Final Results

RNS Number : 5829M

AorTech International PLC

28 August 2013

 

AorTech International plc

("AorTech", "the Company" or "the Group")

Preliminary audited results for the year ended 31 March 2013

AorTech International plc (AIM: AOR), the biomaterials and medical device development company, today announces its preliminary results for the year ended 31 March 2013.

Financial summary

· Group revenue US$3.8m (2012 $5.0m)

· Operating profit of US$1.2m including exceptional items (2012: US$38k after exceptional items)

· Cash reserves decreased from US$1.9m to US$1.0m

Other developments

· Business transitioning to exploiting its IP and outsourcing polymer manufacture

· Reduction in operating costs from resultant closure of US production facility

· Satisfactory settlement of dispute with St Jude Medical

· £1.2m loan notes issued and repaid

- Ends -

For further information contact:

AorTech International plc 

Frank Maguire, Chief Executive                                                   Tel: + 1 801 201 4336 

AorTech International plc 

Bill Brown, Chairman                                                                  Tel: [phone]  

finnCap Limited

Stuart Andrews                                                                          Tel: [phone] 

A copy of this announcement will be available at aortech.com/investor/announcements. The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement.

About AorTech:

AorTech develops and manufactures biostable, implantable polymers, including Elast-Eon™and ECSil™ the world's leading long-term implantable co-polymers, as well as proprietary processing methods for various devices, including small part reaction injection moulding (RIM) manufacturing. With several million implants and six years of successful clinical use, AorTech polymers are being developed and used in cardiology and urological applications, including pacing leads, cardiac cannulae, stents and implantable sensor technology. Devices manufactured from AorTech polymers have numerous US FDA PMA approvals, 510k's, CE Marks, Australian TGA and Japanese Ministry of Health approvals.

Elast-Eon™ and ECSil™'s biostability is comparable to silicone while exhibiting excellent mechanical, blood contacting and flex-fatigue properties. Our polymers can be processed using conventional thermoplastic extrusion and moulding techniques. AorTech provides a range of materials in a variety of application-specific formulations for use in medical devices and components.

CHAIRMAN'S STATEMENT

I set out below my report to the shareholders of AorTech for the year ended 31 March 2013.

There have been fundamental changes in the Group's structure and trading activities which I will review in more detail during the course of this report. In addition, your Board has implemented a strategy which has made sizeable reductions in the running costs of the Group and has also taken strategic steps to enhance the future revenue of the Group in the coming years.

Audited results for the year

Group revenue for the year was $3,795,000 after exceptional items of $1,990,000 (2012: $5,038,000). Operating profit after exceptional items was $1,206,000 (2012: $38,000).  The net loss for the year was $847,000 (2012: profit $57,000) after exceptional finance costs of $2,048,000. These finance costs relate to the redemption premium paid of $1,914,000 together with a provision in respect of potential additional redemption premium due to loan note holders.  I will refer to these finance costs later in the report.

The exceptional items of $3,193,000 net of fees and expenses was the payment received from St Jude Medical in respect of the settlement in December 2012 of the dispute.

The Group's administrative and development expenditure before exceptional items was $2,563,000 (2012: $3,928,000).  The reduction in this expenditure arises as a direct consequence of AorTech's move from Australia to the Rogers facility in the USA. 

The Group's cash position at 31 March 2013 was $987,000.  Although this shows a decrease of approximately $1 million from the same date last year it also shows a marked increase from the bank balance at the half year stage of $295,000.  The Group has generated cash post the year end and at the end of July 2013 the cash position had increased to $1.2m.

Upon the transfer of the Rogers facility to St Jude Medical at the end of March 2013, the Group ceased volume manufacturing of polymer but since that date has had access to the facility to manufacture Elast-Eon™ on a small batch basis.  As a consequence, there has been a reduction in the running costs of the business. The manufacture of Elast-Eon™ by AorTech in the Rogers facility will cease by 31 December 2013.

St Jude Medical Dispute

All matters with St Jude Medical have now been fully resolved with the final payment of $500,000 having been received in April 2013. The settlement figure received from St Jude Medical was $3,900,000 along with amounts in respect of inventory and plant and machinery, of which $1,990,000 is treated as exceptional revenue in the consolidated income statement and $1,653,000 as exceptional other income, along with $618,000 of reimbursed production expenditure.

SynCardia Dispute

As previously announced to the shareholders, AorTech has taken legal action for the recovery of its outstanding debt and related costs due from SynCardia.  This action is subject to arbitration although I can now advise that a mediation process will take place in September 2013.

AorTech remains confident of its legal position in this case and will provide further updates as and when appropriate.

Issue and Repayment of Loan Notes

As advised to shareholders last year, in the absence of either a sale of the Company or a fund raising, the cash position of AorTech was going to become critical by the end of October 2012.  We were fortunate to secure the support of a number of investors, including existing shareholders in the Company, to the issue of secured loan notes totalling £1,210,000, so as to provide the capital required to finance the Company, including meeting the costs of the St Jude dispute.  The loan note holders, despite having security over the IP of AorTech, took on a significant risk due to the uncertainty over both the timescale and outcome of the litigation. The terms of the loan notes called for an initial premium of 100% if the original sum subscribed for loan notes was repaid before 31 March 2013, together with a "carried interest" into 15% of any sums paid to the shareholders on a change of control or winding up of the Company. The sums subscribed for loan notes together with the initial premium have been paid to noteholders already.  I indicated at the time of the interim results that it would be helpful to consolidate the remaining 15% carried interest of the loan note holders by issuing shares in the Company in exchange for the remaining loan note interests. Having now taken legal, accounting and taxation advice, we are advised that converting the remaining interest into equity at this stage would not only be costly to the Company in legal, court and accounting fees but would also create a negative taxation situation for loan note holders.  As a result, we have concluded that it is best to let the loan note terms remain as originally contemplated.

Although the returns on the loan notes were attractive, the capital the loan note providers introduced to the Company enabled AorTech to continue trading and allowed us to reach a negotiated settlement in our dispute with St Jude.  Without the loan note monies, AorTech would have undoubtedly failed with little return of value for shareholders. The loan notes have now been repaid and the further cost to shareholders is limited to a potential 15% dilution on a winding up or on a change of control of the Company.  For accounting purposes, an estimate has been made of the current potential value of this amount, based on the Company's market capitalisation at the year end.  This estimate will be updated every six months.

Heart Valve

Having last year re-acquired all the patents and IP in relation to heart valve technology, your Board is still of the opinion that there potentially is uplift for the Company and its shareholders in the heart valve field.  We continue to have ongoing discussions with various parties regarding the potential of using our Elast-Eon™ material for new generation heart valves. We can now advise that one of our licensees has commenced its first clinical implants using Elast-Eon™ in mitral valve repair. 

Future Strategy

The strategy of deriving value for AorTech shareholders from exploitation of our IP rather than as a manufacturer of bio materials has been the focus of the Board over the past 18 months.  We explored the potential sale of the Company as a way of achieving value for our IP in the short term; however with the cash problems and the major dispute being distractions from the core value, a satisfactory proposal has not been forthcoming.

Your Board is now pursuing a strategy to exploit the value of the Company's IP, Patents and know-how without the problems of having to operate a sub-scale manufacturing facility. It is our intention to fully transition AorTech to an IP business.

The transfer of the Rogers facility to St Jude has provided the opportunity to completely change the basis upon which AorTech does business and to provide a more attractive, longer term return.  Due to the very small scale of the polymer manufacturing facilities, the cost of manufacture was much too high and as a result precluded the ability to achieve a greater penetration of Elast-Eon™ into the market.  A review of the contracts that had been signed indicated that customers have elected to use our material because it solves a problem, with cost being less of an issue. A secondary problem is that placing reliance on a business of the size and scale of AorTech is a substantial risk for a medical device developer. 

To this end AorTech is presently in discussions with a well respected, mid-sized US polymer and medical device component manufacturer, with the intention of concluding a contract for the manufacture of AorTech's polymers. Under such an arrangement the income generated by AorTech would arise from revenue share from manufacturing activities together with licence fees. Our ongoing discussions to conclude a licence and manufacturing agreement with our polymer manufacture licensee will provide the security of the supply of Elast-Eon™ to our customer base and potentially new business areas for our manufacturing licensee, which would also provide additional revenue potential for the Group.  As part of the licence agreement to manufacture, our IP and know-how will be protected, which should extend the value of our licence agreements beyond any patent expiry date.

It takes a number of years for our licence agreements to mature to income generating royalties due to the time-consuming testing and regulatory requirements through which our licensees have to go.  I am pleased to report that several licences signed in prior years are now either approaching clinical trials, in clinical trials or indeed have achieved initial regulatory approval.

The potential income forecast by the licensees could result in significant royalties in future years for the Group. These forecasts are of course wholly dependent upon the success of the licensees in their various medical device fields.

This strategy and business model allows the annual operating costs of AorTech to be kept to a minimum, provides a supply of material to existing customers and enables the Group to benefit not only from its future royalty stream but also potentially to share in the value of new business generated by our manufacturing licensee.

Annual General Meeting

Section 656 of the Companies Act 2006 states that "if a public company's assets fall below half or less of its called-up share capital the directors are required to convene a general meeting of the company to discuss whether any and if so what steps are to be taken in relation to this situation".  The notice of the AGM to be sent to shareholders includes the following statement:

Following the finalisation of the parent company accounts for AorTech International plc and making appropriate provisions for £442,000 under UK GAAP in respect of the 15% premium due to loan note holders and a £4,417,000 provision against the inter-company loan due by AorTech Polymer & Medical Devices Inc in the USA, AorTech International plc's net assets were reduced to approximately £4,351,000 with its issued share capital being £12,082,000. This general meeting has been convened partly to comply with Section 656, and this matter will be dealt with before we move on to the usual AGM business. The strategy implemented by your Board whereby the majority of our income will be generated by licence fees and royalties means that future income of the Group will flow to the parent company of the Group, AorTech International plc.  The Group's cash position at 31 July 2013 was $1,212,000 and the Board are keeping tight control over running costs.  On that basis your Directors do not consider that any additional action needs to be taken.

Conclusion

I take this opportunity of welcoming Roy Mitchell, who was appointed to the Board on 23 May 2013.  Roy brings to the Board his own skills and expertise which will enhance the Group's future prospects.

I am fully aware that the past twelve months must have been a frustrating period for our shareholders but you may be assured that your Board has continued its work to not only resolve the issues and problems of the past but to also plan for the future.

Your Board has strived to implement a strategy which will enable the Group to achieve both growth and profitability to enhance shareholder value. We believe that we have now established the appropriate business model to deliver not only a profitable business but also one that can be done at attractive net margins without the requirement to raise further capital from shareholders.

Your Board, therefore, has grounds to be more optimistic about the Group's future than it has in the recent past and believes that all of the hard work over the past year has been successful in the transformation of AorTech.

Bill Brown

Chairman

27 August 2013

Consolidated income statement

	Year ended 31 March 2013				Year ended    31 March 2012
	Pre-exceptional items	Exceptional items	Total		Total
	US$000	US$000	US$000		US$000
Revenue	1,805	1,990	3,795		5,038
Other income	289	2,271	2,560		638
Cost of sales	(1,268)	(786)	(2,054)		(701)
Administrative expenses	(2,324)	(420)	(2,744)		(3,130)
Other expenses - development expenditure	(239)	-	(239)		(798)
Profit on disposal of property, plant and equipment	-	138	138		-
Other expenses - amortisation of intangible assets	(250)	-	(250)		(248)
Other expenses - cost of transfer of operations to USA	-	-	-		(761)
Operating (loss) / profit	(1,987)	3,193	1,206		38
Finance (expense) / income	(5)	(2,048)	(2,053)		19
(Loss) / profit before taxation	(1,992)	1,145	(847)		57
Taxation	-	-	-		-
(Loss) / profit attributable to equity holders of the parent company	(1,992)	1,145	(847)		57
(Loss) / earnings per share
Basic and diluted (US cents per share)			(17.53)		1.18

Consolidated statement of comprehensive income

		Year ended  31 March 2013		Year ended  31 March 2012
		US$000		US$000
(Loss) / profit for the year		(847)		57
Other comprehensive income:
Exchange differences on translating foreign operations		(130)		26
Income tax relating to other comprehensive income		-		-
Other comprehensive income for the year, net of tax		(130)		26
Total comprehensive income for the year, attributable    to equity holders of the parent company		(977)		83

Consolidated balance sheet
			31 March 2013		31 March 2012
			US$000		US$000
Assets
Non current assets
	Intangible assets		1,840		2,012
	Property, plant and equipment		4		621
Total non current assets			1,844		2,633
Current assets
	Inventories		-		203
	Trade and other receivables		1,820		956
	Cash and cash equivalents		987		1,917
Total current assets			2,807		3,076
Total assets			4,651		5,709
Liabilities
Current liabilities
	Trade and other payables		(406)		(439)
Total current liabilities			(406)		(439)
Non current liabilities
Trade and other payables			-		(182)
Change of control redemption premium			(134)		-
Total non current liabilities			(134)		(182)
Total liabilities			(540)		(621)
Net assets			4,111		5,088
Equity
	Issued capital		18,351		19,319
	Share premium		3,555		3,742
	Other reserve		(3,043)		(3,203)
	Foreign exchange reserve		5,684		4,819
	Profit and loss account		(20,436)		(19,589)
Total equity attributable to equity holders of the parent			4,111		5,088

Consolidated cash flow statement
		Year ended  31 March 2013		Year     ended  31 March 2012
		US$000		US$000
Cash flows from operating activities
	Group (loss) / profit after tax	(847)		57
Adjustments for:
	Depreciation of property, plant and equipment	84		53
	(Gain) / loss on disposal of property, plant and equipment	(138)		23
	Amortisation of intangible assets	250		248
	Finance expense / (income)	2,053		(19)
	(Increase) / decrease in trade and other receivables	(864)		125
	Decrease in inventories	203		31
	Decrease in trade and other payables	(215)		(437)
Net cash flow from operating activities		526		81
Cash flows from investing activities
	Purchase of property, plant and equipment	(11)		(671)
	Proceeds from disposal of property, plant and equipment	682		320
	Purchases of intangible assets	(72)		(49)
Interest received		-		19
Net cash flow from investing activities		599		(381)
Cash flows from financing activities
Interest paid		(5)		-
Proceeds from issue of loan notes		1,914		-
Repayment of loan notes		(1,914)		-
Redemption premium paid to loan note holders		(1,914)		-
Net cash flow from financing activities		(1,919)		-
Net decrease in cash and cash equivalents		(794)		(300)
Foreign exchange movements on cash held in foreign currencies		(136)		3
Cash and cash equivalents at beginning of year		1,917		2,214
Cash and cash equivalents at end of year		987		1,917

Consolidated statement of changes in equity
		Share capital		Share premium account		Other reserve			Foreign exchange reserve			Profit and loss account			Total equity
		US$000		US$000		US$000			US$000			US$000			US$000
Balance at 31 March 2011		19,370		3,751		(3,211)			4,741			(19,646)			5,005
Transactions with owners		-		-		-			-			-			-
Profit for the year		-		-		-			-			57			57
Other comprehensive income
Exchange difference on translating foreign operations		(51)		(9)		8			78			-			26
Income tax relating to components of other comprehensive income		-		-		-			-			-			-
Total comprehensive income for the year		(51)		(9)		8			78			57			83
Balance at 31 March 2012		19,319		3,742		(3,203)			4,819			(19,589)			5,088

Transactions with owners	-		-		-		-		-		-
Loss for the year	-		-		-		-		(847)		(847)
Other comprehensive income
Exchange difference on translating foreign operations	(968)		(187)		160		865		-		(130)
Income tax relating to components of other comprehensive income	-		-		-		-		-		-
Total comprehensive income for the year	(968)		(187)		160		865		(847)		(977)
Balance at 31 March 2013	18,351		3,555		(3,043)		5,684		(20,436)		4,111

Basis of preparation

The Group financial statements are for the year ended 31 March 2013.  They have been prepared in compliance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee (IFRIC) interpretations as adopted by the European Union as at 31 March 2013.

The Group financial statements have been prepared under the historical cost convention.

The accounting policies remain unchanged from the previous year.

Going concern

After considering the year end cash position, making appropriate enquiries and reviewing budgets and profit and cash flow forecasts for a period of at least twelve months from the date of signing these financial statements, the Directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Group has sufficient resources to continue in operational existence for the foreseeable future. For this reason the Directors consider the adoption of the going concern basis in preparing the Group financial statements is appropriate.

Exceptional items

The St Jude Medical transaction has been accounted for in the financial statements as follows:

		$000	$000
	Revenue - accelerated licence fees		1,990
	Other income - further consideration from St Jude Medical		1,653
	Other income - reimbursement of production costs to March 2013		618
	Cost of sales - inventory acquired		(168)
	Cost of sales - production costs to March 2013		(618)
	Administrative expenses - legal and other costs		(420)
	Profit on disposal of property, plant and equipment:
	Proceeds received	676
	Net book value of assets transferred	(538)
			138
	Operating profit from St Jude Medical transaction - exceptional item		3,193

The total consideration received by AorTech under the transaction agreements was $3.9 million less legal and other costs.  Of this, $3.4 million was paid upon signing and $0.5 million paid shortly after the end of March 2013 along with payment in respect of the acquisition of certain of AorTech's assets. The agreements accelerated certain existing transitional arrangements relating to the manufacture and supply of Elast-Eon™, reaffirmed St Jude Medical's exclusive, perpetual, non-royalty bearing licence to use Elast-Eon™ for implantable leads for implantable cardiac rhythm management devices or monitoring systems, and set forth the purchase by St Jude Medical of certain AorTech assets.  Among the transitional arrangements between the parties, the agreements also provided for the reimbursement by St Jude Medical to AorTech for the financial costs of running the Rogers facility for a period to 31 March 2013 at which time the complete transfer of the Rogers facility to St Jude Medical took place. These arrangements have ensured St Jude Medical's reliable ongoing supply of Elast-Eon™.

Earnings per share

The basic loss per Ordinary share of 17.53 US cents (2012: earnings of 1.18 US cents) is calculated on the loss of the Group of US$847,000 (2012: profit of US$57,000) and on 4,832,778 (2012: 4,832,778) equity shares, being the number of shares in issue during the year.  The diluted earnings per share is not materially different from the basic earnings per share. The diluted loss per share does not differ from the basic loss per share as the exercise of share options would have the effect of reducing the loss per share and is therefore not dilutive under the terms of IAS 33.

Preliminary announcement

The summary accounts set out above do not constitute statutory accounts as defined by Section 434 of the UK Companies Act 2006. The summarised consolidated balance sheet at 31 March 2013, the summarised consolidated income statement, the summarised consolidated statement of comprehensive income, the summarised consolidated statement of changes in equity and the summarised consolidated cash flow statement for the year then ended have been extracted from the Group's statutory financial statements for the year ended 31 March 2013 upon which the auditor's opinion is unqualified and did not contain a statement under either sections 498(2) or 498(3) of the Companies Act 2006. The audit report for the year ended 31 March 2012 did not contain statements under Section 498(2) or Section 498(3) of the Companies Act 2006. The statutory financial statements for the year ended 31 March 2012 have been delivered to the Registrar of Companies. The 31 March 2013 accounts were approved by the Directors on 27 August 2013, but have not yet been delivered to the Registrar of Companies.

Notice of Annual General Meeting

Notice is hereby given that the sixteenth Annual General Meeting of AorTech International Plc will be held in the Tower Suite of the Institute of Directors, New Broad Street House, 35 New Broad Street, London, EC2M 1NH on Thursday, 26 September 2013 at 11:00am.

Posting and availability of accounts

The annual report and accounts for the year ended 31 March 2013 will be sent by post to all registered shareholders on 3 September 2013.  Additional copies will be available for a month thereafter from the Company's Weybridge office. Alternatively, the document may be viewed on, or downloaded from, the Company's website: www.aortech.com.

 

END

 

 

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