RNS Number : 4931E
Arthro Kinetics plc
29 September 2008
Arthro Kinetics plc
MONDAY, 29 September 2008 - Interim Results for the six months ended 30 June 2008
Chief Executive's Statement
The first half of 2008 has seen the Group continue to improve revenue growth and reduce costs with a significant contribution derived
from our core Biologics business.
Highlights
* Biologics revenue of EUR988k, a 69% increase on the comparative period in 2007
* Closing cash balance of EUR3.5m
* Significant progress on both the CFI & spinal implant development programmes
Trading
Revenues of EUR1.5m, 68% of which was derived from biologics, delivered a gross profit of EUR0.3m. Operating expenditure remained in
line with plan such that overall the Group reported a loss before taxation of EUR1.5m.
Operational Review
Sales of biologics and allograft processing revenues continued to grow in the first half of 2008 and were in line with our expectations.
Sales of spinal instruments were however disappointing. Consequently, and in line with the Group's strategic focus on biologics, we are
taking steps to dispose of this business unit.
New Product Development
The cell free implant "CFI" has been the priority development objective for the Group in 2008 and in this respect I am pleased to report
that all patients in whom a CFI has been implanted continue to progress well and all the remaining patients necessary for the filing of an
application for a CE Mark have been recruited.
Finally, our spinal nucleus replacement implant has attained all of its in vitro and safety goals and has entered pre-clinical studies
in the second half of 2008 alongside our novel, annulus closure device. The Company is hopeful that both devices will enter human studies in
2009.
Outlook
Whilst the Group has achieved its targeted cash position of EUR3.5m, this provides insufficient funds to support the ongoing
requirements of the business and the further development of CFI and the nucleus implant through 2009. Consequently we are pursuing
negotiations to realise value from certain assets within the Group. The directors have reviewed the current status of these negotiations and
are confident that a transaction can be completed during the course of 2008 which would materially impact the Group's cash position so as to
support the preparation of the statements on a going concern basis.
Jason Loveridge
Chief Executive Officer
Consolidated Income Statement
for the six months ended 30 June 2008
Six months Six months Year ended
ended ended 31 December
30 June 2008 30 June 2007 2007
In thousands of Euro Note unaudited unaudited audited
Revenue 3 1,455 1,127 2,691
Cost of sales (1,123) (798) (1,496)
Gross profit 332 329 1,195
Distribution expenses (518) (414) (1,276)
Administration expenses 4 (2,273) (2,761) (5,583)
Other operating income 292 265 1,187
Other operating expenses
Investment impairment 6 - - (3,019)
Other (6) (42) (93)
Total other operating expenses (6) (42) (3,112)
Operating loss (2,173) (2,623) (7,589)
Financial income 795 96 1,031
Financial expenses (123) (137) (132)
Net financing income/(cost) 672 (41) 899
Share of loss of associate - (68) (33)
Loss before taxation for (1,501) (2,732) (6,723)
continuing operations
Income tax expense - - (2)
Loss for the period/year (1,501) (2,732) (6,725)
attributable to equity holders
of the parent for continuing
operations
Basic loss per share (EUR) 5 (0.02) (0.05) (0.09)
Consolidated Balance Sheet
as at 30 June 2008
Six months Six months Year ended
ended ended 31 December
30 June 2008 30 June 2007 2007
In thousands of Euro Note unaudited unaudited audited
restated*
Assets
Non current
Property, plant & equipment 430 607 498
Intangible assets 707 826 770
Investment in associate 6 - 2,984 -
Other non current assets 69 70 70
Total non current assets 1,206 4,487 1,338
Current assets
Inventories 582 628 751
Trade and other receivables 768 1,013 795
Current tax assets 76 108 194
Cash and cash equivalents 3,519 7,196 5,577
Total current assets 4,945 8,945 7,317
Total assets 6,151 13,432 8,655
Equity and liabilities
Capital and reserves
Ordinary share capital 12,552 12,552 12,552
Share premium 8,976 8,976 8,976
Merger reserve 30,753 30,753 30,753
Currency translation reserve (1,399) 185 (857)
Accumulated losses (49,094) (43,884) (47,655)
Total equity attributable to 1,788 8,582 3,769
equity holders of the parent
Non current liabilities
Interest bearing loans and 349 123 354
borrowings
Total non current liabilities 349 123 354
Current liabilities
Interest bearing loans and 8 250 12
borrowings
Trade and other payables 3,787 4,175 4,215
Current tax liabilities 44 61 104
Provisions 175 241 201
Total current liabilities 4,014 4,727 4,532
Total equity and liabilities 6,151 13,432 8,655
* see note 6
Consolidated Statement of Cash Flows
for the six months ended 30 June 2008
Six months Six months Year ended
ended ended 31 December
30 June 2008 30 June 2007 2007
In thousands of Euro Note unaudited unaudited audited
Cash flows from operating
activities:
Loss for the period/year (1,501) (2,732) (6,725)
Adjustments for:
Depreciation and amortisation 144 144 328
Investment impairment - - 3,019
Movement on investment in - 68 33
associate
Loss on disposal of property, - - 45
plant and equipment
Finance income (795) (96) (1,031)
Finance expenses 123 137 132
Income tax expenses - - 2
Decrease/(Increase) in 169 47 (76)
inventories
Decrease/(Increase) in trade 145 (215) (687)
and other receivables
(Decrease)/Increase in trade (514) (886) (842)
and other payables
Equity settled share based 62 260 482
payment transactions
Cash used in operations (2,167) (3,273) (5,320)
Interest paid - (131) (109)
Interest received 81 72 211
Taxes paid - - (2)
Net cash used in operating (2,086) (3,332) (5,220)
activities
Cash flows from investing
activities
Purchase of property, plant (13) (24) (90)
and equipment
Net cash used in investing (13) (24) (90)
activities
Cash flow from financing
activities
Proceeds from issue of - 8,891 8,891
ordinary shares
Costs from issue of ordinary - (298) (298)
shares
Proceeds from loans - 693 693
Repayment of loans from third - - 604
parties
Repayment of loans (9) (2,009) (2,017)
Net cash generated from (9) 7,277 7,873
finance activities
Net (Decrease)/Increase in (2,108) 3,921 2,563
cash and cash equivalents
Cash and cash equivalents at 5,577 3,199 3,199
beginning of period/year
Currency translation 50 76 (185)
Cash and cash equivalents at 3,519 7,196 5,577
end of period/year
Consisting of:
Cash at bank 3,519 7,196 5,577
3,519 7,196 5,577
Consolidated Statement of Changes in Equity
for the six months ended 30 June 2008 unaudited
In thousands of Euro Ordinary
Share Share Merger Reserve Currency Accumulated
Capital Premi Translat Losses
um ion Total
Balance at 31 December 2007 12,552 8,976 30,753 (857) (47,655) 3,769
Net loss for the period - - - - (1,501) (1,501)
Currency translation reserve - - - (542) - (542)
Total recognised income and - - - (542) (1,501) (2,043)
expense
Share based payments - - - - 62 62
Balance at 30 June 2008 12,552 8,976 30,753 (1,399) (49,094) 1,788
for the six months ended 30 June 2007 unaudited
In thousands of Euro Ordinary
Share Share Merger Reserve Currency Accumulated
Capital Premi Translat Losses
um ion Total
Balance at 31 December 2006 8,106 5,284 30,753 112 (41,867) 2,388
Net loss for the period - - - - (2,732) (2,732)
Currency translation reserve - - - 73 - 73
Total recognised income and - - - 73 (2,732) (2,659)
expense
Net proceeds from placing and 4,446 3,692 - 455 8,593
subscription -
Share based payments - - - - 260 260
Balance at 30 June 2007 12,552 8,976 30,753 185 (43,884) 8,582
for the year ended 31 December 2007 audited
In thousands of Euro Ordinary
Share Share Merger Reserve Currency Accumulated
Capital Premi Translat Losses
um ion Total
Balance at 31 December 2006 8,106 5,284 30,753 112 (41,867) 2,388
Net loss for the year - - - - (6,725) (6,725)
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
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 Group is listed on AIM.
The address of the Company's registered office is 7 Silk House, Park Green, Macclesfield, Cheshire, UK.
2. Basis of Preparation
a) Statement of Consistency
The interim statement has been prepared on the basis of the accounting policies set out in the annual report and accounts for the year
to 31 December 2007 and in accordance with those accounting policies expected to be followed in the year end statements. The Group has
chosen not to adopt IAS 34 "Interim Financial Statements" in preparing the interim statement since the adoption as a standard is not
mandatory.
The financial information contained in this report does not amount to statutory financial statements within the meaning of section 240
Companies Act 1985. The financial information contained in this report is unaudited. The balance sheet comparative data for 30 June 2007 has
been restated to reflect a change in the accounting treatment for the investment in an associate as detailed in note 6. The financial
statements for the year ended 31 December 2007, from which data has been extracted, were prepared in accordance with International Financial
Reporting Standards as adopted by the EU ("Adopted IFRSs") and have been delivered to the Registrar of Companies. The report of the auditors
was unqualified in accordance with section 235 of the Companies Act 1985 and did not contain a statement under section 237 (2) or (3) of the
Companies Act 1985. The interim statements were approved by the board of directors on 26 September 2008.
b) Business Combination
Arthro Kinetics Plc acquired all the equity and financial instruments of Arthro Kinetics AG and Arthro Kinetics UK Limited on 24
February 2006. Arthro Kinetics AG was the significantly larger partner and in line with IFRS 3 is deemed to be the acquirer. Consequently,
the business combination has been accounted for using reverse acquisition accounting principles. Subsequent to the reverse acquisition,
Arthro Kinetics Plc acquired Arthro Kinetics UK Limited.
In accordance with IFRS 3:
The pre-combination results are those of Arthro Kinetics AG and subsidiaries.
The accumulated loss of the Group is based on the pre-combination reserves of Arthro Kinetics AG and subsidiaries and the post
combination reserves of all Group companies.
Arthro Kinetics Plc and Arthro Kinetics UK Limited have been consolidated from the date of acquisition at the fair values as at that
date.
c) Functional and Presentational Currency
The financial statements are presented in euros, which is the Group's presentational currency. All financial information presented in
euros has been rounded to the nearest thousand.
d) Going Concern
The financial statements are prepared on a going concern basis which the directors believe to be appropriate for the following reasons.
Based on current projected cash flows for the business the directors forecast that the Group has sufficient cash to support its operations
through the first quarter of 2009. As detailed in the Chief Executive's statement the directors have initiated negotiations for the sale of
certain assets from within the Group. The directors have reviewed the current status of these negotiations and are confident that a
transaction can be completed during the course of 2008 which would materially impact the Group's cash position so as to support the
preparation of the statements on a going concern basis. There can however be no certainty that a transaction will be concluded and within
the required timeframe. This uncertainty 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. Segmental Reporting
Segment information is presented in respect of the Group's business and geographical segments. The primary format, geographic segments,
is based on the Group's management and internal reporting structure.
Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a
reasonable basis. Unallocated items comprise mainly investments, loans and borrowings and related expenses, corporate assets and head office
expenses and income tax assets and liabilities.
Geographic Segments
The Group operates in three geographical areas: Asia Pacific, North and Latin America, and Europe. In Europe manufacturing and
distribution facilities are located in Austria and Germany respectively. The Group has sales and marketing operations in Germany, the UK and
the United States covering the geographical areas noted above.
In presenting information on the basis of geographic segments, segment revenue is based on the geographic location 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
* Biologics - the research, development and manufacture of biological implants.
* Surgical - the sale of endoscopic instrumentation for spinal surgery.
* Allografts - a bone processing service to produce allograft material.
Primary Reporting Format - Geographic Segments
In thousands of Euro Europe North & Latin America Group
Six months ended 30 June 2008
Revenue 1,286 169 1,455
Segment result and operating loss (1,827) (346) (2,173)
Financial income 795
Financial expense (123)
Loss before tax (1,501)
Segment assets 2,817 171 2,988
Unallocated assets 3,163
Group assets 6,151
Segment liabilities 3,903 111 4,014
Unallocated liabilities 349
Group liabilities 4,363
Capital expenditure 11 2 13
Depreciation & amortisation 144 - 144
In thousands of Euro Europe North & Latin America Asia Pacific Group
Six months ended 30 June 2007
Revenue 776 181 170 1,127
Segment result and operating (2,265) (238) (120) (2,623)
loss
Financial income 96
Financial expense (137)
Share of loss of equity
accounted joint venture (68)
Loss before tax (2,732)
Segment assets 2,983 272 133 3,388
Unallocated assets 11,595
Group assets 14,983
Segment liabilities 887 206 43 1,136
Unallocated liabilities 5,265
Group liabilities 6,401
Capital expenditure 17 - 7 24
Depreciation & amortisation 138 - 6 144
In thousands of Euro Europe North & Latin America Asia Pacific Group
Year ended 31 December 2007
Revenue 1,913 422 356 2,691
Operating loss before (4,029) (299) (174) (4,502)
impairment
Impairment charges (3,019) (68) - (3,087)
Segment result and operating (7,048) (367) (174) (7,589)
loss
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.
Secondary Reporting Format - Business Segments
In thousands of Euro Revenue Segment Assets
Six months ended 30 Six months ended 30 Year ended 31 Six months ended 30 Six months ended 30
Year ended 31
June 2008 June 2007 December 2007 June 2008 June 2007
December 2007
Biologics 988 585 1,596 1,719 6,289
1,782
Allografts 155 90 187 225 181
150
Surgical 312 452 908 286 607
453
Unallocated - - - 3,921 7,906
6,270
1,455 1,127 2,691 6,151 14,983
8,655
Capital Expenditure
In thousands of Euro Tangible Assets
Six months ended 30 Six months ended 30 Year ended 31 December 2007
June 2008 June 2007
Biologics 5 15 39
Surgical 2 3 37
Unallocated 6 6 14
13 24 90
Unallocated assets consist of cash and other centrally held assets.
4. Expenses
Included in administration expenses is the following;
In thousands of Euro Six months Six months Year
ended 30 ended 30 ended 31
June June December
2008 2007 2007
Research and development 840 911 1,963
5. Loss per Share
In thousands of shares Six months Six months Year
ended 30 ended 30 ended 31
June June December
2008 2007 2007
Net loss for the period/year (1,501) (2,732) (6,725)
(EUR'000)
Weighted average no. of shares in 74,433
issue (Basic, 000 of shares) 88,003 60,638
Basic loss per share (EUR per share) (0.02) (0.05) (0.09)
The movement in the weighted average number of shares in issue is a consequence of the timing of the share issue in 2007. The balance at
30 June 2008 reflects the total number of ordinary shares in issue. The effect of the full exercise of share options in the money is
anti-dilutive as the Group made a loss in all periods.
6. Investment in Associate
In thousands of Euro Six months Six months Year
ended 30 ended 30 ended 31
June June December
2008 2007 2007
Investment in associate at fair value 3,052 3,052 3,052
Share of loss of associate (33) (68) (33)
Impairment (3,019) - (3,019)
Investment in associate - (2,984) -
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 30 June 2008 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 comparative numbers for the six months ended 30 June 2007 have been restated to reflect the agreed accounting treatment at 31
December 2007 reducing the investment in associate at fair value from EUR4,603k to EUR3,052k with corresponding adjustments to provisions of
EUR1,556k and trade & other payables of EUR236k.
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.
7. Group entities
Group Undertakings at 30 June 2008
% of voting share
Country of capital held
incorporation
Group name Principal activity
Arthro Kinetics AG Germany 100 Development and sale of orthopedic products
Arthro Kinetics Biotechnologie Austria 100
GmbH Manufacture of orthopedic products
Arthro Kinetics Medical Ltd UK 100 Holding of intellectual property
Arthro Kinetics UK Limited UK 100 Dormant company
Arthro Kinetics Pty Limited Australia 100 Dormant company
Arthro Kinetics Inc. USA 100 Marketing of orthopedic products
Cell and Tissue Bank Austria Austria - Special purpose vehicle for the sale and
(CTBA) distribution of orthopedic products
As at 30 June 2008 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.
Contacts
Arthro Kinetics Plc Tel: +49 (0)711 305 110 70
Jason Loveridge, Chief Executive
Doug Quinn, Chief Financial Officer
END
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