Final Results

Collagen Solutions plc

("Collagen Solutions", the "Company" or the "Group")

11 July 2016

Final Results for the year ended 31 March 2016

Collagen Solutions plc (AIM: COS), the developer and manufacturer of medical grade collagen components for use in regenerative medicine, medical devices and in-vitro diagnostics, announces its final results for the year ended 31 March 2016.

Financial Highlights

· Group revenue and other income increased to £3.24 million (2015: £1.04 million), ahead of guidance of £2.8 million in January 2016

· Adjusted LBITDA (before separately identifiable items): £410,016 (2015: £689,816)

· Net cash balances at 31 March 2016: £2.49 million (2015: £3.39 million)

Operational Highlights

· Southern Lights Biomaterials acquisition realised value and significant growth

· Exclusive IP licence and acquisition of assets for the ChondroMimetic pipeline

· US patent granted for novel processing of pericardium for heart valve replacement

· Participation in various collaboration projects with leading academic and industry partners

· New distribution channels set up with Sigma, a part of Merck KGaA, and BBI Solutions

· Further expansion of global customer and raw materials sourcing base

· Increased investment in global R&D facilities and in global sales and marketing operations

Post Period End

· In May 2016 Jamal Rushdy was appointed as Chief Executive Officer, with Dr Stewart White assuming the role of Chief Scientific Officer

· A joint venture set up with Cre8ive in April 2016 to exploit distribution channels in China

Annual General Meeting

· The Company's AGM will be held at 3 Robroyston Oval, Nova Business Park, Glasgow, G33 1AP on 24 August 2016 at 11:00am

Jamal Rushdy, Chief Executive Officer of Collagen Solutions, commented: "Our focused strategy is to scale our commercial platform, and develop finished devices through both internal development and acquired technologies, such as the ChondroMimetic platform, that we will commercialise via licensing and distribution partnerships.

We strengthened and grew our core biomaterials supply and manufacturing business resulting in a full year of solid results from our acquired Southern Lights Biomaterials business, and we have also executed new customer agreements and continue to establish a global commercial organisation focused on core business growth.

The past year was transformational for the Company in terms of a step change in scale, product and technology breadth, and organisational development. This has given us a strong foundation as we continue to make progress in the current financial year, with clear and specific strategic initiatives, an engaged management team and a shared vision: to become the industry's first choice for regenerative biomaterials."

Enquiries:

CHAIRMAN'S STATEMENT

I am pleased to present Collagen Solutions' annual report and accounts for the year ended 31 March 2016.

Revenue Growth

The year under review has been one of positive progress for the Group as a whole, with a very strong contribution to revenue growth from Southern Lights Biomaterials which we acquired in December 2014. This has enhanced our global reach and provided access to safe new tissue and biomaterial sourcing in New Zealand and Australia, which are negligible BSE risk sources. In addition, we now have many additional customer opportunities in both North America and especially in Asia where we have now appointed an experienced Regional Commercial Manager in Korea. We have invested in a new multi-purpose processing facility in New Zealand to allow product development and prototyping to be carried out without disruption to our main contract manufacturing operations. As part of this investment we have also increased our headcount in Quality Assurance, R&D and production functions there.

Innovation and IP

In September, we were able to acquire an exclusive IP licence to a very exciting biomaterials platform technology based around a bi-layered collagen sponge which is the result of many years' research at Cambridge and MIT Universities. It is my view that we have the ability to create significant strategic value through appropriate partnering and investment in a way that de-risks the Company's opportunity in collagen biomaterial applications.

In May, we announced the granting of a US patent for the processing of a novel biomaterial for heart valve surgery patients and other applications. During the course of the last year we have announced collaborations with various academic and industry partners, including our participation in a prestigious European Horizon 2020 consortium to develop a disease-modifying therapy for Parkinson's which could slow down the progression of the disease rather than offering symptomatic benefits.

Board and Management

In November 2015, we sadly lost the talents of Dr Kevin Wilson who passed away after a short illness. At a purely personal level I lost a true friend, and at a corporate level Collagen Solutions has lost one of its founding shareholders who had a hugely positive influence on the Company. We have not yet replaced Kevin as a Non-Executive Director as later this year Geoff Bennett will move from his current executive position to a non-executive position.

In May 2016, we announced a leadership change which will allow the Group to accelerate its strategic plans and initiatives. Jamal Rushdy, who initially joined the senior management team as Chief Business Officer and has over 20 years' experience in the medical device arena, having most recently served as Vice President at Tornier Inc., took on the role of Chief Executive Officer. He has a track record of building businesses with successful exits and transforming organisations through integration and performance improvement, adding value through business development and leadership. In promoting Jamal to his new leadership position I did so in the knowledge that we are on a journey and that Jamal has the requisite leadership qualities for the next stage of our journey.

Moving to the role of Chief Scientific Officer, Dr Stewart White, Collagen Solutions' founder, now leads our R&D and product related corporate activities and will focus on the Company's product development and innovation platform whilst also realising value from innovative technologies such as the ChondroMimetic portfolio of assets. I have a huge admiration for Stewart and what we have achieved together in the formation and growth of Collagen Solutions, and it is a testimony to his professionalism that he has taken on his new role and has continued to provide the necessary support to Jamal in his recent appointment.

At the start of the year, we added the considerable experience of Tom Hyland to our management team, who joined the Company as Chief Operating Officer. Tom has over 20 years' collagen chemistry knowledge having worked in senior roles in various global medical device and life science organisations.

The Board is confident that we now have the right team in place to deliver the short to medium-term strategic goals and have also strengthened our functional teams to drive product innovation and take the business to the next level.

Overview

Our Board and Management team have made substantial progress to put in place the clear organisation and detailed initiatives to drive our focused strategy in the current financial year and beyond, which is to build a leading global regenerative biomaterials business based upon a core supply, development and manufacturing platform, enhanced by developing our own novel products such as ChondroMimetic, across a range of clinical indications. This strategy remains our focus and we will continue to strengthen our core business through operational improvements and investing in innovation to create significant value.

The Group is still in its early stages of growth; however, we are pleased to report that progress has been made in terms of creating long-term shareholder value. In particular I would draw your attention to the following:

· ChondroMimetic family IP and assets acquisition;

· distributor channels set up with Sigma, a part of Merck KGaA, BBI Solutions and a Chinese JV with Cre8ive; and

· expansion of our global customer base and investment in our global sales and marketing operations.

We have set ourselves a goal to accrete value by creating a leading biomaterials business through a combination of organic growth and exploitation of our own and licensed IP, as well as through appropriate acquisitions, and we believe the momentum for achieving this is increasing.

Results

The Group's results for the year ended 31 March 2016 are set out in the Consolidated Statement of Comprehensive Income. Revenue and other income for the year was £3,244,257 (2015: £1,035,500). Administrative expenses (before separately identifiable items) were £2,473,690 (2015: £1,265,918) and selling and marketing costs were £333,426 (2015: £218,732). Losses before interest, tax, depreciation and amortisation (LBITDA) (before separately identifiable costs) decreased to £410,016 (2015: £689,816) and the loss per share was 0.57p (2015: 1.17p).

Net cash used in operations during the year was £194,821 (2015: £1,070,812), net cash used in investing activities was £660,012 (2015: £2,404,496) and net cash (outflow)/inflow from financing activities was £(25,591) (2015: £5,363,304). The Group's cash balances at 31 March 2016 were £2,493,146 (2015: £3,391,356).

Outlook

We have made a positive start to the current financial year and I am emboldened by the knowledge that the positive benefits of having "sticky" revenues from embedded products will ensure about 70% of the Group's ongoing revenues are already, in effect, secured. Our challenges are to win new customers and execute our pipeline in a timely manner; we have invested in personnel to achieve this. Additionally, we are looking to successfully execute our R&D pipeline where the investment that we have made, and continue to make, begins to produce cash flow.

ChondroMimetic represents a significant value creating opportunity but to deliver this we need to be smart about how we execute our plan to ensure we are not putting at risk shareholder value.

It was through my colleague Kevin Wilson that we had the opportunity to be introduced to Cre8ive with whom we have formed a joint venture. I am very excited by this opportunity because I believe in and trust the people Kevin introduced. The Company has an initial JV Board meeting in Hong Kong in July, and while the scale of the opportunity is significant and exciting, it will take time to gain traction. Consequently, the Board views contributions from the joint venture being realised largely in the years beyond this current one.

The Company is on a journey and whilst we have continued our journey positively this year, we require a higher level of momentum as we move on to the next stage in our development as a Company dedicated to enhancing shareholder value. I remain hugely committed to ensuring the success of Collagen Solutions and I know that commitment is shared throughout the Company. I would like to thank all of our employees and my fellow Directors for their hard work and dedication throughout 2015/16.

I look forward to updating you further throughout the year. Thank you for your support.

David Evans

Non-executive Chairman

8 July 2016

CEO'S STATEMENT

May I welcome you to the results for the year ended 31 March 2016 for Collagen Solutions and convey my own excitement about the future of our Company.

Addressing our opportunity

Having joined the Company in November 2015 and having assumed the CEO role in May 2016, I believe we have a strong foundation of people, customers, technology and innovation, upon which we can execute our strategy to achieve a leading position in the biomaterials and regenerative medicine market.

We address a current opportunity in excess of $1.5bn for collagen and tissue biomaterials applications. Our focused strategy is to strengthen and grow our core biomaterials supply and manufacturing business, and develop finished devices through both internal development and acquired technologies that we will commercialise via licensing and distribution partnerships.

During the reported financial year, the Company continued to make good progress towards achieving this strategy. We strengthened and grew our core biomaterials business including a full year of contribution from our acquired Southern Lights Biomaterials business. We executed new customer agreements, and late in the year established a commercial organisation focused on core business growth. We also completed the acquisition of the ChondroMimetic assets from Orthomimetics Limited to establish a basis for our finished devices platform.

Revenue growth

During the reported financial year ended 31 March 2016, the Company added scale from a broad base of customers in North America and Asia.

Revenue from North America grew by £1.262 million to £1.808 million, an increase of 231%, driven by a full year of contribution from the acquisition of Southern Lights Biomaterials as well as our organic growth from a broad base of existing customers. Revenue from Asia grew by £0.889 million to £1.175 million, an increase of 311%, our fastest-growing region, driven by customer growth from the existing Southern Lights Biomaterials base. Revenue from European customers was flat at £0.147 million from a small customer base, however this region now has a dedicated commercial manager and we expect growth in customer base and sales during the coming year.

Within our core biomaterials business, our mix of activities was approximately 61% contract manufacturing, 31% materials supply and 8% development and other services. This is relatively consistent with the prior year's mix of 56% contract manufacturing, 30% materials and 14% services with a shift of service revenue to contract manufacturing as some of our customer development agreements matured into contract manufacturing.

Our customer base includes a broad cross-section of the market in terms of end-user segments, geographies and customer sizes. Our opportunity is to penetrate deeper into these geographic markets with a focus on commercial execution to expand this customer base with improvements in sales operations and expansion of marketing, the direct sales team and channel partners.

Innovation and product development

Since its founding, Collagen Solutions has had a commitment to innovation within regenerative biomaterials, with over 50% of the current employee base holding advanced scientific degrees. The R&D teams are chartered to support and develop our core biomaterials business as well as develop our intellectual property through internal development, partnering, and licensing and acquisitions.

In September 2015, we acquired the assets and an exclusive worldwide licence for the associated intellectual property to the ChondroMimetic family of pipeline products from Orthomimetics Limited and Cambridge Enterprise Limited, representing a regenerative orthopaedics platform for cartilage, bone, meniscus, tendon and ligament surgery. The first lead product is ChondroMimetic, a regenerative scaffold intended for repair of small defects in the cartilage of the knee, which had a successful pilot clinical study in Europe in 2010. We believe we have a unique opportunity to relaunch ChondroMimetic with the advantage of over six years of evidence from these early patients.

In addition, we are investing in internally developed technology for additional market access finished devices we can commercialise with partners, as well as basic research partnerships to advance regenerative medicine technology based on our biomaterials. For example, in March 2015 we announced a research collaboration with the Blond McIndoe Research Foundation to investigate the use of primary human skin cells used in formulation with Collagen Solutions' products with a view to developing more effective treatments for burns, thereby reducing the burden and limitation of skin grafting.

During the reported financial year, we increased our R&D revenue expenditure by £0.207 million to £0.367 million, inclusive of the combined R&D spend of legacy Southern Lights Biomaterials. In addition, we spent £0.267 million in R&D-related capital expenditure to enhance our capabilities. The Group now has a global R&D organisation of eight scientific and engineering team members, led by our founder and Chief Scientific Officer, Dr Stewart White. We will continue to invest in R&D with the team's focus on supporting the core biomaterials business, developing new finished devices for commercialisation, and continuing to develop innovative regenerative medicine technologies.

Strategic Initiatives

In January our new combined leadership team from the UK, the USA and New Zealand met for our annual strategic planning session in order to set the vision, mission, goals and specific strategic initiatives for the Company in the current financial year in order to create long term value.

The strategic platform for the growth and development of the Company is now built upon four interconnected pillars; customers, employees, products and capabilities and growth. Within each pillar we are focused on executing detailed strategic initiatives. These form the basis of our overall strategy:

Customers: To improve our customer engagement and market share, we are investing in our sales teams, product development and processes. We have set goals to hire and on-board a motivated and responsive direct sales team of commercial managers focused on North America, Asia, and Europe, in addition to selected channel partners such as our recent announcements about a joint venture in China, and distribution arrangements with Sigma, part of Merck KGaA, and BBI Solutions. We are developing advanced training for this sales team to ensure a high level of engagement with our customers to better understand their needs and offer solutions in a more comprehensive and timely manner. We are also fully implementing a sales opportunity management process based on best practices to ensure we have a sufficient quality pipeline of business efficiently moving through the sales funnel process.

Employees: Within our employee base, over 85% of the organisation has direct experience working in our customers' markets in either research organisations or medical device companies. Our goal is to foster a culture of responsiveness and engagement reflecting our global team's talents in biomaterials science, production and market knowledge aligned towards achieving our strategic goals. To further this aim we are implementing comprehensive talent review, development and reward processes this fiscal year.

Products and capabilities: We have multiple innovation and operational excellence initiatives to improve both near-term core business with OEM and manufacturing processes, as well as improving our R&D pipeline prioritisation and execution in order to ensure a consistent future flow of new finished device products.

Growth: We are very encouraged by the results of our January Voice of the Customer independent survey. Our current and potential customers gave us clear feedback that we offer a compelling value proposition but our complete range of products, services and capabilities needs to be articulated more fully to the wider market. As such, we are making investments in marketing in the current year, including a comprehensive new brand communications strategy and new website that was recently launched.

Conclusion

The financial year ended 31 March 2016 was transformational for the Company in terms of a step change in scale, product and technology breadth, and organisational development. We have a strong foundation as we continue to make progress in the current financial year, with a clear strategy, specific strategic initiatives, an engaged management team and a shared vision: to become the industry's first choice for regenerative biomaterials.

Jamal Rushdy

Chief Executive Officer 

8 July 2016

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 March 2016

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 March 2016

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 March 2016

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 March 2016  

NOTES TO THE AUDITED PRELIMINARY ANNOUNCEMENT

1. BASIS OF THE ANNOUNCEMENT

The audited preliminary results for the year ended 31 March 2016 were approved by the Board of directors on 8 July 2016. The financial information in this preliminary announcement does not constitute full accounts within the meaning of section 434 (3) of the Companies Act 2006 but is derived from the accounts for the year ended 31 March 2016. The figures for the year are audited. The preliminary announcement is prepared on the same basis as set out in the statutory accounts for the year ended 31 March 2016. Those accounts upon which the auditors issued an unqualified opinion, also had no statement under section 498(2) or (3) of the Companies Act 2006.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards, as adopted by the European Union (EU) (IFRS), this announcement does not in itself contain sufficient information to comply with IFRS.

The Company is a limited liability company incorporated and domiciled in England & Wales and whose shares are quoted on AIM, a market operated by The London Stock Exchange. The consolidated financial information of Collagen Solutions plc is presented in pounds sterling (£), which is also the functional currency of the Group.

The statutory accounts for the financial year ended 31 March 2016 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

2. GOING CONCERN

As part of its going concern review the Board has followed the guidelines published by the Financial Reporting Council entitled "Going Concern and Liquidity Risk Guidance for UK Companies 2009". In determining the appropriate basis of preparing the financial statements, the Directors are required to consider whether the Company can continue in operational existence for the foreseeable future, being a period of not less than twelve months from the date of the approval of the financial statements. As at 31 March 2016 the Group had cash and cash equivalents of £2.49 million and net current assets of £2.52 million.

Management prepares detailed working capital forecasts which are reviewed by the Board on a regular basis. Cash flow forecasts and projections have been prepared through to 30 September 2017, and take into account sensitivities on revenues and costs. Having made relevant and appropriate enquiries, including consideration of the Company's and Group's current cash resources and the working capital forecasts, the Directors have a reasonable expectation that the Company and Group will have adequate cash resources to continue to meet the requirements of the business for at least the next twelve months. Accordingly, the Board continues to adopt the going concern basis in preparing the financial statements.

3. SEGMENTAL REPORTING

The Group's Chief Operating Decision Maker, the Chief Executive Officer, is responsible for resource allocation and the assessment of performance. In the performance of this role, the Chief Executive Officer reviews the Group's activities, in aggregate. The Group has therefore determined that it has only one reportable segment under IFRS 8, Operating Segments, which is biomaterials.

4. LOSS PER SHARE

The calculation of basic loss attributable to the equity holders of the parent is based on losses of £980,464 (2015: £1,123,592) and on 171,210,108 (2015: 96,409,178) ordinary shares being the weighted average number of shares in issue during the year.

The loss for the year and the weighted average number of ordinary shares for calculating the diluted loss per share for the year ended 31 March 2016 are identical to those for the basic loss per share. This is because the outstanding share options would have the effect of reducing the loss per ordinary share and would therefore not be dilutive under the terms of International Accounting Standard (IAS) No. 33.

5. SEPARATELY IDENTIFIABLE ITEMS

In the year ended 31 March 2016 included in administrative expenses are separately identifiable items of £152,365 which relate to the release of a contingent consideration provision for the earn-out payable on the acquisition of Collagen Solutions LLC.

Separately identifiable items of (£155,131) in the year ended 31 March 2015 relate to the acquisition and integration costs of Southern Lights Ventures 2002 Limited t/a Southern Lights Biomaterials and are included within administrative expenses.

6. SHARE CAPITAL

Ordinary shares

The total number of issued shares at 31 March 2016 was 171,403,815 (2015: 170,968,865).

On 11 September 2015, 434,950 ordinary shares were issued to Orthomimetics Limited in the sum of £50,706 for consideration of ChondroMimetic assets. Further ordinary shares are required to be issued by the Company under the Asset Purchase Agreement of £50,706. 50% is due to Orthomimetics Limited on 11 September 2016 and the remaining 50% is due on 11 September 2017. These shares have been included in the shares to be issued reserve at 31 March 2016.

We anticipate issuing next month 8 million shares in relation to the first "earn-out" tranche to the vendors of the Collbio Group pursuant to our obligations under the Share Purchase Agreement dated January 2014.

Deferred shares

The total number of deferred shares at 31 March 2016 was 500,000 (2015: 500,000). The deferred shares do not confer any voting rights.

Options

At 31 March 2016 the Company had 9,238,349 (2015: 5,438,349) unissued ordinary shares of 1p each under the Company's share option schemes, details of which are as follows:

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) 596/2014.