RNS Number:8115S
Arthro Kinetics plc
22 April 2008
Arthro Kinetics plc
TUESDAY, 22 April 2008 - Annual Report and Accounts for the year to 31 December
2007
Chief Executive's Statement
2007 saw the Group successfully complete a significant restructuring program
that resulted in a radically improved trading position, more consistent revenue
growth and a strong outlook for 2008. Revenue growth increased 49% and in line
with our expectations, whilst personnel and costs were appreciably reduced when
compared to 2006. New product development focused on advancing our lead program
for our cell-free implant ("CFI") into patients and our radio frequency ("RF")
generator successfully gaining FDA approval for sale in the US.
Highlights
* Revenue growth of 49% to Euro2.7m on a significantly reduced cost base
* Second half revenues of Euro1.6m represented 39% growth on the first half
of 2007 and over 70% against the comparable period in 2006
* Euro1.2m of gross profit, supported by a 30% increase in the average
selling price of CaReS(R) direct to hospitals
* A better than planned year end cash position of Euro5.6m
* Clinical studies initiated and enrolment of the first patients required
to obtain the CE Mark for CFI
* Gained US FDA 510(k) approval for the RF unit from our ESS (endoscopic
spine surgery) instrumentation portfolio
* Completed an Euro8.9m placing and subscription in March 2007
Trading
Against revenues of Euro2.7m the Group achieved a gross profit of Euro1.2m, a
significant improvement on the gross loss of Euro208k reported in 2006. Overall,
the Group reported a loss before tax of Euro6.7m, including a write down of Euro3.1m
on the value of investments.
CaReS(R) remains the Group's only marketed biological implant and biologics are
the main source of Group revenue. From a geographical perspective the focus in
2007 was within Europe and on expanding the number of client hospitals approved
in Germany; this achieved significant success in the second half of 2007 -
whilst maintaining lower sales costs and improved gross margin. It is extremely
pleasing to have recovered from our absence from the German market at the
beginning of the year. We have restored the CaReS(R) sales volume in Europe and
achieved a significantly improved selling price. Europe also serviced parties
licencing CaReS(R) technology for future manufacture, notably China and Japan.
Included in the Euro6.7m Group loss was a Euro3.1m write down on the value of our
investment in the Arthro Anda Tianjin Biologic Technology Company in China as a
result of regulatory uncertainties in China. Whilst we consider this action
prudent, it does not have an impact on our future income as the majority of
licence revenue from the partnership was received in 2007 and we were not
anticipating significant Chinese CaReS(R) sales until 2011.
Sales of the endoscopic surgical instruments improved but were below our
expectations due to the delayed approval of our RF unit and the yet-to-be
approved shaver system in the United States. Our efforts in this area continue
to be predominately focused on North America where the trend towards endoscopic
spine surgery is most advanced. To this end, in 2007 we appointed a number of
distributors covering key areas of the US East Coast. Having now established a
core distributor group in the US we see 2008 as a crucial test of this business
segment.
Allograft processing remains a small part of Arthro Kinetics' business with end
user sales slightly higher in 2007 as a result of improved sourcing of bone for
processing. In 2008 we do not expect allograft processing to make a significant
contribution and are currently reviewing a number of options for this business
line.
New product development
CFI remains the priority development objective for the Group in 2008. The first
human implantations were completed in 2007 and we continue to expand the number
of clinical centres in order to accelerate enrolment of the remaining patients.
We plan to submit for CE approval around the middle of 2008.
Progress on our other main development program for nucleus replacement (of the
spinal disc) continues and we intend this work to result in a collagen implant
entering pre-clinical studies in the first half of 2008, which with positive
data, could result in a first-in-man study early in 2009.
Outlook
Our confidence in the potential for the business sits in stark contrast to the
uncertainty of early 2007. The efforts of our staff resulted in strong Group
revenues and improved growth in 2007, and, in particular, the improved
performance of the second half versus the first (in our main biologics business)
underlies our expectation for a strong 2008. Additionally this year we expect
our second biologics implant to become available on the European market and to
be supported by the initiation of a number of clinical studies to support the
establishment of CFI as a new paradigm in tissue repair.
Jason Loveridge Michel Lendvai
Chief Executive Officer Chairman
21 April 2008
Financial Review
Trading
The Group achieved a significantly improved trading position in 2007 reporting
consolidated revenues of Euro2.7m and a gross profit of Euro1.2m. Operating
expenditure was in line with plan and overall the Group reported an operating
loss of Euro7.6m. Stripping out the Euro3.1m impairment charge against the Group's
investment in Arthro Anda Tianjin Biologic Technology Company of China the Group
reported an operating loss of Euro4.5m, in line with our expectations.
Gross profit benefited from a significant improvement from the average selling
price of CaReS(R); a combination of improved selling prices direct to hospitals
in central Europe and an increase in sales within the UK. Additionally a release
of Euro88k from the ESS inventory provision, due to lower inventory levels,
benefited gross profit.
In May 2007 Arthro Kinetics Plc and Tianjin Anda Group Holding Company ratified
the establishment of Arthro-Anda Tianjin Biologic Technology Company Limited
("AABT"), a company established for the manufacture and distribution of CaReS(R)
in China. Arthro Kinetics contributed intellectual property to the business in
exchange for a 25% holding in the entity, but is obliged to transfer 40% of this
holding (ie 10% of the 25%) to external parties. The Company remained the legal
and beneficial owner of the 25% holding at 31 December 2007 and accounted for it
on this basis, however an impairment assessment of the net present value of
future cash flows of AATB resulted in the Company and Group fully impairing its
holding value to zero with a charge to other operating expenses of Euro3.1m. There
is no cash impact to the Group as a consequence of this investment impairment.
In 2006 the Company provided for an outstanding loan balance of Euro604k with
Australian Biotechnologies Pty Limited due to the uncertainties of its
repayment. The funds were duly repaid in full in July 2007 with the inclusion of
Euro604k within other operating income on the income statement.
The first phase of restructuring initiated in December 2006 was concluded in the
first half of 2007 and saw Group headcount reduce from 58 in December 2006 to 38
in May 2007. In December 2007 the Group closed its office in Sydney, Australia
since it is able to more economically service its customer base in Asia Pacific
from its offices in Europe and the US. The closure resulted in two redundancies.
Total Group headcount further reduced to 34 as at 31 December 2007.
Financial income of Euro1,031k includes Euro820k of exchange rate gains. Overall the
Group reported a loss for the year of Euro6.7m.
Working Capital
In March 2007 the Group concluded a subscription and placing for gross proceeds
of Euro8.9m, a transaction that was approved by shareholders at an EGM on 22 March
2007. These shares were admitted to trading on AIM on 23 March 2007. Net cash
used in operating activities amounted to Euro5.2m and the Group ended the year with
a cash position significantly stronger than planned, holding Euro5.6m of cash.
Balance Sheet
As detailed above the investment holding in Arthro-Anda Tianjin Biologic
Technology Company Limited was fully impaired at 31 December 2007. The
investment was recorded at the fair value of the intellectual property
transferred to the entity, i.e. Euro3.1m. In line with IAS 18 the Company has
recorded the corresponding entry as deferred revenue, to be recognised at the
point when AATB can independently manufacture CaReS(R).
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 2007. 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.
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
21 April 2008
Directors' Report
The directors present their annual report and the audited consolidated financial
statements for the year ended 31 December 2007.
Principal Activity
The principal activity of the Company is that of a holding company. The Group is
engaged in the development, manufacture and sale of orthopedic products.
Company Information and Presentation of Financial Statements
The Company was incorporated on 30 January 2006 ahead of the formation of the
Group on 24 February 2006. The Company is listed on AIM following its admission
on 2 March 2006.
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.
The Company results and consolidated statements of the Group have been prepared
for the year ended 31 December 2007. The comparative results of the Group are
the consolidated statements for the year ended 31 December 2006. For the Company
the comparative results are for the 11 month period from incorporation to 31
December 2006.
Enhanced Business Review
To comply with the Companies Act 1985, the Group provides a review of the
development of the business during the year within the Trading and New Product
Development sections of the Chief Executive's Statement as well as in the
Financial Review. The sections below provide more detail on the objectives of
the business in 2007 together with the key performance indicators agreed by the
Board to monitor ongoing performance. The Enhanced Business Review also
considers the regulatory and R&D aspects of the business together with a
description of the principal risks and uncertainties facing the Group.
Objectives
The Group established the following priorities for the business in 2007;
* revenue growth - driven by CaReS(R) and allograft processing in Europe
and ESS in Asia Pacific and North & Latin America
* the development of acellular implants
Whilst the Group achieved significant revenue growth in 2007 the level of
penetration of ESS in North & Latin America was lower than planned primarily
because of delays in product regulatory approvals. Consequently management will
continue to review options for this segment during 2008.
Key Performance Indicators
In early 2007 the directors agreed a number of key performance indicators (KPI)
considered critical to measure the Group's performance in 2007. The KPI's have
high visibility amongst the Group's senior management team and are reported on
monthly. The agreed KPI's and performance against them in 2007 is detailed
below;
Indicator
German hospital applications and approvals for the sourcing of donor material
for use in the production of CaReS(R). The Group planned to achieve sufficient
approvals in the first half of 2007 to achieve its plan of CaReS(R) sales across
the year.
Performance
Against a target of 53 hospitals, the Group secured approvals with 70 hospitals
in Germany although more than half were achieved in September 2007 impacting the
Group's ability to achieve its targeted number of CaReS(R) sales in 2007.
Indicator
The number of unit CaReS(R) sales and the average selling price (excluding
distributor sales). The Group targeted a reduced number of hospitals in Germany
and Austria in 2007, whilst seeking to maintain a consistent average selling
price across all hospitals and one which was higher than that achieved in 2006.
Performance
The Group achieved 209 unit CaReS(R) sales against a plan of 300 but at a
significantly improved average selling price.
Indicator
Spinal surgeon training and instrumentation sales. Whilst targeting existing ESS
surgeons is the key priority the Group is additionally training surgeons less
familiar with the technique.
Performance
ESS sales were 30% lower than plan. During the course of the year, as the North
America market began to develop, management agreed to prioritise existing ESS
surgeons in order to reduce the dependency and cost on surgeon training and
training capacity.
Indicator
Group headcount. Following the restructuring initiated at the end of 2006 the
Group was forecasting to maintain a flat headcount below 40 persons during the
course of 2007.
Performance
The Group ended 2007 with 34 persons having secured a more stable operating
business on significantly reduced headcount.
Indicator
Group cash burn rate. The Group is targeting to ensure the funds raised from the
transaction completed in March 2007 are sufficient to support operations during
2007 and 2008.
Performance
The Group ended the year with Euro5.6m of cash, significantly higher than its plan
of Euro4.4m.
Indicator
Regulatory approvals for the remaining ESS products in the US and European CE
approval for the acellular cartilage repair product.
Performance
The Group achieved US FDA approval for the RF generator in 2007, albeit later
than planned but did not secure approval of the shaver unit although it is
continuing to pursue approval in conjunction with the manufacturer. Steps for
European CE approval for the acellular cartilage repair product were progressed
and the Group anticipates approval during the course of 2008.
For 2008 the business objectives remain the same;
* revenue growth focused on CaReS(R) sales in Europe and ESS sales in
North & Latin America
* the development of acellular implants
To this end the Board has retained the same KPI categories for 2008 but
management are monitoring and reporting at a more granular level; for example
tracking unit sales and average selling prices for CaReS(R) between direct
hospital sales and distributor sales.
Regulatory Matters
Regulatory approvals remain a key priority for the business in 2008 with the
targets of CE mark application for the Group's acellular cartilage repair
product and US FDA approval of the shaver system within the Group's ESS product
range.
The Group has a meeting scheduled with the FDA in April 2008 to discuss the
regulatory requirements for approval of the acellular implant in the US.
Research and Development
During 2007 the Group charged research and development costs of Euro2.0m to the
income statement. During 2008 R&D will continue to focus on three primary
projects; market approval of the acellular cartilage repair product in Europe,
progressing the spinal nucleus replacement program into preclinical studies, and
providing technical assistance to the licensing programs for CaReS(R).
Principal Risks and Uncertainties
Certain statements included within the Chief Executive's Statement, Financial
Review, Directors' Report and the financial statements are forward-looking and
may involve risks and uncertainties that could cause actual results to differ
materially from our expectations. All forward-looking statements in this report
are based upon information known to the Group on the date of this report, but
may not be borne out in practice.
Liquidity
The Group managed its cash requirements closely during 2007, which when combined
with the fundraising in March 2007 resulted in a strong year end cash position
of Euro5.6m. Cash management in line with revenue projections remains a priority
for 2008 and management will continue to review the structure of the business in
light of this.
Loss of Key Staff
Headcount was reduced significantly during the course of 2007 whilst the Group
achieved significant revenue growth. Consequently reliance on key staff
increased during the course of the year and remains the case in 2008. The Group
continues to increase the documentation and sharing of standard processes as
well as the centralised storage of information to minimise the reliance where
possible.
Competition
In Europe the market for ACI treatments is highly competitive with pressure on
end-user prices originating from insurance and reimbursement groups as well as
from suppliers seeking to expand market share. The Group recovered sales in
Europe following a period off the market and over the latter months of 2007 and
into 2008 regaining consistent monthly volumes.
Supplier Failure
The Group is reliant on a number of suppliers for the sourcing of its raw
material and components for the manufacturing process for its cartilage repair
products. The Group does not manufacture its ESS equipment range and is reliant
on a number of suppliers for the provision of this equipment. The Group
maintains good relationships with all its key suppliers and whilst alternative
sources of supply are available these would take significant time and resources
to establish.
Reimbursement, Regulatory Restrictions and Delays in Approval
The Group's strategy and performance will be materially impacted if the Group
experiences significant delays or problems with reimbursement or regulatory
approvals as currently planned. Changes in the regulatory requirements for new
product approvals may result in additional clinical trial and product
development costs.
Failure to comply with applicable new or changed laws, regulations or governance
standards or new or changed regulatory interpretation thereof may harm the
business or the Group's reputation.
Loss of Key Buildings - Destruction, Contamination
The Group has a Good Manufacturing Practice (GMP) approved manufacturing
facility in Krems, Austria and is dependent on this facility for the supply of
CaReS(R) and allograft processing. In the short term, and for a limited volume
of product, the Group is able to arrange for the external manufacture of CaReS
(R). This would be dependent on the nature of the disruption as the supply of a
finished good through another facility requires collagen which is also produced
in Krems and cannot be sourced elsewhere in the short term.
Critical Accounting Policies
The Group's accounting policies are described in note 3 to the Group financial
statements. Critical accounting policies are defined as those that reflect
management judgement, where different assumptions would lead to materially
different results or where estimates are required. Management believe the
critical accounting policies for the Group are intangible asset recognition
(including estimated useful life of intangibles), impairment reviews and
recognition, provisions, share based payments and business combinations. The
financial statements include a limited number of accounting estimates, details
of which are given in note 2 to the Group financial statements.
Proposed Dividend and Transfer to Reserves
The loss for the year after taxation amounted to Euro6.7m. The directors do not
recommend the payment of a dividend.
Policy and Practice on Payment of Creditors
It is the Group's approach that payments to suppliers are made in accordance
with the terms and conditions agreed between the Group companies and their
suppliers, providing that all trading terms and conditions have been complied
with. The Group does not follow any code or standard on payment practice. The
total amount outstanding in relation to Group trade payables at 31 December 2007
was Euro634k, representing 55 days when averaged over the year (2006: 38 days). The
total amount outstanding in relation to Company trade payables at 31 December
2006 was Euro111k, representing 64 days when averaged over the year (2006: 61).
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
successful completion of the placing and subscription in 2007 raising Euro8.9m of
gross proceeds the group ended the year with a cash balance significantly higher
than planned. The directors have prepared projected cash flow information for
the period ending fourteen months from the date of their approval of these
financial statements. On the basis of this cash flow information the directors
consider that the Company and Group will have sufficient cash to support their
operations through into the second half of 2009. The Group's operations are
focused on the application and development of, in the main, biological implants
and biologics. Given the sales and marketing phase of the Group's life cycle and
continual work to develop further applications, significant research and
development and sales and marketing costs have been incurred to date in excess
of revenue. The nature of the Group's operations means that the future income
incorporated in the cash flow forecasts is dependent on securing additional
contracts from existing products/markets and on developing new applications and
penetrating those related markets. Given the inherent risks with forecasting
revenues in the current markets in which the Group operates and risks associated
with the development and market penetration of new products there can be no
certainty in relation to any of these matters. These uncertainties may cast
doubt on the Company's and Group's ability to continue as a going concern. The
Company and Group may, therefore, be unable to continue realising their assets
and discharging their liabilities in the normal course of business but the
financial statements do not include any adjustments that would result from the
basis of preparation being inappropriate.
Directors' Interests
The directors who held office during the year, and subsequently, are listed
below:
Mr. Michel Lendvai, Chairman
Dr. Jason Loveridge, Chief Executive Officer
Mr. Douglas Quinn, Chief Financial Officer
Mr. James Hobbs, Director
Dr. John Yianni, Non-Executive Director
Mr. Berthold Hackl, Non-Executive Director (appointed 22 March 2007)
Professor Ulrich Abshagen, Non-Executive Director (appointed 10 April 2008)
The directors who held office at the end of the financial year had the following
interests in shares of the Company:
% of Issued 31 December 31 December
Share Capital 2007 2006
Mr. Michel Lendvai 1.25 1,100,000 357,679
Dr. Jason Loveridge 0.33 291,304 -
Mr. James Hobbs 0.48 419,153 317,153
Mr. Douglas Quinn 0.72 633,886 133,886
Dr. John Yianni 0.23 200,000 -
Mr. Berthold Hackl 0.34 303,125 3,125
The directors who held office at the end of the financial year held the
following interests in options over shares of the Company:
31 December 31 December
2007 2006
Mr. Michel Lendvai - -
Dr. Jason Loveridge 3,500,000 -
Mr. James Hobbs 136,985 86,985
Mr. Douglas Quinn 286,985 86,985
Dr. John Yianni - -
Mr. Berthold Hackl - -
Information on share options is detailed below in the Report on Directors'
Remuneration.
Substantial Shareholders
In addition to the directors' interests noted above, the directors are aware of
the following who were interested in 3% or more of the Company's equity as at
the 7 April 2008:
Registered holder % of Issued
Number of Share
Ordinary Shares Capital
Heidelberg Innovation Group 49,108,540 55.8
Credit Suisse Client Nominees (UK) Limited 18,096,666 20.6
Varuma AG 4,148,303 4.7
Disclosure of Information to Auditors
The directors who held office at the date of approval of this directors' report
confirm that, so far as they are each aware, there is no relevant audit
information of which the Company's auditors are unaware; and each director has
taken all the steps that he ought to have taken as a director to make himself
aware of any relevant audit information and to establish that the Company's
auditors are aware of that information.
Auditors
In accordance with Section 384 of the Companies Act 1985, a resolution for the
re-appointment of KPMG Audit Plc as auditors of the company is to be proposed at
the forthcoming Annual General Meeting.
Annual General Meeting
The Annual General Meeting will be held at the Life Science Centre Esslingen,
Schelztorstrasse 54-56, Esslingen, Germany on 15 May 2008 at 9.30 am. The notice
of the meeting is detailed at the back of this document.
By order of the Board
Doug Quinn
Chief Financial Officer
Report on Directors' Remuneration
As an AIM listed company we are not required to comply with the listing rules
related to the reporting of Directors' remuneration. Nevertheless, as part of
the Company's commitment to best practice, a strenuous effort has been made to
adhere to these provisions.
Policy on Executive Directors' Remuneration
The Remuneration Committee comprises Michel Lendvai, John Yianni and Berthold
Hackl (following his appointment to the Board 22 March 2007, as detailed in note
28). The Remuneration Committee is responsible for reviewing and determining the
Group's policy on executive remuneration (including the grant of options under
the Share Option Scheme) and ensuring compliance with and implementation by the
Group, as far as reasonably practicable, of the recommendations and guidelines
of the Combined Code. Executive remuneration packages are designed to ensure the
Group's executive directors and senior executives are fairly rewarded for their
individual contributions to the Group.
Fees for Non Executive Directors
The fees for non executive directors are determined by the Board.
Directors' Remuneration (audited information)
Set out below is a summary of the fees and emoluments received by all directors
for the year:
In thousands of Euro Salary/Fees Total 2007 Total 2006
Executive Directors
Dr. Jason Loveridge 240 240 69
Mr. Douglas Quinn 140 140 119
Mr. James Hobbs 132 132 118
Non Executive Directors
Mr. Michel Lendvai 70 70 59
Dr. John Yianni 35 35 35
Mr. Berthold Hackl 27 27 -
Total 644 644 400
None of the directors received pension contributions in respect of their office.
Directors' Interests
Details of any contracts in which a director has a material interest are
disclosed in note 28.
Share Options (audited information)
The Company operates an unapproved share option scheme for directors and key
members of management. All options are granted at the discretion of the Board.
During the year, the Company granted share options at the prevailing market
price to the directors and key members of management to purchase ordinary shares
in the Company. None of the directors exercised options during the year.
Directors' options outstanding and the options which were granted and expired
during the year are:
Director 31 December Granted Exercised Forfeited 31 December Exercise Earliest Date of
2006 2007 price p Exercise Expiry
Date
Jason - 3,400,000 - - 3,400,000 10.0 10/10/07 10/10/17
Loveridge
- 100,000 - - 100,000 9.4 30/06/09 10/10/17
Total 3,500,000 - - 3,500,000
Doug 86,985 - - - 86,985 20.0 01/01/07 24/02/16
Quinn
- 200,000 - - 200,000 9.4 30/06/09 10/10/17
Total 86,985 200,000 - - 286,985
James 86,985 - - - 86,985 20.0 01/01/07 24/02/16
Hobbs
200,000 - (150,000) 50,000 9.4 30/06/09 10/10/17
Total 86,985 200,000 - (150,000) 136,985
By order of the Board
Michel Lendvai
Chairman
Statement of Directors' Responsibilities in Respect of the Annual Report and
Accounts
The directors are responsible for preparing the Annual Report and Accounts in
accordance with applicable law and regulations.
Company law requires the directors to prepare group and parent company financial
statements for each financial year. As required by the AIM Rules of the London
Stock Exchange we are required to prepare the Group financial statements in
accordance with IFRSs as adopted by the EU and applicable laws and have elected
to prepare the parent company statements on the same basis.
The group and parent company financial statements are required by law and IFRSs
as adopted by the EU to present fairly the financial position of the group and
the parent company and the performance for that period; the Companies Act 1985
provides in relation to such financial statements that references in the
relevant part of that Act to financial statements giving a true and fair view
are references to their achieving a fair presentation.
In preparing each of the group and parent company financial statements, the
directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgments and estimates that are reasonable and prudent;
* state whether they have been prepared in accordance with IFRSs as
adopted by the EU; and
* prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Group and the parent company will
continue in business.
The directors are responsible for keeping proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
parent company and enable them to ensure that its financial statements comply
with the Companies Act 1985. They have a general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the group and to
prevent and detect fraud and other irregularities.
The directors are responsible for the maintenance and integrity of the corporate
and financial information included on the company's website. Legislation in the
UK governing the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Independent Auditors' Report to the Members of Arthro Kinetics Plc
We have audited the group and parent company financial statements (the
''financial statements'') of Arthro Kinetics Plc for the year ended 31 December
2007 which comprise the Consolidated Income Statement, the Consolidated and
Company Balance Sheets, the Consolidated and Company Statements of Cash Flows,
the Consolidated and Company Statements of Changes in Equity and the related
notes. These financial statements have been prepared under the accounting
policies set out therein.
This report is made solely to the company's members, as a body, in accordance
with section 235 of the Companies Act 1985. Our audit work has been undertaken
so that we might state to the company's members those matters we are required to
state to them in an auditor's report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company's members as a body, for our audit work,
for this report, or for the opinions we have formed.
Respective Responsibilities of Directors and Auditors
The directors' responsibilities for preparing the Annual Report and Accounts in
accordance with applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the EU are set out in the Statement of Directors'
Responsibilities on page 15.
Our responsibility is to audit the financial statements in accordance with
relevant legal and regulatory requirements and International Standards on
Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true
and fair view and are properly prepared in accordance with the Companies Act
1985. We also report to you whether in our opinion the information given in the
Directors' Report is consistent with the financial statements. The information
given in the Directors' Report includes that specific information presented in
the Chief Executive's Statement and the Financial Review that is cross referred
from the Enhanced Business Review section of the Directors' Report.
In addition we report to you if, in our opinion, the company has not kept proper
accounting records, if we have not received all the information and explanations
we require for our audit, or if information specified by law regarding
directors' remuneration and other transactions is not disclosed.
We read the other information contained in the Annual Report and consider
whether it is consistent with the audited financial statements. We consider the
implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements. Our responsibilities do
not extend to any other information.
Basis of Audit Opinion
We conducted our audit in accordance with International Standards on Auditing
(UK and Ireland) issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an assessment of the
significant estimates and judgments made by the directors in the preparation of
the financial statements, and of whether the accounting policies are appropriate
to the group's and company's circumstances, consistently applied and adequately
disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion:
the group financial statements give a true and fair view, in accordance with
IFRSs as adopted by the EU, of the state of the group's affairs as at 31
December 2007 and of its loss for the year then ended;
the parent company financial statements give a true and fair view, in accordance
with IFRSs as adopted by the EU as applied in accordance with the provisions of
the Companies Act 1985, of the state of the parent company's affairs as at 31
December 2007;
the financial statements have been properly prepared in accordance with the
Companies Act 1985; and
the information given in the Directors' Report is consistent with the financial
statements.
Emphasis of Matter - going concern
In forming our opinion on the financial statements, which is not qualified, we
have considered the adequacy of the disclosures made in note 2 to the financial
statements concerning the company's and the group's ability to continue as a
going concern. Achievement of the group's cash flow forecasts is dependent on
inflows from growth in revenue from existing and new markets. This condition,
along with the other matters explained in note 2 to the financial statements,
indicates the existence of a material uncertainty which may cast significant
doubt on the company's and group's ability to continue as a going concern. Their
financial statements do not include the adjustments that would result if the
company and group were unable to continue as a going concern.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
St James' Square
Manchester M2 6DS
United Kingdom
21 April 2008
Consolidated Income Statement
for the year ended 31 December 2007
In thousands of Euro Note 2007 2006
Revenue 6 2,691 1,801
Cost of sales 7 (1,496) (2,009)
Gross profit/(loss) 1,195 (208)
Distribution expenses (1,276) (1,986)
Administration expenses (5,583) (6,778)
Other operating income 9 1,187 649
Other operating expenses
Intellectual property impairment - (5,000)
Goodwill impairment - (2,680)
Investment impairment 16 (3,019) -
Other 10 (93) (1,053)
Total other operating expenses (3,112) (8,733)
Operating loss (7,589) (17,056)
Financial income 12 1,031 204
Financial expenses 12 (132) (1,651)
Net financing income/(cost) 899 (1,447)
Share of loss of associate 16 (33) -
Loss before taxation for continuing operations (6,723) (18,503)
Income tax expense 13 (2) (4)
Loss for the year attributable to equity holders of
the (6,725) (18,507)
parent for continuing operations
Basic loss per share (EUR) 21 (0.09) (0.79)
Consolidated Balance Sheet
as at 31 December 2007
In thousands of Euro Note 2007 2006
Assets
Non current
Property, plant & equipment 14 498 680
Intangible assets 15 770 872
Other non current assets 70 70
Total non current assets 1,338 1,622
Current assets
Inventories 17 751 675
Trade and other receivables 18 795 764
Current tax assets 194 142
Cash and cash equivalents 19 5,577 3,199
Total current assets 7,317 4,780
Total assets 8,655 6,402
Equity and liabilities
Capital and reserves
Ordinary share capital 20 12,552 8,106
Share premium 20 8,976 5,284
Merger reserve 30,753 30,753
Currency translation reserve (857) 112
Accumulated losses (47,655) (41,867)
Total equity attributable to equity holders of the
parent 3,769 2,388
Non current liabilities
Interest bearing loans and borrowings 22 354 397
Total non current liabilities 354 397
Current liabilities
Interest bearing loans and borrowings 22 12 1,307
Trade and other payables 24 4,215 1,739
Current tax liabilities 104 65
Provisions 25 201 506
Total current liabilities 4,532 3,617
Total equity and liabilities 8,655 6,402
Approved by the Board of Directors on 21 April 2008 and signed on its behalf by
Jason Loveridge
Director
Company Balance Sheet
as at 31 December 2007
In thousands of Euro Note 2007 2006
Assets
Non current
Investments in group companies 16 7 -
Trade and receivables 18 - 3,794
Total non current assets 7 3,794
Current assets
Trade and other receivables 18 103 157
Cash and cash equivalents 19 5,247 2,819
Total current assets 5,350 2,976
Total assets 5,357 6,770
Equity and liabilities
Capital and reserves
Ordinary share capital 20 12,552 8,106
Share premium 20 8,976 5,284
Currency reserve (276) 12
Accumulated losses (19,297) (8,399)
Total equity attributable to equity holders of the
parent 1,955 5,003
Current liabilities
Interest bearing loans and borrowings 22 - 1,307
Trade and other payables 24 3,313 404
Provisions 25 89 56
Total current liabilities 3,402 1,767
Total equity and liabilities 5,357 6,770
Approved by the Board of Directors on 21 April 2008 and signed on its behalf by
Jason Loveridge
Director
Consolidated Statement of Cash Flows
for the year ended 31 December 2007
In thousands of Euro Note 2007 2006
Cash flows from operating activities:
Loss for the period (6,725) (18,507)
Adjustments for:
Depreciation and amortisation 14,15 328 432
Investment impairment 16 3,019 -
Movement on investment in associate 16 33 -
Intellectual property impairment - 5,000
Goodwill impairment - 2,680
Loss on disposal of property, plant and equipment 45 -
Finance income 12 (1,031) (204)
Finance expenses 12 132 1,651
Income tax expenses 13 2 4
Increase in inventories 17 (76) (478)
(Increase)/decrease in trade and other receivables 18 (687) 1,281
(Decrease)/increase in trade and other payables 24 (842) 130
Equity settled share based payment transactions 23 482 334
Cash used in operations (5,320) (7,677)
Interest paid (109) (193)
Interest received 211 204
Taxes paid (2) (4)
Net cash used in operating activities (5,220) (7,670)
Cash flows from investing activities
Proceeds from sale of property, plant and - 25
equipment
Purchase of property, plant and equipment (90) (393)
Purchase of intangibles - (3)
Cash acquired with acquisitions - 37
Net cash used in investing activities (90) (334)
Cash flow from financing activities
Proceeds from issue of ordinary shares 20 8,891 8,988
Costs from issue of ordinary shares (298) (2,206)
Proceeds from loans 22 693 1,340
Issue of loans to third parties - (604)
Repayment of loans from third parties 18 604 -
Repayment of loans 22 (2,017) -
Payment of finance lease liabilities - (249)
Net cash generated from finance activities 7,873 7,269
Net increase/(decrease) in cash and cash 2,563 (735)
equivalents
Consolidated Statement of Cash Flows continued
for the year ended 31 December 2007
Cash and cash equivalents at beginning of year 3,199 3,795
Currency translation (185) 139
Cash and cash equivalents at end of year 5,577 3,199
Consisting of:
Cash at bank 19 5,577 3,199
Company Statement of Cash Flows
for the year ended 31 December 2007
11 month period
Year ended ended
In thousands of Euro Note 31 December 31 December
2007 2006
Cash flows from operating activities:
Loss for the period (11,835) (41,773)
Adjustments for:
Investment impairment 16 3,052 39,648
Foreign exchange movement (315) 72
Finance income (708) (260)
Finance expenses 87 2
Decrease in trade and other
receivables 18 8,144 745
(Decrease)/Increase in trade and
other payables 24 (111) 460
Equity settled share based
payment transactions 23 482 334
Cash used in operations (1,204) (772)
Interest paid (87) -
Interest received 192 161
Net cash used in operating
activities (1,099) (611)
Cash flow from financing activities
Proceeds from issue of ordinary
shares 20 8,891 8,988
Costs from issue of ordinary
shares (298) (2,206)
Issue of loans to Group companies 18 (4,479) (4,014)
Issue of loans to third parties - (604)
Repayment of loans from third
parties 18 604 -
Proceeds from loans 22 693 1,307
Repayment of loans 22 (2,000) -
Net cash generated from finance
activities 3,411 3,471
Net increase in cash and cash
equivalents 2,312 2,860
Cash and cash equivalents at beginning of year 2,819 -
Currency translation 116 (41)
Cash and cash equivalents at end of year 5,247 2,819
Consisting of:
Cash at bank 19 5,247 2,819
Consolidated Statement of Changes in Equity
for the year ended 31 December 2007
In thousands Ordinary Share Merger Currency Accumulated Total
of Euro Share Premium Reserve Translation Losses
Capital
Balance at 31
December 2005 28 120 - - (23,960) (23,812)
Net loss for
the - - - (18,507) (18,507)
year
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
acquisition
of 1,255 6,278 - - - 7,533
Arthro
Kinetics
UK Limited
Reflecting
the
equity
structure 5,091 (35,844) 30,753 - - -
of Arthro
Kinetics Plc
Net proceeds
from 1,498 5,284 - - - 6,782
flotation
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
Net loss for
the - - - - (6,725) (6,725)
year
Currency
translation
reserve - - - (969) - (969)
Total
recognised
income and - - - (969) (6,725) (7,694)
expense
Net proceeds
from
placing and 4,446 3,692 - - 455 8,593
subscription
Share based
payments - - - - 482 482
Balance at 31
December 2007 12,552 8,976 30,753 (857) (47,655) 3,769
Company Statement of Changes in Equity
for the year ended 31 December 2007
In thousands Ordinary Share Merger Currency Accumulated Total
of Euro Share Premium Reserve Translation Losses
Capital
Balance at 30 - - - - - -
January 2006
Net loss for
the - - - - (41,773) (41,773)
11 month
period
Currency
translation
reserve - - - 12 - 12
Total
recognised
income and - - - 12 (41,773) (41,761)
expense
Shares issued
for 6,608 - 33,040 - - 39,648
acquisitions
Impairment of
investments - - (33,040) - 33,040 -
Net proceeds
from 1,498 5,284 - - - 6,782
flotation
Share based
payments - - - - 334 334
Balance at 31
December 2006 8,106 5,284 - 12 (8,399) 5,003
Net loss for
the - - - - (11,835) (11,835)
year
Currency
translation
reserve - - - (288) - (288)
Total
recognised
income and - - - (288) (11,835) (12,123)
expense
Net proceeds
from
placing and 4,446 3,692 - - 455 8,593
subscription
Share based
payments - - - - 482 482
Balance at 31
December 2007 12,552 8,976 - (276) (19,297) 1,955
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 7 Silk House, Park Green,
Macclesfield, SK11 7QJ.
2. Basis of Preparation
a) Statement of Compliance
The Consolidated and Company financial statements have been prepared and
approved by the directors in accordance with International Financial Reporting
Standards as adopted by the EU ("Adopted IFRSs"). On publishing the Company
financial statements here together with the Group financial statements, the
Company is taking advantage of the exemption in s230 of the Companies Act 1985
not to present its individual income statement and related notes that form a
part of these approved financial statements.
The consolidated financial statements were approved by the Board of directors on
21 April 2008.
b) Business Combination
The Consolidated financial statements have been prepared treating the business
combination as a reverse acquisition as detailed in note 8.
c) Basis of Measurement
The consolidated financial statements have been prepared on the historical cost
basis except for investments, share based payments and intangible assets. The
methods used to measure fair value are discussed in note 4.
d) Functional and Presentational Currency
The financial statements are presented in euros, which is the Group's
presentational currency. The parent company's functional currency is Sterling.
All financial information presented in euros has been rounded to the nearest
thousand.
e) Accounting Period
The consolidated financial statements of the Group have been prepared for the
year ended 31 December 2007.
The Company statements have been prepared for the year ended 31 December 2007.
The Company was incorporated 30 January 2006 and the comparative results for the
Company are for the 11 month period to 31 December 2006.
f) Use of Judgments and Estimates
The preparation of financial statements requires management to make judgments,
estimates and assumptions that affect the application of accounting policies and
reported amount of assets, liabilities, income and expenses. Actual results may
differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions
to accounting estimates are recognised in the period in which the estimate is
revised and in any future periods affected.
In particular, information about significant areas of estimation uncertainty and
critical judgments in applying accounting policies that have the most
significant effect on the amount recognized in the financial statements are
described in the following notes:
note 8 - Business combinations
note 15 - Intangible assets
note 16 - Investments
note 23 - Share based payments
note 25 - Provisions
g) 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
successful completion of the placing and subscription in 2007 raising Euro8.9m of
gross proceeds the group ended the year with a cash balance significantly higher
than planned. The directors have prepared projected cash flow information for
the period ending fourteen months from the date of their approval of these
financial statements. On the basis of this cash flow information the directors
consider that the Company and Group will have sufficient cash to support their
operations through into the second half of 2009. The Group's operations are
focused on the application and development of, in the main, biological implants
and biologics. Given the sales and marketing phase of the Group's life cycle and
continual work to develop further applications, significant research and
development and sales and marketing costs have been incurred to date in excess
of revenue. The nature of the Group's operations means that the future income
incorporated in the cash flow forecasts is dependent on securing additional
contracts from existing products/markets and on developing new applications and
penetrating those related markets. Given the inherent risks with forecasting
revenues in the current markets in which the Group operates and risks associated
with the development and market penetration of new products there can be no
certainty in relation to any of these matters. These uncertainties may cast
doubt on the Company's and Group's ability to continue as a going concern. The
Company and Group may, therefore, be unable to continue realising their assets
and discharging their liabilities in the normal course of business but the
financial statements do not include any adjustments that would result from the
basis of preparation being inappropriate.
3. Significant Accounting Policies
The accounting polices set out below have been applied consistently to all
periods presented in these consolidated financial statements, and have been
applied consistently by Group entities.
a) 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.
i) Subsidiaries
Subsidiaries are entities controlled by the Group. Control exists when the Group
has the power, directly or indirectly, to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. In assessing
control, potential voting rights that are currently exercisable or convertible
are taken into account. The financial statements of subsidiaries are included in
the consolidated financial statements from the date that control commences until
the date that control ceases.
ii) Special Purpose Entities
The Group has established a special purpose entity (SPE) for trading and quality
management purposes. The Group does not have any direct or indirect
shareholdings in the entity. An SPE is consolidated if, based on an evaluation
of the substance of the relationship with the Group and the SPE's risks and
rewards, the Group concludes that it controls the SPE.
SPE's controlled by the Group were established under terms that impose the
possibility of some limitations on the decision making powers of the SPE's
management and that result in the Group receiving a part of the benefits related
to the SPE's operations.
iii) Associates
Associates are those entities in which the Group has significant influence, but
not control, over the financial and operating policies. Significant influence is
presumed to exist when the Group holds between 20 and 50 percent of the voting
power of another entity. Associates are accounted for using the equity method
(equity accounted investees) and are initially recognised at fair value. The
Group's investment includes goodwill identified on acquisition, net of any
accumulated impairment losses. The consolidated financial statements include the
Group's share of the income and expenses and equity movements of equity
accounted investees, after adjustments to align the accounting policies with
those of the Group, from the date that significant influence commences until the
date that significant influence ceases. When the Group's share of losses exceeds
its interest in an equity accounted investee, the carrying amount of that
interest (including any long-term investments) is reduced to nil and the
recognition of further losses is discontinued except to the extent that the
Group has an obligation or has made payments on behalf of the investee.
iv) Transactions Eliminated on Consolidation
Intragroup balances, and any unrealised gains and losses or income and expenses
arising from intragroup transactions, are eliminated in preparing the
consolidated financial statements. Unrealised gains arising from transactions
with associates are eliminated to the extent of the Group's interest in the
entity. Unrealised losses are eliminated in the same way as unrealised gains,
but only to the extent that there is no evidence of impairment.
b) Foreign Currency
i) Foreign Currency Transactions
Transactions in foreign currencies are translated to the respective functional
currencies of Group entities at exchange rates at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies at the
reporting date are translated to the functional currency at the exchange rate at
that date. The foreign currency gain or loss on monetary items is the difference
between amortised cost in the functional currency at the beginning of the
period, adjusted for effective interest and payments during the period, and
amortised cost in foreign currency translated at the exchange rate at the end of
the period. Non monetary assets and liabilities denominated in foreign
currencies that are measured at fair value are retranslated to the functional
currency at the exchange rate at the date the fair value was determined. Foreign
currency differences arising on retranslation are recognised in profit or loss.
ii) Foreign Operations
The assets and liabilities of foreign operations are translated to euro at
exchange rates at the reporting date. The income and expenses of foreign
operations are translated to euro at exchanges rates at the dates of the
transactions. Foreign exchange differences arising on translation are recognised
in the translation reserve in equity.
c) Financial Instruments
i) Non-derivative Financial Instruments
Non-derivative financial instruments comprise investments in equity, trade and
other receivables, cash and cash equivalents, loans and borrowings, and trade
and other payables.
Non-derivative financial instruments are recognised initially at fair value plus
any directly attributable costs. Subsequent to initial recognition
non-derivative financial instruments are measured as described below.
A financial instrument is recognised if the Group becomes a party to the
contractual provisions of the instrument. Financial assets are derecognised if
the Group's contractual rights to the cash flows from the financial asset expire
or if the Group transfers the financial asset to another party without retaining
control or substantially all the risks and rewards of the asset. Financial
liabilities are derecognised if the Group's obligations specified in the
contract expire or are discharged or cancelled.
Cash and cash equivalents comprise cash balances.
Accounting for finance income and expense is discussed in (n) below.
Other non-derivative financial instruments are measured at amortised cost using
the effective interest method, less any impairment losses.
ii) Share Capital
Ordinary Shares
Incremental costs directly attributable to the issue of ordinary shares and
share options are recognised as a deduction from equity.
Preference Share Capital
Preference share capital is classified as a liability if it is redeemable on a
specified date or at the option of the shareholders, or if dividend payments are
not discretionary. Dividend payments thereon are recognised as an interest
expense in profit and loss.
Warrants
Where equity shares have been issued which have an additional warrant attached,
the fair value of the warrant is calculated using an appropriate model and that
amount is taken directly to equity as accumulated losses. Any remaining balance
of total consideration received less nominal value of shares issued less fair
value of warrant is then taken to the share premium account.
d) Property, Plant and Equipment
Recognition and Measurement
Items of property, plant and equipment are measured at cost less accumulated
depreciation and impairment losses.
Depreciation
Depreciation in the income statement is recognised on a straight line basis over
the estimated useful lives of each part of an item of property, plant and
equipment. Leased assets are depreciated over the shorter of the lease term and
their useful lives.
The estimated useful lives for the current and comparative periods are as
follows;
Leasehold improvements: 10 years
IT equipment & licences: 3 to 5 years
Laboratory equipment: 5 to 8 years
Other equipment: 3 to 5 years
e) Intangible assets
i) Goodwill
Goodwill arises on the acquisition of subsidiaries and associates. Goodwill
represents the excess of the cost of the acquisition over the Group's interest
in the net fair value over the identifiable assets, liabilities and contingent
liabilities of the acquiree.
Subsequent measurement - Goodwill is measured at cost less accumulated
impairment losses.
ii) Intellectual Property
Acquired intellectual property is recognised as an asset provided it is
separable or arises from contractual or other legal rights and can be measured
reliably. Future economic benefits are expected to be probable. The intellectual
property is carried at cost, and amortised to the income statement on a
straight-line basis over its estimated useful life. Intellectual property from
each acquisition is tested annually for impairment and is impaired to the extent
that the recoverable amount is less than the asset's carrying value, as detailed
below in (i) Impairment.
iii) Research and Development
Expenditure on research activities, undertaken with the prospect of gaining new
scientific or technical knowledge and understanding, is recognised in the income
statement as an expense as incurred. Expenditure on development activities,
whereby research findings are applied to a plan or design for the production of
new or substantially improved products and processes, is capitalised if the
product or process is technically and commercially feasible and the company has
sufficient resources to complete development. No development costs have been
capitalised in the financial information as management do not believe the
associated products to be technically and commercially feasible at present.
iv) Purchased Intangible Assets
Purchased intangible assets are capitalised at cost and reduced by systematic
straight-line amortisation over their useful life. There are no intangible
assets with an indefinite useful life. The estimated useful lives are as
follows:
* Purchased licenses "Human cartilage replacement" and "Human ligament
and disc replacement": 12 years
f) Valuation of Investments
Investments by the Company in subsidiaries and associates are recognised at fair
value as at the date of acquisition. All investments are tested annually for
impairment.
g) Leased Assets
Leases in terms of which the Group assumes substantially all the risks and
rewards of ownership are classified as finance leases. Upon initial recognition
the leased asset is measured at an amount equal to the lower of its fair value
and the present value of the minimum lease payments. Subsequent to initial
recognition, the asset is accounted for in accordance with the accounting policy
applicable to that asset.
Other leases are operating leases and are not recognised in the Group's balance
sheet.
h) Inventories
Inventories are measured at the lower of cost and net realisable value, after
making due allowance for obsolete and slow moving items based on a weighted
average cost principle. Inventories consist of raw materials, consumables,
supplies and surgical instruments.
i) Impairment
Financial Assets
A financial asset is assessed at each reporting date to determine whether there
is any objective evidence that it is impaired. A financial asset is considered
to be impaired if objective evidence indicates that one or more events have had
a negative effect on the estimated future cash flows of that asset. An
impairment loss in respect of a financial asset measured at amortised cost is
calculated as the difference between its carrying amount, and the present value
of the estimated future cash flows discounted at the original effective interest
rate. Individually significant financial assets are tested for impairment on an
individual basis. The remaining financial assets are assessed collectively in
groups that share similar credit risk characteristics. All impairment losses are
recognised in the profit or loss. An impairment loss is reversed if the reversal
can be related objectively to an event occurring after the impairment loss was
recognised.
Non-financial Assets
Inventories are reviewed at each reporting date to determine whether there is
any indication of impairment. If any such indication exists then the assets'
recoverable amounts are estimated as described in (1) below. For goodwill the
recoverable amount is estimated at each reporting date.
An impairment loss is recognised if the carrying amount of an asset or its
cash-generating unit exceeds its recoverable amount. A cash generating unit is
the smallest identifiable asset group that generates cash flows that largely are
independent from other asset groups. Impairment losses are recognised in the
income statement. Impairment losses recognised in respect of cash generating
units are allocated first to reduce the carrying amount of any goodwill
allocated to the units and then to reduce the carrying amount of any other
assets in the unit on a pro-rata basis.
(1) Recoverable amount
The recoverable amount is the greater of the fair value of the asset less its
cost to sell, or its value in use. In assessing value in use, estimated net cash
flows are discounted to present value using a pre-tax discount rate which
reflects the price for bearing uncertainty inherent in the assets, current
market assessments of the time value of money, and any asset specific risk
factors. For an asset that does not generate independent cash flows, the
recoverable amount is determined for the cash-generating unit to which it
belongs.
(2) Reversal of impairment
For all assets, other than goodwill, an impairment loss is reversed when there
is an indication that the impairment loss no longer exists, and there has been a
change in the estimates used to determine the recoverable amount. Impairment
losses are reversed up to the amount required to restate the asset to the value
that would be carried had the impairment loss not occurred (net of depreciation
or amortisation where relevant). An impairment loss for goodwill is not
reversible.
j) Employee Benefits
i) Termination Benefits
Termination benefits are recognised as an expense when the Group is demonstrably
committed, without realistic possibility of withdrawal, to a formal detailed
plan to terminate employment before the normal retirement date.
ii) Share Based Payment Transactions
The fair value is measured at grant date and spread over the period during which
the employees become unconditionally entitled to the options. The fair value of
the options granted is measured using an option valuation model, taking into
account the terms and conditions upon which the options were granted. The amount
recognised as an expense is adjusted to reflect the actual number of share
options that vest except where forfeiture is due only to share prices not
achieving the threshold for vesting.
k) Provisions
A provision is recognised if, as a result of a past event, the Group has a
present legal or constructive obligation that can be estimated reliably, and it
is probable that an outflow of economic benefits will be required to settle the
obligation. Provisions are determined by discounting the expected future cash
flows at a pre-tax rate that reflects the current market assessment of the time
value of money and the risks specific to the liability.
l) Revenue Recognition
i) Goods Sold
Revenue for the three business segments; biologics, allograft and surgical
instruments sold for ESS, represents the invoiced value of goods delivered
during the period, excluding VAT. Revenue is recognised when the significant
risks and rewards of ownership have been transferred to the buyer and recovery
of the consideration is considered probable.
ii) Government Grants
The Group receives government grants for different programs subsidised by the
state. Government grants are recognised in the balance sheet initially as
deferred income when there is reasonable assurance that it will be received and
that the Group will comply with the conditions attaching to it. Grants that
compensate the Group for expenses incurred are recognised as revenue in the
income statement on a systematic basis in the same periods in which the expenses
are incurred. Grants that compensate the Group for the cost of an asset are
recognized in the income statement as other operating income on a systematic
basis over the useful life of the asset.
m) Lease Payments
Annual payments under operating leases are charged to the income statement on a
straight-line basis over the term of the lease.
Minimum lease payments made under finance leases are apportioned between finance
expense and the reduction of the outstanding liability. The finance expense is
allocated to each period during the lease term so as to produce a constant
periodic rate of interest on the outstanding liability.
n) Finance Income and Expense
Finance income comprises interest income from cash deposits and loans and
foreign currency gains. Interest income is recognised as it accrues using the
effective interest method.
Finance expense comprises interest on borrowings, unwinding of the discount on
provisions, dividends on preference shares classified as liabilities, foreign
currency losses. All borrowings are recognised in the profit and loss using the
effective interest method.
o) Earnings Per Share
The Group presents basic and diluted earnings per share (EPS) for its ordinary
shares. Basic EPS is calculated by dividing the profit or loss attributable to
ordinary shareholders of the Company by the weighted average number of ordinary
shares outstanding in the period. Diluted EPS is determined by adjusting the
profit attributable to ordinary shareholders and the weighted average number of
shares outstanding for the effects of all dilutive potential ordinary shares,
which comprise share options granted to management.
p) Segmental Reporting
A segment is a distinguishable component of the Group that is engaged in either
providing related products or services (business segment), or in providing
products or services within a particular economic environment (geographic
segment), which is subject to risks and rewards that are different from those of
other segments. The Groups primary reporting format for segment reporting is
based on geographical segments.
q) Income Tax
Income tax for the year comprises current and deferred tax. Tax is recognised in
the income statement except to the extent that it relates to items recognised
directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantively enacted at the balance sheet date, and
any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used
for taxation purposes. The following temporary differences are not provided for:
the initial recognition of goodwill; the initial recognition of assets or
liabilities that affect neither accounting nor taxable profit other than in a
business combination, and differences relating to investments in subsidiaries
and associates to the extent that they will probably not reverse in the
foreseeable future. The amount of deferred tax provided is based on the expected
manner of realisation or settlement of the carrying amount of assets and
liabilities, using tax rates enacted or substantively enacted at the balance
sheet date.
A deferred tax asset is recognised only to the extent that it is probable that
future taxable profits will be available against which the asset can be
utilised. Deferred tax assets are reduced to the extent that it is no longer
probable that the related tax benefit will be realised.
r) New Standards and Interpretations Adopted
The Group has adopted IFRS 7 Financial Instruments: Disclosures during the year.
This has had no impact on the financial statements other than the disclosures
made in notes 5 and 26.
s) New Standards and Interpretations Not Yet Adopted
A number of new standards, amendments to standards and interpretations are not
yet effective for the year ended 31 December 2007, and have not been applied in
preparing these consolidated financial statements. The standards detailed below
are considered relevant to the Group and Company and is not intended to be an
exhaustive list:
IFRS 8 Operating Segments introduces the "management approach" to segment
reporting. IFRS 8, which becomes mandatory for the Group's 2009 financial
statements, will require the disclosure of segment information based on the
internal reports regularly reviewed by the Group's Chief Operating Decision
Maker in order to assess each segment's performance and to allocate resources to
them. Currently the Group presents segment information in respect of its
business and geographical segments (see note 3(p) above).
IFRIC 11 IFRS 2 - Group and Treasury Share Transactions requires a share-based
payment arrangement in which an entity receives goods or services as
consideration for its own equity instruments to be accounted for as an
equity-settled share-based payment transaction, regardless of how the equity
instruments are obtained. IFRIC 11 will become mandatory for the Group's 2008
financial statements, with retrospective application required. It is not
expected to have any impact on the consolidated financial statements.
4. Determination of Fair Values
A number of the Group's accounting policies and disclosures require the
determination of fair value, for both financial and non-financial assets and
liabilities. Fair values have been determined for measurement and/or disclosure
purposes based on the following methods.
a) Intangible Assets
The value of intellectual property has been determined on a value in use basis.
b) Share Based Payment Transactions
The fair value of employee stock options is measured using an appropriate option
valuation model. Measurement inputs include share price on measurement date,
expected volatility (based on weighted average historic volatility) and the risk
free interest rate (based on government bonds).
c) Investments
The fair value of equity accounted investees is based on the discounted cash
flows expected to be derived from the investment.
5. Financial Risk Management
The Group has exposure to the following risks from its use of financial
instruments:
* Credit risk
* Liquidity risk
* Market risk.
This note presents information about the Group's exposure to each of the above
risks, the Group's objectives, policies and procedures for measuring and
managing risk, and the Group's management of capital. Further quantitative
disclosures are included throughout these financial statements.
The Board of Directors has overall responsibility for the establishment and
oversight of the Group's risk management framework. The Board has recently
established the Risk Management Committee, which is responsible for developing
and monitoring the Group's risk management policies. The committee will report
regularly to the Board of Directors on its activities.
The Group's risk management policies are established to identify and analyse the
risks faced by the Group, to set appropriate risk limits and controls, and to
monitor risks and adherence to limits. Risk management policies and systems are
reviewed regularly to reflect changes in market conditions and the Group's
activities. The Group, through its training and management standards and
procedures, aims to develop a disciplined and constructive control environment
in which all employees understand their roles and obligations.
The Group Audit Committee oversees how management monitors compliance with the
Group's risk management policies and procedures and reviews the adequacy of the
risk management framework in relation to the risks faced by the Group.
Credit Risk
Credit risk is the risk of financial loss to the Group if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Group's receivables from customers
and investment securities.
The Group's exposure to credit risk is influenced mainly by the individual
characteristics of each customer. The Group is not exposed through a significant
volume of sales transactions with a single customer. There is currently a
concentration of credit risk in the geographical area of North & Latin America.
Collections of receivables in the region for the sale of surgical instruments
have been slower than anticipated. The Group provided for a proportion of the
outstanding balance at the year end and is currently focusing on collections.
The Risk Management Committee has not yet established a formal credit policy for
the assessment of creditworthiness of new customers however all new customers
are reviewed before the Group's standard payment and delivery terms and
conditions are offered. For large sale items, primarily surgical equipment, new
customers are often required to pay in advance for a significant proportion of
the order value.
The Group establishes an allowance for impairment that represents its estimate
of incurred losses in respect of trade and other receivables and investments.
The main components of this allowance are a specific loss component that relates
to individually significant exposures, and a collective loss component
established for groups of similar assets in respect of losses that have been
incurred but not yet identified. The collective loss allowance is determined
based on historical data of payment statistics for similar financial assets.
The Group limits its exposure to credit risk by only investing surplus cash in
accounts of the Company placed with HSBC bank.
The Group's policy is to provide financial guarantees only to wholly-owned
subsidiaries. At 31 December 2007 no guarantees were outstanding (2006: none).
Liquidity Risk
Liquidity risk is the risk that the Group will not be able to meet its financial
obligations as they fall due. The Group's approach to managing liquidity is to
ensure, as far as possible, that it will always have sufficient liquidity to
meets its liabilities when due, under normal and stressed conditions, without
incurring unacceptable losses or risking damage to the Group's reputation.
Typically the Group ensures it has sufficient cash on demand in the appropriate
currencies to meet expected operational expenses for a period of 90 days,
including the servicing of financial obligations; this excludes the potential
impact of extreme circumstances that cannot reasonably be predicted, such as
natural disasters.
Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange
purchases, interest rates and equity prices will affect the Group's income or
the value of its holdings of financial instruments. The objective of market risk
management is to manage and control market risk exposures within acceptable
parameters, while optimising the return.
The Group is exposed to currency risk on sales and purchases that are
denominated in a currency other than the respective functional currencies of the
Group entities, primarily the euro (Euro), but also U.S. Dollars (USD), Sterling
(GBP) and Australian Dollars (AUD). The currencies in which these transactions
primarily are denominated are euro, GBP and USD.
In respect of other monetary assets and liabilities denominated in foreign
currencies, the Group ensures that its net exposure is kept to an acceptable
level by buying or selling foreign currencies at spot rates when necessary to
address short-term imbalances.
The Group's exposure to changes in interest rates on borrowings is minimal due
to the limited level of borrowings and all borrowings being on a fixed rate
basis.
Capital Management
The Board's policy is to maintain a strong capital base so as to maintain
investor, creditor and market confidence and to sustain future development of
the business. The Board of Directors monitors the return on capital, which the
Group defines as net operating income divided by total shareholders' equity.
The Board seeks to motivate staff at senior levels within the business through
the grant of share options. At present employees hold 6 per cent of ordinary
shares, or 13 percent assuming that all outstanding share options vest and / or
are exercised.
The Board seeks to maintain a balance between the higher returns that might be
possible with higher levels of borrowings and the advantages and security
afforded by a sound capital position.
There were no changes in the Group's approach to capital management during the
year.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
6. 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. During the year the Group had sales
and marketing operations in Germany, UK, United States and Australia covering
the geographical areas noted above.
In presenting information on the basis of geographic segments, segment revenue
is based on the geographic location customers are serviced from. Segment assets
are based on the geographic location of the assets.
Business Segments
The Group operates in the following three business segments
1. *Biologics - the research, development and manufacture of biological
implants.
2. *Surgical - the sale of endoscopic instrumentation for spinal surgery.
3. *Allografts - a bone processing service to produce allograft material.
Primary Reporting Format - Geographic Segments
In thousands of Euro Europe North & Latin Asia Pacific Group
America
2007
Revenue 1,913 422 356 2,691
Operating loss before
impairment (4,029) (299) (174) (4,502)
Impairment charges (3,019) (68) - (3,087)
Segment result and operating
loss (7,048) (367) (174) (7,589)
Financial income 1,031
Financial expense (132)
Share of loss of associate (33)
Loss before tax (6,723)
Segment assets 2,907 298 106 3,311
Unallocated assets 5,344
Group assets 8,655
Segment liabilities 4,357 144 36 4,537
Unallocated liabilities 349
Group liabilities 4,886
Capital expenditure 51 32 7 90
Depreciation & amortisation 284 32 12 328
Unallocated assets consist of cash and other centrally held assets. Unallocated
liabilities include financial loans and liabilities as detailed in note 22.
In thousands of Euro Europe North & Latin Asia Pacific Group
America
2006
Revenue 1,528 - 273 1,801
Operating loss before
impairment (7,617) (842) (313) (8,772)
Impairment charges (8,284) - - (8,284)
Segment result and operating
loss (15,901) (842) (313) (17,056)
Financial income 204
Financial expense (1,651)
Loss before tax (18,503)
Segment assets 3,135 158 187 3,480
Unallocated assets 2,922
Group assets 6,402
Segment liabilities 1,573 290 118 1,981
Unallocated liabilities 2,033
Group liabilities 4,014
Capital expenditure 357 - 39 396
Depreciation & amortisation 425 - 7 432
Unallocated assets consist of cash and other centrally held assets. Unallocated
liabilities include financial loans and liabilities as detailed in note 22.
Capital expenditure excludes balances arising from business combinations.
Secondary Reporting Format - Business Segments
In thousands of Euro Revenue Segment Assets
31 December 31 December 31 December 31 December
2007 2006 2007 2006
Biologics 1,596 1,339 1,782 1,717
Allograft 187 164 150 131
Surgical 908 298 453 439
Unallocated - - 6,270 4,115
2,691 1,801 8,655 6,402
Capital Expenditure
In thousands of Euro Property, plant and equipment Intangible assets
31 December 31 December 31 December 31 December
2007 2006 2007 2006
Biologics 39 67 - 3
Surgical 37 127 - -
Unallocated 14 199 - -
90 393 - 3
Unallocated assets consist of cash and other centrally held assets and
liabilities.
7. Cost of Sales
In 2006 an impairment of Euro307k was charged to the income statement against cost
of sale being 50% of the ESS year end inventories balance. An impairment review
at 31 December 2007 maintained the provision at 50% of inventories, however Euro88k
was released back to the income statement through cost of sales due to the lower
levels of inventories being held.
8. 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. 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%). The acquisition of Arthro Kinetics UK Limited
gave rise to fair values attributable to intellectual property of Euro5m and
goodwill of Euro2.7m. These values were fully impaired at 31 December 2006 as
detailed in note 15.
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 Kinetics Plc 7,533
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
and 2007.
9. Other Operating Income
In thousands of Euro 31 December 31 December
2007 2006
Derecognition of liabilities - 124
Government grants (relating to R&D) 554 464
Reversal of impairment 604 -
Other 29 61
1,187 649
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 in 2006 relates to liabilities the Group had in
2005 where there is no longer an obligation to make payment.
10. Expenses and Auditors' Remuneration
Included in the income statement are the following charges;
In thousands of Euro 31 December 31 December
2007 2006
Impairment charge on loan recoverability - 604
Research and development expenditure 1,963 1,587
Depreciation and amortisation 330 432
Impairment charges
- Investment in associate 3,019 -
- Intellectual property - 5,000
- Goodwill - 2,680
- Loan - 604
Restructuring costs - 497
Operating lease charges 18 382
Auditors' remuneration (see below) 88 148
Auditors' remuneration;
In thousands of Euro 31 December 31 December
2007 2006
Audit of these financial statements 54 59
Amounts received by auditors and their associates in
respect of:
Audit of financial statements of subsidiaries
pursuant to legislation 34 46
Other services relating to taxation - 7
Other services relating to interim reporting - 36
88 148
Other services relating to business combination
and initial public offering - 373
88 521
The charges relating to the business combination and initial public offering in
2006 were charged against share premium as these are qualifying costs on the
issue of shares in the initial public offering.
11. Personnel Headcount and Expenses
The average number of persons employed by the Group (including directors) during
the year, analysed by category, is shown below. All employees of the Company are
directors other than one sales manager.
Number of employees 31 December 31 December
2007 2006
Directors & senior managers 10 9
Sales & marketing 8 9
Customer service 5 7
Manufacturing 11 13
Research & development 3 5
Finance & administration 7 7
Regulatory affairs 1 1
45 51
The aggregate payroll costs of these persons (including directors) were as
follows;
In thousands of Euro 31 December 31 December
2007 2006
Wages and salaries 2,968 3,515
Compulsory social security contributions 428 544
Share based payments 482 334
3,878 4,393
Details on the remuneration of directors during the year can be found in the
Report on Directors' Remuneration.
12. Financial Income and Expenses
In thousands of Euro 31 December 31 December
2007 2006
Financial Income
Bank interest 211 181
Exchange rate gains 820 -
Others - 23
1,031 204
Financial Expenses
Accretion of preferred shares - 1,503
Interest on finance lease obligations - 21
Exchange rate losses 18 -
Other financial costs 114 127
132 1,651
Accretion of Preferred Shares
Arthro Kinetics AG had in issue preference shares prior to their exchange for
shares in Arthro Kinetics Plc pursuant to the sale and purchase agreement of 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.
13. Income Tax Expense
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 31 December
2007 2006
Current and total tax expense 2 4
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 31 December
2007 2006
Loss for the period before income tax (6,723) (18,503)
Income tax using the UK corporation tax
rate of 30% (2006: 30%) (2,017) (5,551)
Effects of:
Tax effect of expenses that are not
deductible for tax purposes 1 -
Effect of different tax rates in group
locations (89) (334)
Loan impairment (182) 182
Non-deductible expenses
accretion in preferred shares - 451
investment impairment 1,004 -
intellectual property impairment - 1,500
goodwill impairment - 804
loss of non profit group company 135 72
Other (67) -
Foreign exchange (284) (249)
Losses carried forward not recognised 1,481 3,135
Other effects 20 (6)
Total tax expense 2 4
Deferred Tax
The Group has deferred tax losses of Euro65k (2006: Euro124k) relating to leased
assets which have been offset with deferred tax assets of Euro101k (2006: Euro140k)
relating to Group unrealised profit in inventory. Deferred tax in respect of the
impairment of the investment has not been recognised in the financial
statements.
The Group had losses carry-forward for income tax purposes of approximately Euro27m
(2006: Euro20m) 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 carried forward has been recognized.
Corporation Tax Rate
On 21 March 2007, it was announced that the standard rate of UK corporation tax
was to be changed to 28% and capital allowance legislation impacting on the
calculation of the deferred tax will be introduced for taxable periods arising
on or after 1 April 2008. For the purpose of the accounts to 31 December 2007,
the standard rate of corporation tax and capital allowance legislation
applicable to prior to 31 March 2008 has been applied on the basis that these
were applicable at 31 December 2007.
14. Property, Plant and Equipment
Group
In thousands of Euro Laboratory Office Leasehold Total
Equipment Equipment Improvements
Cost
Balance at 1 January 2006 782 288 11 1,081
Business combinations 60 20 - 80
Additions 87 306 - 393
Disposals - (85) - (85)
Currency translation 1 1 - 2
Balance at 31 December 2006 930 530 11 1,471
Balance at 1 January 2007 930 530 11 1,471
Additions 2 117 - 119
Disposals (8) (213) - (221)
Currency translation (9) (5) - (14)
Balance at 31 December 2007 915 429 11 1,355
In thousands of Euro Laboratory Office Leasehold Total
Equipment Equipment Improvements
Depreciation
Balance at 1 January 2006 285 185 2 472
Business combinations 37 9 - 46
Charge in year 165 167 1 333
Disposals - (60) - (60)
Currency translation 2 (2) - -
Balance at 31 December 2006 489 299 3 791
Balance at 1 January 2007 489 299 3 791
Charge in year 105 149 1 255
Disposals (7) (168) - (175)
Currency translation (9) (5) - (14)
Balance at 31 December 2007 578 275 4 857
In thousands of Euro Laboratory Office Leasehold Total
Equipment Equipment Improvements
Carrying amounts
At 31 December 2005 497 103 9 609
At 31 December 2006 441 231 8 680
At 31 December 2007 337 154 7 498
The Company has no property, plant and equipment.
15. Intangible assets
Group
In thousands of Euro Intellectual Goodwill Licenses Total
Property
Cost
Balance at 1 January 2006 - - 1,389 1,389
Business combinations 5,000 2,680 - 7,680
Additions - - 3 3
Balance at 31 December 2006 5,000 2,680 1,392 9,072
Balance at 1 January 2007 5,000 2,680 1,392 9,072
Disposals - - (29) (29)
Balance at 31 December 2007 5,000 2,680 1,363 9,043
In thousands of Euro Intellectual Goodwill Licenses Total
Property
Amortisation and impairment losses
Balance at 1 January 2006 - - 421 421
Amortisation charge - - 99 99
Impairment charge 5,000 2,680 - 7,680
Balance at 31 December 2006 5,000 2,680 520 8,200
Balance at 1 January 2007 5,000 2,680 520 8,200
Charge for the year - - 73 73
Balance at 31 December 2007 5,000 2,680 593 8,273
In thousands of Euro Intellectual Goodwill Licenses Total
Property
Carrying amounts
At 31 December 2005 - - 968 968
At 31 December 2006 - - 872 872
At 31 December 2007 - - 770 770
The Company does not have any intangible assets.
Goodwill on the acquisition of Arthro Kinetics UK Limited was 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 2006 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 was 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 was 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 was 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 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 was charged to other operating
expenditure in the European primary reporting segment.
Following a review in December 2007 there are no adjustments to the fully
impaired positions of intellectual property and goodwill.
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 Euro97k has been charged to general
and administrative expenses (2006: Euro99k).
16. Investments
As a consequence of the business combination detailed in note 8 the Company
recognised investments in Arthro Kinetics AG and Arthro Kinetics UK Limited at
fair value at the date of the combination. The investments were subject to an
impairment review at 31 December 2006 and the fair value at this date and the
date of the combination are shown below. The investments in Arthro Kinetics AG
and Arthro Kinetics UK Limited were calculated based on the issue of shares in
the Company; 18,225,000 shares to the former shareholders of Arthro Kinetics AG
and 4,275,000 shares to the former shareholders of Arthro Kinetics UK Limited.
The investments were calculated with a fair value of Euro1.76 (the Euro equivalent
of the admission price per share to AIM of �1.20).
In thousands of Euro Fair value Impairment Fair Value Fair Value
24 February 31 December 31 December
2006 2006 2007
Arthro Kinetics AG 32,115 (32,115) - -
Arthro Kinetics UK Limited 7,533 (7,533) - -
39,648 (39,648) - -
The impairment review of the surgical cash generating unit based on the net
present value of future cash flows with a discount rate of 30% resulted in the
Company fully impairing its investment in Arthro Kinetics UK Limited.
The impairment review of the biologic cash generating unit based on the net
present value of future cash flows with a discount rate of 30% resulted in the
Company fully impairing its investment in Arthro Kinetics AG.
Following a review in December 2007 there are no adjustments to the fully
impaired positions of the investments in Arthro Kinetics AG and Arthro Kinetics
UK Limited.
On 22 May 2007 Arthro Kinetics Plc and Tianjin Anda Group Holding Company
ratified the establishment of Arthro-Anda Tianjin Biologic Technology Company
Limited (AABT), a company established for the manufacture and distribution of
CaReS in China. Arthro Kinetics contributed intellectual property to the
business in exchange for a 25% holding in the entity. Arthro Kinetics is obliged
to transfer 40% of this holding (ie 10% of the 25%) to external parties. As at
31 December 2007 Arthro Kinetics remained the legal and beneficial owner of the
25% holding and has accounted on this basis.
Based on an assessment of the company the directors have decided to treat it as
an associate and account for its consolidation on an equity basis.
The impairment review of the company based on the net present value of future
cash flows with a discount rate of 15% resulted in the Group and the Company
fully impairing its holding as at 31 December 2007. 15% is the directors' best
estimate of a risk adjusted rate.
In thousands of Euro Group Company
31 December 31 December
2007 2007
Investment in associate at fair value 3,052 3,052
Share of loss of associate (33) -
Impairment (3,019) (3,052)
Investment in associate - -
In January 2007 the Company purchased the entire share of Arthro Kinetics Inc.
from Arthro Kinetics AG for a fair value of Euro7k.
The Company holds investments as a consequence of the business combinations
detailed in note 8. The investments in Arthro Kinetics AG and Arthro Kinetics UK
Limited have been calculated based on the issue of shares in the Company;
18,225,000 shares to the former shareholders of Arthro Kinetics AG and 4,275,000
shares to the former shareholders of Arthro Kinetics UK Limited. The fair values
of the investments at the date of acquisition were Euro32.1m for Arthro Kinetics AG
and Euro7.5m for Arthro Kinetics UK Limited. Both investments were fully impaired
at 31 December 2006 and the fair value remains nil at 31 December 2007.
17. Inventories
In thousands of Euro 31 December 31 December
2007 2006
Raw materials, consumables and supplies 201 114
Work in progress 255 136
Finished goods 295 425
751 675
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 and net realisable value.
The Company has no inventories.
In December 2006 the directors assessed the ESS inventories against the planned
sales forecast for the first half of 2007. Consequently a provision for 50% of
the held inventory
The ESS inventories held at 31 December 2006 were assessed against the planned
forecast sales in the first half of 2007 and the analysis suggested 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.
An impairment review at 31 December 2007 maintained the provision at 50% of
inventories, however Euro88k was released back to the income statement through cost
of sales due to the lower levels of inventories being held.
18. Trade and other receivables
In thousands of Euro Group Company Group Company
31 December 31 December 31 December 31 December
2007 2007 2006 2006
Trade receivables 556 16 317 55
Amounts owed by Group - 4 - -
Prepayments and
accrued income 78 67 447 102
Other receivables 161 16 - -
Total current 795 103 764 157
Amounts owed by Group - - - 3,794
Total 795 103 764 3,951
Included within other receivables is Euro135k relating to government grants as
detailed in note 9.
The Company has a loan agreement in place with each of its subsidiary companies.
The terms are consistent across all agreements and provide for;
* A loan facility of up to �3m (Euro4.1m)
* A single repayment date of 1 August 2010
* Interest rate of 3% above the Bank of England official dealing rate
* Interest to be repaid on the loan repayment date
* No security
The balances outstanding at the year end amounted to Euro6.0m. Following an
impairment review at the year end based on the likely cash flows of the
subsidiary companies up to the end of 2009 the Company provided for the loans in
full at 31 December 2007.
In 2006 the Company provided for an outstanding loan balance of Euro604k with
Australian Biotechnologies Pty Limited due to the uncertainties of its
repayment. The funds were duly repaid in full in July 2007 with the inclusion of
Euro604k within other operating income on the income statement.
19. Cash and Cash Equivalents
In thousands of Euro Group Company Group Company
31 December 31 December 31 December 31 December
2007 2007 2006 2006
Bank balances 5,577 5,247 3,199 2,819
20. Capital and Reserves
Share Capital and Share Premium
In thousands of shares Ordinary shares
On issue at 1 January 2006 28
Redeemed under share exchange agreement (28)
Issued for cash 5,100
Issued under share exchange agreements 22,500
On issue at 31 December 2006 27,600
Issued for cash 60,403
On issue at 31 December 2007 88,003
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.
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
Euro8.9m.
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 fair value of the warrants at the date of grant was measured using a
Black-Scholes model and calculated at �0.01 per share. The collective fair value
of the warrants of Euro455k was recognised in accumulated losses.
The authorised and issued share capital as at 31 December 2007 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
value UK � 7,500,000 4,400,158.30
Aggregate nominal
value Euro 11,022,694 6,275,756.09
Deferred shares
Number of shares Number 27,600,481 27,600,481
Nominal value UK � 0.15 0.15
Aggregate nominal
value UK � 4,140,072.15 4,140,072.15
Aggregate nominal
value Euro 6,275,756 6,275,756.09
Combined
Aggregate nominal
value UK � 11,640,072.15 8,540,230.45
Aggregate nominal
value Euro 17,298,450 12,551,512.18
Following the subscription and placing, Heidelberg Innovation Group, and certain
investors with whom Heidelberg Innovation Group is acting in concert (the
"Concert Party"), controlled a total of 56.7 per cent of the enlarged share
capital.
Through the subscription Heidelberg Innovation Group 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.
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
8,173,332 ordinary shares with an aggregate nominal value of �408,667 for the
issue of shares under the Company's share option scheme.
Translation reserve
The translation reserve comprises all foreign exchange differences arising from
the translation of the financial statements of foreign operations.
21. Loss per Share
In thousands of shares 31 December 31 December
2007 2006
Net loss for the year (Euro'000) (6,725) (18,507)
Weighted average no. of shares in issue
(Basic) 74,433 23,446
Basic loss per share (EUR per share) (0.09) (0.79)
The effect of the full exercise of share options in the money is anti-dilutive
as the Group made a loss in both periods.
22. 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 26.
Non Current liabilities
In thousands of Euro 31 December 31 December
2007 2006
Unsecured loans 349 364
Secured loans 4 33
354 397
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 was to 1 April 2008 but in November 2007 the loan was
extended to 31 March 2013 on the same terms. The contribution has been paid in
full.
LSFE receives a minimum payment of 8.0% per annum 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.
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 2007 the balance on the facility was Euro99k (2006:
Euro99k).
In 2006, Euro266k was recognised directly in accumulated losses in relation to the
de-recognition of a derivate financial liability. These related to milestones
attached to preference shares which were cancelled by way of the initial public
offering. The gain on cancellation was taken as a capital transaction as the
recipients of the preference shares acted in their capacity as shareholders in
the cancellation of the obligation rather than as external lenders, and it was
therefore appropriate to recognise the gain directly in accumulated losses
rather than in the income statement.
Current Liabilities
In thousands of Euro Group Company Group Company
31 December 31 December 31 December 31 December
2007 2007 2006 2006
Secured loans 12 - - -
Unsecured loans - - 1,307 1,307
12 - 1,307 1,307
In 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 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 the placing and subscription
completed in March 2007. 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.
23. Share Based Payments
The Group has in place a share option scheme that will award shares in the
Company to directors and key management personnel. Due to length of the close
period surrounding the Company's announcement of its 2006 financial statements
and interim statements to 30 June 2007 options were not granted until October
2007 although the performance criteria had been established and communicated to
the relevant personnel in Q1 2007. All options are settled by the physical
delivery of shares and the terms and conditions of the grants are as follows;
Grant date/ Number of Vesting conditions Contractual
Employees instruments in life
entitled thousands of options
Option
grant
to
directors
and key
management
personnel 696 Completion of the first human 10 years
on implantation of a nucleus implant in a
24 February clinical study approved by a competent
2006 regulatory agency.
Option
grant
to
Biomedical
Capital 3,400 See below 10 years
Limited on
10
October
2007
Option
grant
to
directors
and key
management 1,325 Continued employment to 30 June 2009 and 10 years
on satisfaction of various 2007 performance
10 October criteria
2007
Option
grant
to key
management
on 200 Continued employment to 30 June 2009 and 10 years
3 December satisfaction of various 2007 performance
2007 criteria
The Board granted 3,400,000 new options to Biomedical Capital Limited of which
Dr. Loveridge is the sole shareholder. New options granted to Biomedical Capital
Limited will vest on achievement of the following milestones:
Number of options in thousands Vesting milestone
400 Admission of the new shares to trading on AIM
600 The Company's share price reaching �0.15
600 The Company's share price reaching �0.20
600 The Company's share price reaching �0.30
600 The Company's share price reaching �0.40
600 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 number and weighted average exercise prices of share options are as follows;
In thousands of options Weighted Number of Weighted Number of
average options average options
exercise exercise
price price
2007 2007 2006 2006
Outstanding at 1 January �0.20 696 - -
Granted during the period �0.10 4,725 �0.20 696
Forfeited during the period �0.10 610 - -
Outstanding at 31 December �0.11 4,811 �0.20 696
Exercisable at 31 December �0.10 400 - -
The options outstanding at 31 December 2007 have an exercise price in the range
of �0.10 to �0.20.
No options were exercised in 2007 or 2006.
The fair value of services received in return for share options granted to
directors and key management personnel 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 Directors and Directors and Directors and
assumptions key key key
management management management
personnel personnel personnel
2007 2007 2006
Fair value at
grant date �0.02 �0.02 �1.06
Share price �0.12 �0.09 �1.24
Exercise price �0.12 �0.09 �0.20
Expected
volatility 45.0% 45.7% 39.5%
Vesting period 19 months 21 months 2 years
Risk free rate of
return (based on
government bonds) 4.47% 4.54% 4.74%
The expected volatility is based on the volatility of the Company's share price
over the period since March 2006 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.
The fair value of services received in return for share options granted to
Biomedical Capital Limited is based on the fair value of share options granted,
measured using a recombining trinomial lattice model, with the following inputs:
Fair value of share options and assumptions Biomedical
Capital
Limited
2007
Fair value at grant date �0.05
Share price �0.12
Exercise price �0.10
Expected volatility 86.5%
Vesting period 39 months
The expected volatility is based on the volatility of the Company's share price
over the period since March 2006 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 2007 2006
Share options granted in 2006 462 334
Share options granted in 2007 20 -
482 334
The charge to employee expenses includes the costs associated with the grant of
options to Biomedical Capital Limited.
24. Trade and Other Payables
In thousands of Euro Group Company Group Company
31 December 31 December 31 December 31 December
2007 2007 2006 2006
Trade payables 634 111 721 87
Other taxation and
social security 70 32 77 25
Accruals 434 118 904 267
Deferred income 3,052 3,052 - -
Other payables 25 - 37 25
4,215 3,313 1,739 404
On 22 May 2007 Arthro Kinetics Plc and Tianjin Anda Group Holding Company
ratified the establishment of Arthro-Anda Tianjin Biologic Technology Company
Limited (AABT), a company established for the manufacture and distribution of
CaReS in China. Arthro Kinetics contributed intellectual property to the
business in exchange for a 25% holding in the entity. The investment was
recorded at the fair value of the intellectual property transferred, i.e. Euro3.1m.
In line with IAS 18 the Company has recorded the corresponding entry as deferred
revenue, to be recognised at the point when AATB can independently manufacture
CaReS(R).
25. Provisions
In thousands of Euro Restructuring Other Group Company
31 December 31 December
2007 2007
Balance at 1 January 2007 497 9 506 56
Provisions made during the year - 189 189 89
Provisions used during the year (412) (9) (421) (56)
Provisions reversed during the (73) - (73) -
year
Balance at 31 December 2007 12 189 201 89
Current 12 189 201 89
12 189 201 89
The Company and Group made a provision for an onerous contract of Euro89k for the
early termination of a research development programme. The Group provided a
holiday pay accrual of Euro80k.
26. Financial Instruments
Credit Risk
The carrying amount of financial assets represents the maximum credit exposure.
The maximum exposure to credit risk at the reporting date was:
Carrying Amount
In thousands of Euro Group Company Group Company
31 December 31 December 31 December 31 December
2007 2007 2006 2006
Loans and receivables 556 16 317 55
Cash and cash
equivalents 5,577 5,247 3,199 2,819
6,133 5,263 3,516 2,874
The maximum exposure to credit risk for trade receivables at the reporting date
by geographic region was:
Carrying Amount
In thousands of Euro Group Company Group Company
31 December 31 December 31 December 31 December
2007 2007 2006 2006
Europe 267 4 241 -
North & Latin America 207 - - -
Asia 82 16 76 -
556 20 317 -
The maximum exposure to credit risk for trade receivables at the reporting date
by business segment customer was:
Carrying Amount
In thousands of Euro Group Company Group Company
31 December 31 December 31 December 31 December
2007 2007 2006 2006
Biologics 223 20 200 -
Surgical 333 - 93 -
Allografts - - 24 -
556 20 317 -
The aging of trade receivables at the reporting date was:
Group Gross Impairment Gross Impairment
In thousands of Euro 2007 2007 2006 2006
Not past due 251 - 97 -
Past due 0-30 days 128 - 69 -
Past due 31-120 days 172 - 141 -
Past due 121-360 days 101 101 9 -
More than one year 5 - 1 -
657 101 317 -
Company Gross Impairment
In thousands of Euro 2007 2007
Not past due - -
Past due 0-30 days 4 -
Past due 31-120 days 16 -
More than one year - -
20 -
There were no Company trade receivables at 31 December 2006.
Based on a review of the specific customers and receivables the Group that no
impairment allowance is necessary in respect of trade receivables not past due
or past due by 120 days.
The movement in the allowance for impairment in respect of trade receivables
during the year was as follows:
In thousands of Euro Group Group
31 December 31 December
2007 2006
Balance at 1 January - -
Impairment loss recognised 101 -
Balance at 31 December 101 -
The impairment loss for the year relates to specific customers who have
purchased surgical instruments and management consider there to be a risk in
collecting the outstanding balances.
There is no impairment loss for trade receivables in the Company at 31 December
2007 (2006: nil).
Liquidity Risk
The following are the contractual maturities of financial liabilities, including
estimated interest payments and excluding the impact of netting agreements:
Group 2007
In
thousands Carrying Contractual 6 mnths 6-12 1-2 years 2-5 years More than
of Euro amount cash flows or less mnths 5 years
Secured
bank 16 16 15 1 - - -
loans
Unsecured 349 369 - 19 18 51 281
loans
Trade and
other 1,267 1,267 1,267 - - - -
payables
1,632 1,652 1,282 20 18 51 281
The contractual cash flows of unsecured loans include the future interest
payments detailed in 22.
Company 2007
In
thousands Carrying Contractual 6 mnths 6-12 1-2 years 2-5 years More than
of Euro amount cash flows or less mnths 5 years
Secured - - - - - - -
bank
loans
Unsecured - - - - - - -
loans
Trade and
other 261 261 261 - - - -
payables
261 261 261 - - - -
Group 2006
In
thousands Carrying Contractual 6 mnths 6-12 1-2 years 2-5 years More than
of Euro amount cash flows or less mnths 5 years
Secured
bank 33 31 - 16 15 - -
loans
Unsecured 1,671 1,587 1,256 19 237 - 75
loans
Trade and
other 1,739 1,739 1,739 - - - -
payables
3,443 3,357 2,995 35 252 - 75
Company 2006
In
thousands Carrying Contractual 6 mnths 6-12 1-2 years 2-5 years More than
of Euro amount cash flows or less mnths 5 years
Secured
bank
loans
Unsecured 1,307 1,307 1,307 - - - -
loans
Trade and
other 404 404 404 - - - -
payables
1,711 1,711 1,711 - - - -
Currency Risk
The Group's exposure to foreign currency risk was as follows:
Group 2007 2006
Euro GBP USD AUD Euro GBP USD AUD
Cash and cash
equivalents 3,279 1,388 268 15 1,430 634 163 77
Trade 266 - 305 139 169 48 - 127
receivables
Secured bank
loans (16) - - - (33) - - -
Unsecured loans (349) - - - (1,671) - - -
Trade and other
payables (439) (81) (114) (14) (417) (75) (102) (192)
2,740 1,307 460 140 522 607 61 12
Company 2007 2006
Euro GBP USD Euro GBP USD
Cash and cash equivalents 2,286 1,374 207 1,152 634 108
Trade receivables 20 - - - - -
Secured bank loans - - - - - -
Unsecured loans - - - (1,307) - -
Trade and other payables - (81) - - (75) -
2,306 1,293 207 (155) 559 108
The following significant exchange rates were applied during the year:
Euro Average Rate Reporting date
spot rate
2007 2006 2007 2006
GBP 1 1.46206 1.46654 1.35710 1.48943
USD 1 0.73082 0.79172 0.67940 0.67940
AUD 1 0.61212 0.59956 0.59570 0.59948
Sensitivity Analysis
A 10 percent strengthening of the Euro against the following currencies at 31
December would have increased (decreased) equity and profit or loss by the
amounts shown below. This analysis assumes that all other variables, in
particular interest rates, remain constant. The analysis is performed on the
same basis for 2006.
In thousands of Euro 31 December 31 December
2007 2006
Equity Profit or Equity Profit or
loss loss
GBP 1,310 18 1,420 (343)
USD 170 (80) (107) (111)
AUD 90 (41) (50) (44)
A 10 percent weakening of the Euro against the above currencies at 31 December
would have had the equal but opposite effect on the above currencies to the
amounts shown above, on the basis that all other variables remain constant.
Interest Rate Risk
At the reporting date the interest rate profile of the Group's interest-bearing
financial instruments was:
Carrying Amount
In thousands of Euro Group Company Group Company
31 December 31 December 31 December 31 December
2007 2007 2006 2006
Fixed rate instruments
Financial liabilities 266 - 1,590 1,307
Variable rate instruments
Financial assets 5,577 5,247 3,199 2,819
The Group does not account for any fixed rate financial assets and liabilities
at fair value through profit or loss, and the Group does not designate
derivatives (interest rate swaps) as hedging instruments under a fair value
hedge accounting model. Therefore a change in interest rates at the reporting
date would not affect profit or loss.
An increase of 100 basis points in interest rates would have increased equity
and reduced the loss by Euro33k (2006: Euro45k) for both the Group and Company. A
decrease of 100 basis points would have had the equal but opposite effect on
equity and losses. This analysis assumes that all other variables, in particular
foreign currency rates, remain constant.
The fair value of financial assets and liabilities, together with the carrying
amounts shown in the balance sheet, are as follows:
Group 31 December 2007 31 December 2006
In thousands of Euro Carrying Fair Carrying Fair
amount value amount value
Cash and cash equivalents 5,577 5,577 3,199 3,199
Loans and receivables 795 795 764 764
Secured bank loans (16) (16) (33) (33)
Unsecured loans (349) (349) (1,671) (1,671)
Trade and other payables (1,267) (1,267) (1,739) (1,739)
4,740 4,740 520 520
Company 31 December 2007 31 December 2006
In thousands of Euro Carrying Fair Carrying Fair
amount value amount value
Cash and cash equivalents 5,247 5,247 2,819 2,819
Loans and receivables 103 103 3,951 3,951
Unsecured loans - - (1,307) (1,307)
Trade and other payables (261) (261) (404) (404)
5,089 5,089 5,059 5,059
27. Other Financial Commitments and Contingent Liabilities
Non-cancellable operating lease rentals are payable as follows:
Group 31 December 2007
In thousands of Euro Equipment Premises Total
Less than one year 48 194 242
Between one and five years 11 - 11
Group 31 December 2006
In thousands of Euro Equipment Premises Total
Less than one year 63 294 357
Between one and five years 88 98 186
There were no non-cancellable operating lease rentals for the Company at 31
December 2007 (2006:Euro37k).
There are no contingent liabilities not provided for at the end of the financial
year.
There are no capital commitments authorised by directors and not provided for in
the financial statements.
28. Related Party Transactions
Group Companies
The Company has related party transactions with its subsidiary undertakings
detailed in note 29. All such transactions with are eliminated on consolidation.
31 December 2007
In thousands of Euro Transaction Balance
value outstanding
Sale of goods and services
Arthro Kinetics AG 168 -
Arthro Kinetics Biotechnologie GmbH 125 -
Arthro Kinetics Pty Limited 15 -
Associate 423 15
Expenses
Arthro Kinetics AG - Distribution 34 -
Arthro Kinetics Biotechnologie GmbH
- Cost of sale 115 -
Arthro Kinetics Pty Limited - Cost
of sale 2 -
Cell and Tissue Bank Austria -
Administration 8 -
Whilst the balances with subsidiary companies remain outstanding at the year end
they have been fully provided for within the statements of the Company and
therefore nil balances are shown.
31 December 2006
In thousands of Euro Transaction Balance
value outstanding
Financial income
Arthro Kinetics AG 44 44
Arthro Kinetics Biotechnologie GmbH 11 11
Arthro Kinetics Pty Limited 11 11
Arthro Kinetics Inc. 18 18
Expenses
Arthro Kinetics AG - reserves 339 -
Arthro Kinetics UK Limited 22 22
Expenses from Arthro Kinetics AG relate to the listing of the Company on AIM and
are accounted for through reserves of the Company and Group.
Parent and Ultimate Controlling Party
At 31 December 2007 Heidelberg Innovation BioScience Venture II GmbH & Co. KG,
Heidelberg Innovation Parallel-Beteiligungs GmbH & Co. KGaA and Heidelberg
Innovation Fonds Management GmbH (collectively "Heidelberg") together with
certain investors whom Heidelberg is acting in concert with (Concert Party),
controlled 56.7 per cent of the shares in the Company through nominee accounts.
In December 2006 the Company entered into a loan agreement with Heidelberg
Innovation GmbH pursuant to which Heidelberg agreed to lend Euro2.0m (�1.35m) to
the Company. Interest was payable at 20% per annum. 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 the placing and subscription completed in March
2007. Through the subscription Heidelberg 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.
Key Management Personnel Compensation
In addition to their salaries, directors' and executive officers also
participate in the Group's share option scheme, see note 23.
Key management personnel compensation, including the remuneration of the
directors, is as follows:
In thousands of Euro Group 31 Group 31
December 2007 December 2006
Remuneration 1,128 903
Share based payments 482 334
Termination benefits - 110
Total 1,610 1,347
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 a non-executive director of the Company dated 24
February 2006.
The Board granted 3,400,000 new options to Biomedical Capital Limited of which
Dr. Loveridge is the sole shareholder. New options granted to Biomedical Capital
Limited will vest on achievement of the following milestones:
Number of options in thousands Vesting milestone
400 Admission of the new shares to trading on AIM
600 The Company's share price reaching �0.15
600 The Company's share price reaching �0.20
600 The Company's share price reaching �0.30
600 The Company's share price reaching �0.40
600 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.
Directors and managers of the Company control 6 per cent of the voting shares of
Arthro Kinetics Plc at 31 December 2007.
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.
Loans from Directors'
There were no unsecured loans from Directors at the year end 31 December 2007
(2006: nil).
29. Group entities
Subsidiary Undertakings at 31 December 2007
Group name Country of % of Principal activity
incorporation voting
share
capital
held
Arthro
Kinetics AG
(formerly Ars
Arthro AG) Germany 100 Development and sale of orthopedic
products
GFZO Arthro
GmbH Germany 100 Holding of intellectual property
Arthro
Kinetics
Biotechnologie
GmbH Austria 100 Manufacture of orthopedic products
Arthro
Kinetics
Medical Ltd UK 100 Holding of intellectual property
Arthro
Kinetics UK
Limited
(formerly
Endospine
Kinetics
Limited) UK 100 Dormant company
Arthro
Kinetics Pty
Limited Australia 100 Marketing of orthopedic products
Arthro
Kinetics Inc.
(formerly Ars
Arthro Inc.) USA 100 Marketing of orthopedic products
Cell and Tissue Austria - Special purpose vehicle for the sale
Bank Austria and distribution of orthopedic
(CTBA) products
As at 31 December 2007 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.
EKL Asia Limited, a dormant non-trading company incorporated in Hong Kong was
dissolved 14 December 2007.
30. Subsequent Events
Board Appointment
At a meeting on 10 April 2008 the directors approved the appointment of
Professor Ulrich Abshagen as a non-executive director of Arthro Kinetics Plc.
Professor Abshagen is a director of Heidelberg Innovation and was appointed
under a letter of appointment dated 10 April 2008. The letter of appointment
provides for Professor Abshagen to receive an annual fee of �12,000 (Euro16,000)
for the services and the appointment continues until terminated on three months'
notice by either side.
Board Remuneration
In conjunction with the appointment of Professor Abshagen the existing
non-executive directors agreed a reduction in their annual remuneration with
effect 1 April 2008. The remuneration for Mr. Lendvai has reduced from �48,000
per annum to �44,000 (Euro60,000) per annum and the remuneration for Mr. Hackl and
Wayside Technologies Limited (Dr. Yianni) has reduced from �24,000 per annum to
�22,000 (Euro30,000) per annum.
Corporation Tax Rate
On 21 March 2007, it was announced that the standard rate of UK corporation tax
was to be changed to 28% and capital allowance legislation impacting on the
calculation of the deferred tax will be introduced for taxable periods arising
on or after 1 April 2008. For the purpose of the accounts to 31 December 2007,
the standard rate of corporation tax and capital allowance legislation
applicable to prior to 31 March 2008 has been applied on the basis that these
were applicable at 31 December 2007.
Notice of Annual General Meeting
NOTICE IS HEREBY GIVEN that the annual general meeting of Arthro Kinetics Plc
(the "Company") will be held at the Life Science Centre Esslingen,
Schelztorstrasse 54-56, Esslingen, Germany on 15 May 2008 at 9.30 am for the
following purposes.
ORDINARY BUSINESS
1. To receive and adopt the financial statements of the Company for the
financial year ended 31 December 2007 and the reports of the directors and
auditors on those financial statements.
2. To receive, adopt and approve the directors' remuneration report for the
year ended 31 December 2007.
3. To elect Professor Ulrich Abshagen as a director of the Company.
4. To re-elect Mr Michel Lendvai, who retires by rotation and offers himself
for re-appointment by general meeting, as a director of the
Company.
5. To re-elect Mr Douglas Quinn, who retires by rotation and offers himself for
re-appointment by general meeting, as a director of the
Company.
6. To re-elect KPMG Audit PLC as auditors.
7. To authorise the directors to determine the auditors' remuneration.
SPECIAL BUSINESS
As special business to consider and, if thought fit, pass resolution 8 as an
ordinary resolution and resolutions 9 and 10 as special resolutions.
8. That (in substitution for any existing authority which is
hereby revoked but without prejudice to the validity of any allotment pursuant
to such previous authority) the directors be and are hereby generally and
unconditionally authorised for the purposes of section 80 of the Companies Act
1985 (the "Act") to exercise all the powers of the Company to allot relevant
securities (as defined in section 80(2) of the Act) up to an aggregate nominal
amount of �1,466,719.43. This authority shall, unless previously revoked, varied
or renewed by the Company in general meeting, expire on the conclusion of the
next annual general meeting of the Company following the passing of this
resolution or, if earlier, the date 15 months after the date of passing this
resolution, save that the Company may before such expiry make any offer or
agreement which would or might require relevant securities to be allotted after
such expiry and the directors may allot relevant securities in pursuance of any
such offer or agreement as if the power and authority conferred by this
resolution had not expired.
9. That the Company be and is hereby generally and
unconditionally authorised for the purposes of section 166 of the Act to make
market purchases (as defined in section 163 of the Act) of ordinary shares of
�0.05 each in the capital of the Company ("Ordinary Shares") in such manner and
on such terms as the directors of the Company may from time to time determine,
and where such shares are held as treasury shares, the Company may use them for
the purposes set out in section 162D of the Act, including for the purpose of
its employee share schemes, provided that:
(a) the maximum aggregate nominal value of Ordinary Shares
hereby authorised to be purchased is �440,015.83;
(b) the minimum purchase price which may be paid for any
Ordinary Share is 5 pence (exclusive of expenses);
(c) the maximum purchase price which may be paid for any
Ordinary Share (exclusive of expenses) is an amount equal to 105% of the average
of the middle market quotations for an Ordinary Share as derived from the London
Stock Exchange Daily Official List for the five business days immediately
preceding the day on which the purchase is made;
(d) this authority shall take effect on the date of passing of
this resolution and shall (unless previously revoked, renewed or varied) expire
on the conclusion of the next annual general meeting of the Company following
the passing of this resolution or, if earlier, 15 months after the date of
passing of this resolution, save in relation to purchases of Ordinary Shares the
contract for which was concluded before the expiry of this authority and which
will or may be executed wholly or partly after such expiry.
10. That, subject to the passing of resolution 8 above, the
directors be and are hereby generally and unconditionally given power for the
purposes of section 95 of the Act to allot equity securities (as defined in
section 94 of the Act) for cash pursuant to the authority conferred by
resolution 8 above or otherwise in the case of treasury shares (as defined in
section 162(3) of the Act), in each case as if section 89(1) of the Act did not
apply to any such allotment, provided that this power shall be limited to:
(a) the allotment of equity securities in connection with or
pursuant to a rights issue, open offer or other pro-rata issue made to the
holders of shares in the company and other persons entitled to participate
therein, in the proportion (or as nearly as may be) to such holders' holdings of
such shares (or, as appropriate, to the respective number of shares which such
other persons are for these purposes deemed to hold), but subject to such
exclusions or other arrangements as the directors may feel necessary or
expedient to deal with fractional entitlements or the regulations or
requirements of any recognised regulatory body or any stock exchange in any
territory;
(b) the grant of options to subscribe for shares in the Company,
and the allotment of such shares pursuant to the exercise of options granted,
under the terms of any share option scheme adopted or operated by the Company;
and
(c) the allotment of equity securities, other than pursuant to
sub-paragraphs (a) and (b) above of this resolution, up to an aggregate nominal
amount of �220,007.91.
This power shall (unless previously renewed, varied or revoked by the Company in
general meeting) expire at the conclusion of the next annual general meeting of
the Company following the passing of this resolution or, if earlier, on the date
15 months after the passing of such resolution, save that the Company may before
the expiry of this power make any offer or enter into any agreement which would
or might require equity securities to be allotted, or treasury shares sold,
after such expiry and the directors may allot equity securities or sell treasury
shares in pursuance of any such offer or agreement as if the power conferred by
this resolution had not expired. This power applies in relation to a sale of
shares which is an allotment of equity securities by virtue of section 94(3A) of
the Act as if in the first paragraph of this resolution the words "That, subject
to the passing of resolution 8 above," were omitted.
By order of the Board
Doug Quinn
Director
Registered Office:
7 Silk House
Park Green
Macclesfield
SK11 7QJ
Notes:
1. A member entitled to attend and vote at the meeting is
entitled to appoint one or more proxies to attend and, on a poll, vote on his
behalf. A proxy need not be a member. Completion and return of a form of proxy
will not preclude a member from attending and voting in person at the meeting or
any adjournment of the meeting.
2. A form of proxy is provided with this notice and
instructions for use are shown on the form. To be effective, the completed form
of proxy must be deposited at the office of the Company's solicitors, Taylor
Wessing LLP, Carmelite, 50 Victoria Embankment, Blackfriars, London EC4Y 0DX,
for the attention of Grant Wellcome, not later than forty-eight hours before the
start of the meeting (or any adjournment of the meeting) together with, if
appropriate, the power of attorney or other authority (if any) under which it is
signed or a notarially certified or office copy of such power of authority.
3. A vote withheld option is provided on the form of proxy to
enable you to instruct your proxy not to vote on any particular resolution,
however, it should be noted that a vote withheld in this way is not a 'vote' in
law and will not be counted in the calculation of the proportion of the votes
'For' and 'Against' a resolution.
4. The Company, pursuant to Regulation 41 of the
Uncertificated Securities Regulations 2001, specifies that only those
shareholders registered in the register of members of the Company at 11:00 am on
8 April 2008 shall be entitled to attend and vote at this annual general meeting
in respect of such number of shares registered in their name at that time.
Changes to entries on the register of members after 11:00 am on 8 April 2008
shall be disregarded in determining the rights of any person to attend or vote
at the meeting.
5. Copies of the service agreements of the executive
directors, the letters of appointment of the non-executive directors and the
register of directors' interests will be available for inspection during normal
business hours from the date of dispatch of this notice until the date of the
meeting (Saturdays, Sundays and public holidays excepted) at the registered
office of the Company and will also be made available for inspection at the
place of the annual general meeting for a period of 30 minutes prior to and
during the continuance of the meeting.
6. CREST members who wish to appoint a proxy or proxies
through the CREST electronic proxy appointment service may do so for our annual
general meeting to be held on 15 May 2008 and any adjournment(s) of the meeting
by using the procedures described in the CREST Manual. CREST personal members or
other CREST sponsored members, and those CREST members who have appointed a
voting service provider(s), should refer to their CREST sponsor or voting
service provider(s), who will be able to take the appropriate action on their
behalf. Please note the following.
(a) In order for a proxy appointment or instruction made using
the CREST service to be valid, the appropriate CREST message (a "CREST Proxy
Instruction") must be properly authenticated in accordance with CRESTCo's
specifications and must contain the information required for such instructions,
as described in the CREST Manual. The message, regardless of whether it
constitutes the appointment of a proxy or to an amendment to the instruction
given to a previously appointed proxy must, in order to be valid, be transmitted
so as to be received by the issuer's agent by the latest time(s) for receipt of
proxy appointments specified in this notice of the annual general meeting. For
this purpose, the time of receipt will be taken to be the time (as determined by
the timestamp applied to the message by the CREST applications host) from which
the issuer's agent is able to retrieve the message by enquiry to CREST in the
manner prescribed by CREST. After this time any change of instructions to
proxies appointed through CREST should be communicated to the appointee through
other means.
(b) CREST members and, where applicable, their CREST sponsors or
voting service providers should note that CRESTCo does not make available
special procedures in CREST for any particular messages. Normal system timings
and limitations will therefore apply in relation to the input of CREST Proxy
Instructions. It is the responsibility of the CREST member concerned to take
(or, if the CREST member is a CREST personal member or sponsored member or has
appointed a voting service provider(s), to procure that his CREST sponsor or
voting service provider(s) take(s)) such action as shall be necessary to ensure
that a message is transmitted by means of the CREST system by any particular
time. In this connection, CREST members and, where applicable, their CREST
sponsors or voting service providers are referred in particular to those
sections of the CREST Manual concerning practical limitations of the CREST
system and timings.
(c) The Company may treat as invalid a CREST Proxy Instruction
in the circumstances set out in regulation 35(5)(a) of the Uncertificated
Securities Regulations 2001.
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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