27th Mar 2007 07:00
For further information, please contact: Medical Solutions plc Nick Ash Managing Director Tel: 0115 973 9010 www.medical-solutions.co.uk Bishopsgate Communications Ltd Nick Rome/Sophie Davis Tel: 0207 5623350 www.bishopsgatecommunications.com27 March 2007 Medical Solutions plc ("Medical Solutions" or "the Company" or "the Group") Preliminary results for the year ended 31 December 2006
The Board of Medical Solutions plc , the diagnostics and healthcare business specialising in histopathology and cytology services and products, announces its preliminary results for the year ended 31 December 2006 prepared under International Financial Reporting Standards ("IFRS").
This is the Group's first set of results following the divestment of its Dubai operations. It now has a strong balance sheet, with ‚£15.2m in cash, and plans to grow its healthcare and diagnostics business through organic growth from its existing operations combined with selected acquisitions.
Financial Highlights
* Revenue from continuing operations up 7% to ‚£6.0 million * Gross profit improved to ‚£2.4 million; gross profit margin improved to 40% * Operating expenses (excluding restructuring costs) reduced by ‚£0.9 million to ‚£4.6 million * Operating loss from continuing operations reduced by ‚£1.0 million to ‚£2.4 million * Loss for the year from continuing operations reduced by ‚£1.3 million to ‚£ 2.3 million * Net cash of ‚£15.2 million * Disposal of Dubai operations completed during the year for gross consideration of ‚£16.5 million and net cash proceeds of ‚£13.2 million after transaction costs to date
Operational Highlights
* Roll out of SurePath¢â€ž¢ liquid based cytology ("LBC") programme to new and existing regions; England & Wales LBC target market share raised to 47% * LBC UK distribution agreement with TriPath Imaging, Inc. renewed until 31 December 2010 * New products launched in Diagnostic Pathology and Drug Development Services divisions including Circulating Tumour Cell ("CTC") analysis * Key initiatives in automated cervical cancer screening, a major potential growth market * Completed disposal of Dubai operations; Group refocused on the UK based operations * Continued focus on cost control without detriment to our operational capability * Achieved unconditional CPA accreditation and maintained GLP standards
Post year-end events
* Changes to Board of Directors - appropriate skills to manage business through growth and development stage * Appointed as the exclusive UK commercial reference laboratory for CellSearch¢â€ž¢ CTC enumeration * Wales trial for automated cervical cancer screening commenced
Laurie Turnbull, Chairman of Medical Solutions, said:
"There have been dramatic changes across the Group in 2006. During the year the Board focused on delivering the phased exit from the Dubai operations, this was successfully completed during November 2006, whilst also dealing with the turnaround of the UK based operations. There has been a great deal of progress made in the year and the Group is now in a strong and secure financial position.
"There has also been significant restructuring at Board level, both during 2006 and the early part of 2007. The Group now has a closely knit team of Directors and senior management which, the Board is confident, provides the right blend of skills, experience and expertise to deliver the strategic objectives and move the business forward financially and operationally.
"The short term objective is to return the Group to profitability and cash generation. This will be achieved through a combination of organic growth in our Pathology Services and Cytology divisions and prudent, appropriate investment in acquisition opportunities."
Chairman's Statement
Introduction
I am delighted to be making my first annual report to shareholders of Medical Solutions. The past twelve months have seen significant changes at Medical Solutions, both in the operations of the Group and in the composition of the Board of Directors. We achieved our stated aim of a planned phased exit from our operations in Dubai and the Board remains committed to becoming a profitable and cash generative business, focused primarily on the UK diagnostics and pathology markets.
Summary of the results for the year
Continuing operations 2006 2005 % growth/ (as (reduction) ‚£'000 restated) ‚£'000 Revenue 6,025 5,655 6.5 Gross profit 2,385 2,000 19.3 Operating expenses (excluding (4,613) (5,477) (15.8)restructuring costs) Operating loss (2,413) (3,441) (29.9) Loss before tax (2,332) (3,584) (34.9) Year end cash and cash equivalents 15,229 2,313 -
See note 6 for details of the restatement
The continuing operations have made significant progress during the year and these achievements are set out in detail later in this preliminary announcement.
Board of Directors
The changes to the Board of Directors saw my appointment as Executive Chairman during November, with Sir Gareth Roberts stepping down to a non-executive role.
Dr Nick Ash was appointed Managing Director on 1 February 2007, from his former position of Chief Financial Officer, as part of the planned succession arrangements following the departure of Dr Neil Johnston.
Sir Gareth Roberts retired from the Board on 1 February 2007 on the grounds of ill health, after serving as a Director of the Company since 1999. It was with great sadness that the Company learned of Sir Gareth's death on 6 February 2007.
The revised Board represents a focused and tightly knit team with the necessary skills, expertise and experience required to ensure that the Group is managed in an effective manner as it enters a new stage of its development.
Disposals
During November, we completed the disposal of our Dubai operations for gross consideration of ‚£16.5 million, raising net cash proceeds of ‚£13.2 million after transaction related costs paid during the year of ‚£0.75 million. The completion of this disposal now enables the full focus of the Directors and senior management to be targeted towards our continuing operations.
Staff
Other than the changes at Board level, 2006 was a year of relative stability with respect to the staff in the UK operations. As the Group now looks forward to progressing with its short and long term objectives, we have a skilled and motivated staff who will be instrumental in our achieving those objectives.
Strategy
The Group's strategy remains to grow our healthcare and diagnostics business through organic growth from our existing operations combined with selected acquisitions and reinvesting the proceeds from the disposal of our Dubai operations to broaden our portfolio of product and services.
The Group is now focused on its UK based operations and the development of our diagnostics and pathology based activities. These include our current core offerings in pathology and cytology services along with our reference laboratory and drug development operations.
Through our Pathology Services division we will continue to broaden our portfolio of tests targeted at the diagnosis and treatment of cancer. In addition to providing services to other healthcare providers, we have identified opportunities to provide services directly to medical practitioners, and their patients, and we will seek to realise a number of these opportunities during the coming year. We will also continue to explore the opportunities to expand our pathology service offering through a joint venture arrangement or by acquisition.
Medical Solutions has been at the forefront of cervical cancer screening in the UK, supplying liquid based cytology equipment, consumables and technical support to Hospital Trusts throughout the UK. The next stage of our Cytology strategy is to accelerate the introduction of automated cytology screening and we have initiated a number of clinical trials to support this strategy.
We will continue to focus on cost control, reducing these where appropriate, improving our operational efficiency and investing in key research and development projects and new technologies.
Fundamental to the Group and the quality of our service offering, is the recruitment and retention of quality staff. We continue to review our benefits and rewards package to ensure we attract and retain the best staff.
Prospects
Our largest customer remains the NHS. The coming year will be another challenging one for the NHS with increasing focus on the operational and financial performance of Hospital Trusts, however this provides opportunities for Medical Solutions. Lord Carter's report into NHS Pathology Services in England, published in August 2006, specifically identified histopathology services as an area where the private sector could have a greater involvement.
There is increasing demand from the pharmaceutical and biotechnology industries for providers of support services in drug discovery and development who offer expertise in the more traditional laboratory discipline of histopathology, in which Medical Solutions has internationally recognised expertise, as well as in situ hybridisation and other cutting edge DNA and RNA based techniques. One element of the Medical Solutions strategy is to identify, and partner with, providers of the latest diagnostic techniques to broaden the portfolio of services that we offer to pharmaceutical and biotechnology companies, as well as developing clinical applications for healthcare providers.
The Directors are confident that the continuing Group will develop and grow in an effective and controlled manner, delivering value to its shareholders.
Laurie TurnbullExecutive Chairman27 March 2007
Operating and Financial Review (abbreviated)
Cautionary statement
This Operating and Financial Review contains certain forward-looking statements with respect to the financial condition, results, operations and businesses of Medical Solutions plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. Nothing in this Operating and Financial Review should be construed as a profit forecast.
Overview
Medical Solutions plc is a diagnostics and healthcare company based in the UK. During the year, our core activities continue to have been concentrated upon becoming a leading provider of diagnostic pathology and cytology services and products, with a refocusing of the business on the UK based operations.
The Pathology Services division, following the disposal of our Dubai based operations, comprises our Diagnostic Pathology and Drug Development Services operations in Nottingham, UK. This division provides expert pathology services to public and private healthcare providers as well as the pharmaceutical and biotechnology industry. Pathology services are an essential element of clinical services, making a contribution to the effective detection, diagnosis, treatment and management of disease, especially chronic disease. Pathology expertise are also a key element in the drug discovery and development activities of pharmaceutical and biotechnology companies.
The Pathology Services division also has access to an established bank of normal and diseased processed human tissue and a UK network of over 60 specialist consultant pathologists. Medical Solutions operates in a highly competitive market and competes for business against other service based organisations, often against teams from within the customer itself. Regulatory accreditation from relevant authorities is considered to be critical in ensuring the Group can offer its products and services to customers in a trusted manner.
Our Cytology division distributes and supports the SurePathTM LBC system and consumables for the preparation and analysis of cervical smear samples. SurePathTM is one of only two systems approved by the National Institute for Health and Clinical Excellence ("NICE") for use in England and Wales.
During 2005 the Board set out a plan aimed at securing the financial stability of the Group. The principal components of this plan included refocusing the Group's business, reducing the cost base significantly, selling or closing non-core activities, improving efficiency and strengthening financial controls. This vision was reinforced at the start of 2006 as the Board continued to focus on the objectives of profitability and cash generation.
At the half year 2006, the Board was able to report that the Group, including the Dubai operations, was profitable and cash generative for the 6 months ended 30 June 2006. We also reported that the UK operations, including central services, continued to be loss making and that the sale of the Dubai operations would return the Group to a loss making position.
The Group's results for the year ended 31 December 2006 demonstrate that significant progress has been made in the continuing operations of the Group, although more remains to be done if Medical Solutions is to realise its long-term potential. The Board remains committed to the achievement of profitability and cash generation for the continuing Group through organic growth of the existing business in combination with selected acquisitions.
Business Segment Performance Review
Pathology Services
Our Pathology Services division generated revenue from continuing operations of ‚£2.5 million in 2006 compared with ‚£3.2 million in 2005, a decrease of 22%. However, the significant cost reduction measures taken during both this and the previous year led to a significantly improved operating performance in 2006 with the division achieving break even (2005: operating loss of ‚£0.6 million).
Diagnostic Pathology
Revenue from our continuing Diagnostic Pathology operation fell by 9% to ‚£2.2 million (2005: ‚£2.4 million) yet this area continued to improve its profitability generating an operating profit of ‚£0.5 million compared with ‚£0.1 million in 2005.
The continued growth in HER2 testing volumes and a full year's benefit from the consolidation of operations onto a single site in Nottingham, coupled with the ongoing strong cost control in other areas, has led to a significantly improved operating performance for this part of the business. This improved performance is especially impressive given that the Diagnostic Pathology result for 2005 included an exceptional profit of ‚£387,000 from the sale of certain fixed assets during that year.
The market drivers for this business remain sound but we have seen to ongoing change in the dynamics of the NHS requirement for outsourced pathology services. The shortfall in the number of consultant histopathologists that we have historically seen in the UK has largely been addressed. This was always anticipated within the Diagnostic Pathology business model and Medical Solutions has moved to broaden its portfolio of diagnostic services. However, whilst there has been a reduction in the demand for histology support due to capacity constraint in the NHS, there is ongoing pressure from the Department of Health for the increased involvement of the private sector in the provision of healthcare. The Review of NHS Pathology Services in England, chaired by Lord Carter of Coles, published in August 2006, specifically identified histopathology services as an area where the private sector could have greater involvement.
We have introduced a number of additional diagnostic and theranostic services during the year including Circulating Tumour Cell and Circulating Endothelial Cell ("CEC") enumeration and the Topoisomerase IIa test. We have also begun to introduce tailored packages of tests aimed at supporting clinicians in their clinical decision making and helping them achieve the best possible outcome for the patient. The first of these is targeted at breast cancer and includes the Medical Solutions Breast Cancer Decision Making Tool.
We are targeting further organic growth from this area of our business during 2007 and aim to introduce a number of new products during the course of the year. These will be in our core areas of expertise in histopathology and cytopathology but will be targeted at cancers other than breast cancer. We will also be exploring opportunities to broaden our pathology offering to include blood and other fluid pathology. We are exploring a number of models by which these services will be offered, from investment in in-house capability through potential joint venture and partnership arrangements to acquisitions.
This broadening and increased depth of our pathology offering, together with the ongoing control of the cost base for this part of our business, should provide a sound basis for a further improvement in the profitability of this area of our business in the short to medium term.
Dubai Diagnostic Pathology - a post script
As we stated during 2006, The Board of Medical Solutions decided to focus on its UK based business going forward and our plan to exit in a phased manner from our operations in Dubai was realised during 2006. In November we were pleased to announce the completion of the sale of our Dubai subsidiaries for gross consideration of ‚£16.5 million of which ‚£14.0 million was received in cash.
Drug Development Services
Medical Solutions Drug Development Services offers diagnostic and theranostic testing services to support drug discovery and development, and assists pharmaceutical and biotechnology companies in identifying and validating markers closely linked with response to therapy during clinical trials. We have particular strengths in high throughput quantitative immunohistochemistry and in situ hybridisation, as well as sophisticated image analysis and biomarker determination capabilities.
The sales performance of Drug Development Services was disappointing during the year, with revenues of ‚£0.3 million compared with ‚£0.8 million in 2005. However, the restructuring of this part of our business, which was instigated during 2005, and ongoing focus on the underlying costs continued to realise benefits during 2006. As a consequence, the operating result for this business unit improved by ‚£0.2 million from a loss of ‚£0.7 million during 2005 to a loss of ‚£0.5 million in 2006.
During the year we have focused an increased amount of our sales and marketing activity on the smaller to medium pharmaceutical and biotechnology companies with operations located mainly in the UK and Europe, and less on the global players. The time taken to convert our sales activity to project proposals has been longer than we expected, however the refocus is beginning to reap rewards and proposal activity has increased throughout the second half of 2006.
During 2007, we are aiming to return the sales levels from this area of our business to those achieved during 2005 based on the increased number of ongoing projects and the general improvement in sales leads, project proposals and market awareness resulting from the refocusing of our activities during 2006. The level of incremental revenue needed to achieve profitability remains challenging but achievable.
Cytology
Cytology has become a genuine success story for Medical Solutions with the division exceeding our original expectations in respect of market share. The majority of the revenues continue to be generated from the supply of SurePath¢â€ž¢ LBC services and consumables to the NHS, predominantly in England and Wales.
During the year we continued our LBC roll out programme including to some previously unannounced regions such as Nottingham, Derby, Hampshire/Isle of Wight and Thames Valley East. As a result we have raised our market share expectations to 47%. This is based on an estimated annual requirement of 3.8 million cervical smears in England and Wales generating a market for LBC products estimated to be worth approximately ‚£10 million per annum.
Revenue improved significantly as a consequence of the ongoing roll out program and the additional contract wins, increasing to ‚£3.5 million compared with ‚£2.5 million in 2005, an increase of 40%. The Cytology division also improved its operating result for the year to a profit of ‚£0.7 million from ‚£0.2 million in 2005.
The exclusive UK distribution agreement for the supply of the TriPath Imaging, Inc. SurePath¢â€ž¢ LBC equipment and consumables was extended until 31 December 2010.
The SurePath¢â€ž¢ LBC roll out programme is substantially complete with the instalment of the final systems planned for early 2007. During 2007 the Board is aiming for further growth from the Cytology division driven largely by the achievement of full run rate for the supply of consumables on existing contracts.
The key opportunities for continued significant growth in Cytology are provided by extending the use of LBC systems for non-gynaecological applications and by the use of ProExC¢â€ž¢ which helps diagnose pre-cancer in persistent borderline smears; but by far the greatest potential opportunity remains the introduction of automated cervical screening in the UK. Medical Solutions has continued to co-sponsor the Health Technology Assessment ("HTA") trial being run in Manchester but, because of the importance of automated screening, we have also conducted a separate trial of our own in Arrowe Park, Wirral and a further trial is being conducted with three hospitals in Wales. We expect the results of the Wales trial to be published during 2007; the HTA trial is not expected to conclude until late 2008 or early 2009.
Central resources
Central resources include facilities, key support services, personnel and related costs and the plc Board costs. Other costs shown centrally include insurances, legal, professional and advisor fees in addition to investor relations. Central costs have increased marginally to ‚£3.1 million (2005: ‚£3.0 million, as restated), however this includes restructuring costs of ‚£0.2 million in 2006, whereas in 2005 the restructuring costs of ‚£0.35m were attributable mainly to Diagnostic Pathology. We will continue to monitor and control central costs tightly.
Geographic performance
During the year, we have refocused on our operations in the UK. The continuing operations generated revenues of ‚£6.0 million (2005: ‚£5.7 million), virtually all of which arose from sales within the UK. The reasons for this growth in revenue from continuing operations are as described above.
Financial review
Financial performance
Turnover from continuing operations has increased by 7% to ‚£6.0 million (2005: ‚£5.7 million) mainly driven by the growth in the Cytology business.
However, as a result of the ongoing focus on cost control, cost of sales decreased to ‚£3.6 million from ‚£3.7 million in 2005. This increase in efficiency is also due in part to the impact of a full year of consolidation of the Diagnostic pathology operations into Nottingham, action which was taken during the second half of 2005. Gross margins have increased to 40% in 2006 from 35% in 2005.
Our laboratory staff are highly qualified, experienced and flexible. This provides good operational gearing as revenue grows and assists in dealing with fluctuations in workload. Moreover, the laboratory infrastructure is capable of handling increased volumes and is then scalable with minimal investment.
Selling and distribution costs of ‚£0.6 million were reduced by ‚£0.2 million compared with 2005 following more effective use of resources and targeting of activity.
Administrative expenses, excluding restructuring costs and impairment of goodwill and development costs, were ‚£3.8 million in 2006 compared with ‚£4.4 million in 2005 (as restated), representing a reduction of 12%. This reduction is primarily due to savings realised in the area of personnel, including share based compensation costs, and a full year of property cost savings following the closure of the Harley Street operations during 2005. Administrative expenses include the charge of ‚£47,000 (2005: ‚£0.3 million) relating to share option based compensation charges as required by IFRS 2 Share based payment.
Administrative expenses also include a cost of ‚£0.1 million in respect of a potential over recovery of VAT (2005: ‚£0.1 million) as detailed in note 6. Her Majesty's Revenue and Customs ("HMRC") contend that the Company's VAT reclaim should have been subject to a group partial exemption calculation dating back to 2003. At 31 December 2006 an accrual of ‚£0.45 million has been made being the amount estimated to satisfy the claim. Of this amount, ‚£0.1 million has been charged during the year and ‚£0.1 million reflected as a prior year adjustment in 2005, with the balance relating to prior years. The income statement for 2005 has been restated to reflect this (note 6).
Restructuring costs in the year were ‚£0.2 million arising from the compensation due on the resignation of Mr Charles Green from his position of Chief Executive Officer in August 2006. Restructuring costs incurred during 2005 were ‚£0.3 million and related mainly to the closure of the Harley Street facility and other redundancy costs.
Total administrative expenses, including restructuring costs and impairment of goodwill and development costs, were ‚£4.0 million compared with ‚£4.8 million in 2005, representing a reduction of 16%.
Research and development costs of ‚£0.2 million were consistent with 2005 (‚£0.2 million).
Operating losses from continuing operations for the year ended 31 December 2006, excluding restructuring costs and profit on sale of fixed assets, were ‚£ 2.2 million compared with ‚£3.5 million (as restated) in 2005. This reduction in operating losses is a testament to the attitude of all of the staff in the Group who have focused on maintaining our exceptionally high quality of service whilst driving costs out of the business and increasing operational efficiency.
After taking account of tax and interest, the loss from continuing operations for the 2006 financial year was ‚£2.3 million compared with a loss of ‚£3.6 million (as restated) in 2005.
Financial position
At 31 December 2006, the Group had net assets of ‚£15.4 million compared with ‚£ 16.9 million (as restated) at 31 December 2005. Of the net assets, ‚£15.2 million (31 December 2005: ‚£2.3 million) was represented by cash of which ‚£13.2 million, net of transaction expenses, was realised following the disposal of the Dubai operations.
In conjunction with the disposal of the Dubai operations, the Company also settled the deferred consideration of ‚£2.5 million that remained on the original 2003 acquisition of part of the Dubai operations.
Fixed assets have decreased to ‚£2.3 million at 31 December 2006, from ‚£17.0 million at 31 December 2005. The main driver for this is a reduction in goodwill of ‚£14.2 million as a result of the disposal of the Dubai operations.
Net current assets increased to ‚£13.3 million from ‚£0.2 million at the end of 2005 and this positive change is largely a result of the disposal of the Dubai operations in conjunction with strong working capital management and the reduction in short term borrowings during the year.
The Group has historically been funded primarily through equity although debt has been raised as and when appropriate for the needs of the business. As at 31 December 2006, the Group's balance sheet included bank and finance lease obligations of approximately ‚£0.4 million, ‚£0.2 million of which is repayable within one year and ‚£0.2 million after more than one year but less than three years.
Cash flows and liquidity
A total of ‚£13.2 million, net of transaction costs, was raised through the disposal of the Dubai operations which was completed during November 2006. Net cash used in operating activities (continuing operations) during the year ended 31 December 2006 was ‚£0.9 million compared with net cash used of ‚£2.8 million in 2005.
Capital expenditure of ‚£0.3 million was incurred during the year (2005: ‚£0.3 million) primarily in relation to additional LBC systems.
Interest received was significant during the second half of year, mainly arising from the Dubai disposal funds placed on deposit, amounting to ‚£0.2 million compared with ‚£0.1 million during 2005.
Prospects
There have been dramatic changes across the Group in 2006. During the year the Board focused on delivering the phased exit from the Dubai operations and this was successfully completed during November 2006, whilst dealing with the turnaround of the UK based operations. There has been a great deal of progress made in the year and the Group is now in a strong and secure financial position.
There has also been significant restructuring at Board level, both during 2006 and the early part of 2007. The Group now has a closely knit team of Directors and senior management, which the Board are confident provides the right blend of skills, experience and expertise to deliver the strategic objectives and move the business forward financially and operationally.
The short term objective is to return the Group to profitability and cash generation. This will be achieved through a combination of organic growth in our Pathology Services and Cytology divisions and prudent, appropriate investment in acquisition opportunities.
The organic revenue growth in Pathology Services will be delivered through both Diagnostic Pathology and Drug Development Services. Within Diagnostic Pathology we will continue the introduction of new products and services aimed at increasing the breadth and depth of our offering targeted at the diagnosis and prognosis of breast cancer and other cancers. Initially these enhanced services will be marketed to private healthcare providers. We will also seek to introduce new technologies and promote additional applications for existing technologies, for example CTC and CEC analysis. Within Drug Development Services, we will continue to strengthen our relationships with the smaller to medium sized pharmaceutical and biotechnology companies and invest in the next generation of image analysis capability.
Organic revenue growth in Cytology will be delivered mainly through the ongoing roll out programme of the SurePath¢â€ž¢ LBC system. In addition to this, we are targeting opportunities to increase the use of the SurePath¢â€ž¢ LBC system for non-gynaecological applications.
The Board is also identifying and targeting appropriate investment and acquisition opportunities. Any such acquisitions are aimed at expanding our core pathology expertise into complementary areas. This includes enhancing our reference laboratory portfolio to offer the latest diagnostic techniques including DNA and RNA based tests. There is strong demand from the pharmaceutical and biotechnology sectors for companies that offer a portfolio that includes protein and DNA and RNA based tests, and there are opportunities to develop clinical applications for healthcare providers.
Over the medium to long term, the Board remains confident that the opportunities for growth are strong and we expect the markets for our services and products to grow significantly. Within Pathology Services we are exploring opportunities to expand our existing offering, which is largely tissue based, to include blood and other fluids. This will also enable us to respond to the anticipated increased demand for pathology services from the primary care arena and national screening initiatives.
There is also growing demand, from healthcare providers and patients, for therapeutics which differentially target segments of patient populations in conjunction with companion diagnostics. Through our enhanced reference laboratory diagnostic portfolio we will be in a prime position to provide both the diagnostic techniques required to segment target patient populations and the ability to offer and develop companion diagnostics.
The introduction of automated cervical cancer screening into the UK presents the greatest opportunity within Cytology. We will continue to support the HTA trial in England through to its conclusion and will continue to invest in automated cytology screening with partners both outside of England and within private healthcare.
Dr Nick AshManaging Director27 March 2007Consolidated Income StatementFor the year ended 31 December 2006 Unaudited Year Year ended ended 31 31 December December 2005 2006 (as restated) Continuing operations Note ‚£'000 ‚£'000 Revenue from continuing operations 6,025 5,655 Cost of sales (3,640) (3,655) Gross profit 2,385 2,000 Selling and distribution expenses (609) (833) Administrative expenses: - normal (3,837) (4,373) - restructuring costs (185) (347) - impairment of goodwill and development costs - (64) Administrative expenses (4,022) (4,784) Research and development (167) (207) Gain on sale of fixed assets - 383 Operating loss from continuing operations (2,413) (3,441) Interest receivable 186 108 Interest payable and similar charges (105) (251) Loss before tax from continuing operations (2,332) (3,584) Taxation - - Loss after tax but before profit from discontinued (2,332) (3,584)operations Discontinued operations Profit from discontinued operations 3 946 1,566 Loss for the year (1,386) (2,018) Attributable to: Equity holders of the parent company (1,386) (2,018) Loss for the year (1,386) (2,018)
Basic and diluted loss per ordinary share from 4 (1.14)p (1.82)p continuing operations
Basic and diluted total loss per ordinary share 4 (0.68)p (1.03)p
See note 6 for details of the restatement
Consolidated Statement of Changes in Shareholders' Equity For the year ended 31 December 2006
Attributable to equity holders of the Parent Company Merger Profit Share Share and Translation and loss Minority Total capital premium other reserve reserve interest equity reserves (as (as restated) restated) ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Balance at 1 January 4,075 32,284 4,608 117 (24,201) 52 16,9352006 (as restated) Currency translation - - - (407) - (2) (409)adjustments Net income recognised - - - (407) - (2) (409)directly to equity Realisation of merger - - (2,200) - 2,200 - -reserve Loss for the year - - - - (1,386) 29 (1,357) Total recognised - - (2,200) (407) 814 27 (1,766)income/(expense) for the year Employee share option scheme: - value of services - - - - 47 - 47provided Disposal of overseas - - - 290 - (27) 263subsidiary Minority interest - - - - - (52) (52)settled in cash Balance at 31 December 4,075 32,284 2,408 - (23,340) - 15,4272006 Consolidated Balance SheetAs at 31 December 2006 Unaudited As at As at 31 31 December December 2006 2005 (as restated) ‚£'000 ‚£'000 Non-current assets Goodwill 583 14,808 Other intangible assets 117 181 Property, plant and equipment 1,634 2,041 2,334 17,030 Current assets Inventories 533 773 Trade and other receivables 1,172 3,212 Financial assets - cash and cash equivalents 15,229 2,313 16,934 6,298 Current liabilities Trade and other payables 3,473 3,356 Financial liabilities - borrowings 162 301 Provisions - 2,443 3,635 6,100 Net current assets 13,299 198 Total assets less current liabilities 15,633 17,228 Non-current liabilities Financial liabilities - borrowings 206 293 206 293 Net assets 15,427 16,935 Equity Issued share capital 4,075 4,075 Share premium 32,284 32,284 Other reserves 2,408 4,725 Profit and loss reserve (23,340) (24,201) Total equity attributable to equity holders of the 15,427 16,883parent company Minority interest - 52 Total equity 15,427 16,935
See note 6 for details of the restatement
Consolidated Cash Flow StatementFor the year ended 31 December 2006 Unaudited Year ended Year ended 31 31 December December 2006 2005 (as restated) Note ‚£'000 ‚£'000 Cash flows from operating activities (continuing operations) Cash used in operations 5 (841) (2,719) Interest paid (45) (78) Net cash used in operating activities (continuing (886) (2,797)operations) Cash flows from investing activities (continuing operations) Purchases of property, plant and equipment (255) (255) Purchases of intangible assets (12) (30) Proceeds from sale of property, plant and 2 29equipment Proceeds from sale of intangible assets - 405 Proceeds from sale of subsidiary 3 13,963 - Payment of transaction costs (748) - Cash remaining in disposal group (1,623) - Interest received 180 108 Net cash generated from investing activities 11,507 257(continuing operations) Cash flows from financing activities (continuing operations) Proceeds from the issue of share capital - 6,365 Repayment of borrowings (277) (2,937) Payment of transaction costs - (695) Finance lease principal repayments (37) (48) Net cash (used in)/generated from financing (314) 2,685activities (continuing operations) Net increase in cash and cash equivalents 10,307 145(continuing operations) Cash flows from operating activities (discontinued operations) Cash generated from operations 2,744 655 Net cash generated from operating activities 2,744 655(discontinued operations) Cash flows from investing activities (discontinued operations) Acquisition of subsidiaries, net of cash acquired - (491) Purchases of property, plant and equipment (83) (7) Net cash used in investing activities (83) (498)(discontinued operations) Cash flows from financing activities (discontinued operations) Payment of accrued minority interest (52) - Net cash used in financing activities (52) -(discontinued operations) Net increase in cash and cash equivalents 2,609 157(discontinued operations) Net increase in cash and cash equivalents 12,916 302 Cash and cash equivalents at beginning of year 2,313 1,990* Exchange gains on cash and cash equivalents - 21 Cash and cash equivalents at end of year 15,229 2,313
* including a ‚£2 million restricted cash deposit
Notes to the Consolidated Preliminary Financial Statements For the year ended 31 December 2006
1. Basis of preparation
From 1 January 2005, Medical Solutions plc has been required to prepare consolidated financial statements, including comparative data, in accordance with IFRS as adopted by the European Union. Accordingly, financial information for the year 2006, and comparative information, has been prepared on this basis.
The financial information contained in this announcement of preliminary financial statements does not constitute statutory financial statements within the meaning of section 240 of the Companies Act 1985. Neither the Directors of the Company, nor our auditors, have as yet approved the statutory financial statements for the financial year ended 31 December 2006. These financial statements are therefore unaudited. The financial statements for the year ended 31 December 2005 have been delivered to the Registrar of Companies. The auditors reported on those accounts and their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for the year ended 31 December 2006 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
Notes to the Consolidated Preliminary Financial Statements For the year ended 31 December 2006
2. Segmental reporting
Primary reporting format - operating divisions
At 31 December 2006, the Group's continuing trading operations were organised into two main operating divisions:
* Pathology Services
* Cytology
Pathology Services comprises the business units of Diagnostic Pathology, Drug Development Services and prior to disposal, Dubai Diagnostic Pathology.
During 2006 there were immaterial sales between business segments (2005: immaterial), and where these do occur, are at arm's length pricing. Unallocated costs represent corporate expenses and common operating costs. Segment assets include plant and equipment, stocks and debtors. Unallocated assets include property, central debtors and prepayments and operating cash. Segment liabilities comprise operating liabilities and exclude borrowings. Capital expenditure comprises additions to plant and equipment and capitalised development costs.
Year ended 31 December 2006 Pathology Services Dubai Drug Diagnostic Diagnostic Development Pathology Pathology Services Cytology Unallocated Group ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Continuing operations Revenue 2,200 299 3,526 - 6,025 Segment result 529 (516) 658 (3,084) (2,413) Interest expense (105) (105) Interest income 186 186 Loss before tax (3,003) (2,332) Taxation - - Loss for the year from (3,003) (2,332)continuing operations Discontinued operations Revenue 6,004 6,004 Segment result 2,064 2,064 Loss on disposal of (1,089) (1,089)operation Profit before tax 975 975 Taxation - - Profit for the year from 975 975discontinued operations Profit attributable to (29) (29)minority interests Net loss attributable to (1,386)equity shareholders Segment assets 1,021 382 1,655 - 3,058 Unallocated assets - property, plant and 611 611equipment - debtors and prepayments 370 370 - cash and cash 15,229 15,229equivalents Total assets 1,021 382 1,655 16,210 19,268 Segment liabilities 139 303 818 - 1,260 Unallocated liabilities - corporate borrowings 213 213 - creditors and accruals 2,368 2,368 Total liabilities 139 303 818 2,581 3,841 Other segment items Capital expenditure 38 88 185 115 426(tangibles) Capital expenditure - 12 - - 12(intangibles) Depreciation 54 95 296 203 648 Amortisation of 53 23 - - 76intangible assets Other non-cash expenses - share option scheme - - - - 47 47Year ended 31 December 2005 Pathology Services UK Dubai Drug Diagnostic Diagnostic Development Group Pathology Pathology Services Cytology Unallocated (as (as restated) restated) ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Continuing operations Revenue 2,415 773 2,467 - 5,655 Segment result 121 (740) 183 (3,005) (3,441) Interest expense (251) (251) Interest income 108 108 Loss before tax (3,148) (3,584) Taxation - - Loss for the year from (3,148) (3,584)continuing operations Discontinued operations Revenue 5,017 5,017 Segment result 1,617 1,617 Profit before tax 1,617 1,617 Taxation - - Profit for the year from 1,617 1,617discontinued operations Profit attributable to (51) (51)minority interests Net loss attributable to (2,018)equity shareholders Segment assets 1,392 719 1,678 - 3,789 Unallocated assets - property, plant and 737 737equipment - debtors and 322 322prepayments - cash and cash 2,081 2,081equivalents - discontinued 16,399 16,399operations Total assets 1,392 719 1,678 19,539 23,328 Segment liabilities 240 420 603 - 1,263 Unallocated liabilities - corporate borrowings 490 490 - creditors and accruals 1,801 1,801 - discontinued 2,839 2,839operations Total liabilities 240 420 603 5,130 6,393 Other segment items Capital expenditure 2 2 169 89 262(tangibles) Capital expenditure 3 27 - - 30(intangibles) Acquisition of - - - 3,761 3,761subsidiaries Profit/(loss) on sale of 387 - - (4) 383fixed assets Depreciation 115 80 254 251 700 Amortisation of 58 3 - - 61intangible assets Impairment of intangible 64 - - - 64assets Other non-cash expenses - share option scheme - - - 304 304
Secondary format - geographical segments
The group manages its business segments on a global basis. The continuing operations are based in the UK which is the home country of the parent company.
The sales analysis in the table below is based on the location of the customer, which is not materially different from the location where the order is received and where the assets are located.
Revenue Segment Capital assets expenditure 2006 2005 2006 2005 2006 2005 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Continuing operations UK 5,981 5,607 19,268 6,929 355 289 Middle East & Asia 21 - - - - - European (non-UK) 21 40 - - - - North America 2 8 - - - - Total 6,025 5,655 19,268 6,929 355 2893. Discontinued operations 2006 2005 ‚£'000 ‚£'000 Post tax results from discontinued operations 2,035 1,566 Loss on disposal of subsidiary net tangible assets: Proceeds - cash 13,963 - settlement of deferred consideration 2,488 Total proceeds 16,451 Tangible fixed assets 169 Goodwill 13,925 Current assets (including cash) 2,482 Current liabilities (477) Net assets disposed of 16,099 Cumulative exchange loss (290) Transaction related fees and expenses (1,074) Bonus paid to former Director on disposal (77) Loss on disposal of subsidiary (1,089) Taxation - Loss on disposal after tax (1,089) Total profit from discontinued activities 946 1,566
On 7 November 2006, the Group completed the disposal of its Dubai based subsidiaries Medical Solutions FZ LLC, Dubai Medical Laboratory FZ LLC and Specialised Clinical Laboratory FZ LLC. These companies comprised the Dubai Diagnostic Pathology business unit. The disposal generated a loss of ‚£1,089,000 after accounting for certain transaction-related legal and professional costs.
Cash flows from discontinued operations 2006 2005 ‚£'000 ‚£'000 Net cash inflow from operating activities 2,744 655 Net cash in/(out)flow from investing activities (83) (498) Net cash outflow from financing activities (52) - Exchange gain on cash and cash equivalents - 21 Total 2,609 178
During 2006, discontinued operations contributed ‚£6,004,000 (2005: ‚£5,017,000) to revenue and a profit of ‚£2,035,000 (2005: ‚£1,566,000) to pre-tax loss, after expenses of ‚£3,969,000 (2005: ‚£3,451,000). There was no tax charge as a result of this transaction. The discontinued operations represented the Dubai Diagnostic Pathology business segment.
4. Loss per share
The calculation of basic and diluted earnings per share for the year was based on the loss attributable to ordinary shareholders of ‚£1,386,000 (2005: loss of ‚£2,018,000 as restated) on 203,765,232 ordinary shares (2005: 196,780,731 ordinary shares) being the weighted average number of ordinary shares in issue.
IAS 33 Earnings per share requires presentation of diluted earnings per share when a company could be called upon to issue shares that would decrease net profit or increase net loss per share. Net loss per share in a loss-making company would only be increased by the exercise of share options, which were out of the money. Assuming that option holders will not exercise out-of-money options, no adjustment has been made to the diluted loss per share for out-of-money share options.
5. Reconciliation of operating cash flows (continuing operations)
Year ended Year ended 31 31 December December 2005 2006 (as restated) ‚£'000 ‚£'000 Loss for the year from continuing operations (2,332) (3,584) Taxation - - Depreciation of tangible fixed assets 600 642 Recognition of grant income (55) (67) Amortisation of capitalised development costs 76 61 Impairment of capitalised development costs - 64 Impairment of tangible fixed assets - 140 Profit on sale of property, plant and equipment (2) (383) Interest payable 105 251 Interest receivable (186) (108) Share based payments - value of employee service 47 304 Decrease in inventories 146 177 Decrease in trade and other receivables 522 292 Increase/(decrease) in creditors 238 (508) Cash used in continuing operating activities (841) (2,719)
Cash used in the year in continuing operating activities was ‚£841,000 (discontinued operating activities generated ‚£2,744,000). Cash used in the year ended 31 December 2005 in continuing operating activities was ‚£2,719,000 (discontinued operating activities generated ‚£655,000).
6. Prior year adjustment
Potential over recovery of VAT
Following an inspection during the last quarter of 2006, Her Majesty's Revenue and Customs ("HMRC") challenged a number of the Company's historic VAT returns, specifically in relation to the quantum of input VAT the Company had reclaimed. The extent of the enquiry relates to returns made in the three years between October 2003 and September 2006.
Over the course of this period Medical Solutions plc had retained the VAT group registration for which it was the representative member, and included the subsidiaries Kinetic Imaging Limited and Fairfield Imaging Limited. This group registration excluded the trading of fellow subsidiaries Pathlore Ltd and Medical Solutions London Limited, each of which were party to separate registration status.
Given the nature of the trading and other transactions of Medical Solutions plc and Pathlore Ltd, which itself was partially exempt over the period in question, and their respective accounting treatment, the basis of HMRC's challenge is that Medical Solutions plc's input VAT should not be reclaimed in full but rather should be subject to a group partial exemption calculation. Under such a method, the amount of the input tax recoverable is linked in proportion to trading, with regard to whether the trading was standard rated, or exempt for VAT purposes.
Accordingly, Medical Solutions is in the process of finalising an agreement with HMRC to satisfy its claim and has therefore made an accrual, incorporating interest charges, to the amount anticipated to satisfy the claim. The Company anticipates reaching agreement and settling any liability during the first half of 2007.
The additional charge to the income statement and the corresponding incremental accrual at the end of each period, is as summarised below:
Period Accrual ‚£'000 Up to 31 December 2004 170 Year ended 31 December 2005 128 Year ended 31 December 2006 148 Total accrual as at 31 December 2006 446
In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the financial impact on the respective financial statements of the above accruals is detailed below.
The opening balance sheet of both the Company and the Group as at 1 January 2005 have been restated to reduce the profit and loss reserve brought forward by ‚£170,000. For the year ended 31 December 2005, the income statement has been restated and an additional ‚£128,000 has been charged to administrative expenses and creditors have been increased by the same value. The cumulative effect is to restate the opening balance sheet of both the Company and the Group as at 1 January 2006 by a reduction in the profit and loss reserve brought forward by ‚£ 298,000 with a corresponding increase in creditors.
There is no impact on the cash flow statement, other than the reconciling adjustment for the respective movement in creditors in each period and the charge in the income statement falls under the Unallocated category within the Segmental Analysis (note 2).
The loss per share for 2005 is increased by 0.07p as a consequence of the additional charges of ‚£128,000 on 196,780,731 shares, being the weighted average number of shares in issue during 2005.
MEDICAL SOLUTIONS PLCRelated Shares:
SBS.L