. The
agreement replaces an agreement between the Company and Warambi Sarl for the
services of Dr. Loveridge as non-executive director of the Company dated 24
February 2006.
Directors and managers of the Company (including the Chairman of the Company's
Medical Advisory Board) control 17% of the voting shares of Arthro Kinetics Plc
at 31 December 2006. This control reduced to 8% as a consequence of the placing
and subscription detailed in note 27.
The sole director of Arthro Kinetics Pty Limited is related to the Chairman of
the Company's Medical Advisory Board. At 31 December 2006 their combined holding
in Arthro Kinetics Plc was 10%, reducing to 3% as a consequence of the placing
and subscription detailed in note 27.
Loans from Directors'
There were no unsecured loans from Directors at the year end 31 December 2006
(2005: nil).
26. Group Entities
Subsidiary Undertakings at 31 December 2006
+---------------------+-------------+------------+-----------------------------+
| | |% of voting | |
| | | | |
| |Country of |share | |
| | |capital | |
|Group name |incorporation| |Principal activity |
| | |held | |
+---------------------+-------------+------------+-----------------------------+
|Arthro Kinetics AG |Germany | 100|Development and sale of |
|(formerly Ars Arthro | | |orthopedic products |
|AG) | | | |
+---------------------+-------------+------------+-----------------------------+
|GFZO Arthro GmbH |Germany | 100|Holding of intellectual |
| | | |property |
+---------------------+-------------+------------+-----------------------------+
|Arthro Kinetics |Austria | 100| |
|Biotechnologie GmbH | | | |
| | | |Manufacture of orthopedic |
| | | |products |
+---------------------+-------------+------------+-----------------------------+
|Arthro Kinetics |UK | 100|Holding of intellectual |
|Medical Ltd | | |property |
+---------------------+-------------+------------+-----------------------------+
|Arthro Kinetics UK |UK | 100| |
|Limited (formerly | | | |
|Endospine Kinetics | | |Sale and distribution of |
|Limited) | | |orthopedic products |
+---------------------+-------------+------------+-----------------------------+
|Arthro Kinetics Pty |Australia | 100|Marketing of orthopedic |
|Limited | | |products |
+---------------------+-------------+------------+-----------------------------+
|Arthro Kinetics Inc. |USA | | |
|(formerly Ars Arthro | | | |
|Inc.) | | 100|Marketing of orthopedic |
| | | |products |
+---------------------+-------------+------------+-----------------------------+
|Cell and Tissue Bank |Austria | -|Special purpose vehicle for |
|Austria (CTBA) | | |the sale and distribution of |
| | | |orthopedic products |
+---------------------+-------------+------------+-----------------------------+
|EKL Asia Ltd |Hong Kong | 100|Dormant |
+---------------------+-------------+------------+-----------------------------+
As at 31 December 2006 Arthro Kinetic Plc was deemed through its subsidiary
companies to have control over the Cell and Tissue Bank Austria (CTBA). The
Group controls the finance and operating policies of the CTBA as a result of it
being the sole supplier of allograft processing services to the CTBA and a
consequence of key members of Arthro Kinetics management residing on the
management board of the CTBA.
The business of GFZO Arthro GmbH, a 100% subsidiary of Arthro Kinetics AG
holding intellectual property, was merged into Arthro Kinetics AG on 13
September 2006.
In November 2006 the Company initiated a joint venture with Tianjin Anda Group
Holding Co. Ltd for the commercialization of CaReS(R) in China. At 31 December
2006 the joint venture had not been formerly validated and consequently there is
no impact on the reported Group results for 2006.
27. Subsequent Events
Increase in Share Capital
At an EGM on 22 March 2007, the board obtained shareholder approval for the
issue of 44,402,685 ordinary shares subscribed for at #0.10 each to parties
including funds controlled by Heidelberg Innovation, and the placing of a
further 16,000,000 shares at #0.10 each by Nomura Code Securities Limited with
institutional investors. The total amount raised through the fund raise was
Euro9.0m.
Each investor participating in the subscription and placing received a warrant
carrying the right to subscribe for one share at #0.20 each for every two shares
subscribed, exercisable up to and including 17 December 2008.
The subscription and placing price was below the nominal value of the Company's
shares of #0.20. Therefore, unissued shares have been sub-divided into 4 new
shares of #0.05 each. Existing shares have been divided into one new share of
#0.05 plus a deferred share, which will carry no commercial value, of #0.15. The
deferred shares have no voting rights, no rights to dividends and negligible
rights on a return of capital. The deferred shares will not be listed on any
stock exchange and will not be freely transferable. No share certificates will
be issued for any of the deferred shares. The Company will have the right at any
time to purchase all the deferred shares for an aggregate consideration of
#0.01. There are no immediate plans to purchase or to cancel the deferred
shares, although the directors propose to keep the situation under review.
The authorised and issued share capital following the subscription and placing
is detailed below:
+----------------------+-------+----------------------+------------------+
| | Unit| Authorised| Issued Share|
| | | | |
| | | Share Capital| Capital|
+----------------------+-------+----------------------+------------------+
|Ordinary shares | | | |
+----------------------+-------+----------------------+------------------+
|Number of shares | Number| 150,000,000| 88,003,166|
+----------------------+-------+----------------------+------------------+
|Nominal value | UK #| 0.05| 0.05|
+----------------------+-------+----------------------+------------------+
|Aggregate nominal | UK #| 7,500,000| 4,400,158.30|
|value | | | |
+----------------------+-------+----------------------+------------------+
| | | | |
+----------------------+-------+----------------------+------------------+
|Deferred shares | | | |
+----------------------+-------+----------------------+------------------+
|Number of shares | Number| 27,600,481| 27,600,481|
+----------------------+-------+----------------------+------------------+
|Nominal value | UK #| 0.15| 0.15|
+----------------------+-------+----------------------+------------------+
|Aggregate nominal | UK #| 4,140,072.15| 4,140,072.15|
|value | | | |
+----------------------+-------+----------------------+------------------+
| | | | |
+----------------------+-------+----------------------+------------------+
|Combined | | | |
+----------------------+-------+----------------------+------------------+
|Aggregate nominal | UK #| 11,640,072.15| 8,540,230.45|
|value | | | |
+----------------------+-------+----------------------+------------------+
| | | | |
+----------------------+-------+----------------------+------------------+
Following the subscription and placing, Heidelberg, and certain investors with
whom Heidelberg is acting in concert (the "Concert Party"), controlled a total
of 56.7 per cent of the enlarged share capital.
The proceeds of the subscription and the placing will be used to strengthen the
Company's balance sheet and to provide working capital to both finance the
restructuring and support the ongoing operations of the business, including the
ongoing development and regulatory approval of products in its development
pipeline.
The additional funds to be received through the exercise of the warrants will
also be applied to further strengthen the Company's balance sheet and to raise
further working capital.
Through the subscription Heidelberg Innovation agreed to set off the obligation
to repay the Euro2.0m unsecured loan plus accrued interest (Euro91k) against the
monies due in connection with the subscription.
Share Options
The board considers share options a necessary and important way of rewarding,
retaining and attracting key Company personnel. On 22 March 2007, members
approved a proposal to increase the share option pool to 8,173,332 shares being
9.29 % of the Company's enlarged issued share capital.
The board granted 3,400,000 new options to Biomedical Capital Limited of which
Dr. Loveridge is the sole shareholder by means of a one-off share option
agreement which will contain the same terms and conditions as the Non-Employee
Option Scheme. New options granted to Biomedical Capital Limited will vest on
achievement of the following milestones:
+-----------------------+--------------------------------------------+
|Number of Options |Vesting Milestone |
+-----------------------+--------------------------------------------+
|400,000 |Admission of the new shares to trading on |
| |AIM |
+-----------------------+--------------------------------------------+
|600,000 |The Company's share price reaching #0.15 |
+-----------------------+--------------------------------------------+
|600,000 |The Company's share price reaching #0.20 |
+-----------------------+--------------------------------------------+
|600,000 |The Company's share price reaching #0.30 |
+-----------------------+--------------------------------------------+
|600,000 |The Company's share price reaching #0.40 |
+-----------------------+--------------------------------------------+
|600,000 |The Company's share price reaching #0.50 |
+-----------------------+--------------------------------------------+
The vesting period of the new options extends until 31 December 2010 or for a
period of 12 months following termination of the consultancy agreement if the
agreement is terminated before 31 December 2009. New options shall be
exercisable at a price of #0.10 per Share.
The balance of new options to subscribe for 4,077,455 Shares are to be granted
to current and future employees of the Group at the discretion of the
Remuneration Committee.
Board Appointment
At the EGM on 22 March 2007 shareholders approved the appointment of Mr.
Berthold Hackl as a non-executive director of Arthro Kinetics Plc. Mr. Hackl is
Managing Partner of Heidelberg Innovation and will be remunerated #24,000
(Euro37,000) per annum for his role and the appointment continues until terminated
on three months' notice by either party.
Directors' Interests
Each of the directors subscribed for shares through the subscription and placing
detailed above and had the following interests in shares of the Company as at 14
June 2007:
+-------------------+---------------------+---------------------+
| | % of Issued Share| |
| | | |
| | Capital| Number of Shares|
+-------------------+---------------------+---------------------+
|Mr Michel Lendvai | 1.25| 1,100,000|
+-------------------+---------------------+---------------------+
|Dr Jason Loveridge | 0.33| 291,304|
+-------------------+---------------------+---------------------+
|Mr James Hobbs | 0.48| 419,153|
+-------------------+---------------------+---------------------+
|Mr Douglas Quinn | 0.72| 633,886|
+-------------------+---------------------+---------------------+
|Dr John Yianni | 0.23| 200,000|
+-------------------+---------------------+---------------------+
|Mr Berthold Hackl | 0.34| 303,125|
+-------------------+---------------------+---------------------+
Contacts
Arthro Kinetics Plc Tel: +49 (0)711 305 110 70
Jason Loveridge, Chief Executive
Officer
Doug Quinn, Chief Financial Officer
END
This information is provided by RNS
The company news service from the London Stock Exchange
END
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