Bioquell Regulatory News (BQE)

26 Mar 2007 07:01

Bioquell PLC26 March 2007 TO: CITY EDITORSFOR IMMEDIATE RELEASE 26 March, 2007 BIOQUELL PLC Preliminary results 2006 BIOQUELL PLC, the UK leader in specialist bio-decontamination technology andtesting/compliance services, announces its preliminary results for the yearended 31 December 2006. The highlights are: FINANCIALS * the Group moves firmly into profit * turnover £25.2 million (2005: £17.2 million), a 47% increase (excluding acquisitions, organic revenue growth was 19%) * increase in gross margin to 39% (2005: 37%), reflecting the increasing proportion of turnover from higher value equipment and services * gross expenditure on product development £1.0 million (2005: £1.2 million) * profit before tax: £1.2 million (2005: loss: £(0.5) million) * net cash from operating activities £3.5 million (2005: £1.7 million) * capital expenditure £1.5 million (2005: £1.2 million) * net debt £0.6 million (2005: £1.6 million) - gearing 5% (2005: 16%) * net assets £11.5 million (2005: £10.1 million) * basic earnings per share 2.9p (2005: (0.8)p) OPERATIONALBio-decontamination division * turnover £14.6 million (2005: £11.5 million), organic growth of 27% * strong growth in hydrogen peroxide vapour ("HPV") bio-decontamination equipment and service revenues, particularly in North America * launch of new product: BIOQUELL Z - for zone / room bio-decontamination - to generate increased international revenues * licensing of RBDS to international partners to increase market share and international revenues * increased "superbug" problems in healthcare facilities leading to higher bio-decontamination revenues * substantial growth in specialist CBRN (chemical, biological, radiological and nuclear) filtration system revenues from defence sector * pursuing further significant defence-related opportunities for BIOQUELL's HPV and CBRN filtration technologies * good progress on the development of new wound healing technology - amalgamation of two clinical trials into one TRAC (Testing, Regulatory and Compliance) division * turnover £10.6 million (2005: £5.7 million), a 86% increase (adjusting for acquisitions, the organic increase in revenues was 4%) * strong performance from TRL Compliance and KTL - the two businesses acquired in October 2005 * property consolidation progressing to plan: the new EMC centre of excellence for TRLC generating significant interest from the military / aerospace market * military / aerospace orders robust throughout the TRAC division * new management at Cape making good progress with significantly reduced cost base * integration of businesses under TRAC Global branding proceeding well and beginning to generate significant incremental revenues and take market share Commenting on the preliminary results, John Salkeld, Chairman of BIOQUELL PLCsaid: "2006 was a watershed year for BIOQUELL with the Group moving firmly into profitand starting to generate cash. The Group is pursuing a number of initiatives -in both the Bio-decontamination and TRAC divisions - which are building on themomentum already generated. The opportunities for the Group'sbio-decontamination technology - including the eradication of "superbugs" andwound healing - are growing in the UK and internationally, and there will befurther developments in 2007. In addition, we are seeing substantially increasedlevels of orders and interest in BIOQUELL's technologies from the defencesector. The TRAC division is also making good progress and is pursuing a numberof interesting opportunities." Enquiries John Salkeld BIOQUELL PLC 01264 835 900Nick AdamsMark Bodeker Emma Kane Redleaf Communications 020 7822 0200Sam Robbins CHAIRMAN'S STATEMENT BIOQUELL PLC - preliminary results for the year ended 31 December, 2006 Overview The BIOQUELL Group comprises two divisions: Bio-decontamination and TRAC -Testing, Regulatory and Compliance - which includes Cape and the new servicebusinesses, TRL Compliance and KTL, acquired in October 2005. Results and finance Turnover for the Group increased by 47% to £25.2 million (2005: £17.2 million).Excluding the two businesses acquired in October 2005, the Group's revenuesshowed organic growth of 19%. The Bio-decontamination division's revenues in2006 were £14.6 million (2005: £11.5 million), representing organic growth of27%. The TRAC division's revenues were £10.6 million (2005: £5.7 million),representing growth of 86%; growth excluding the effect of acquisitions was 4%.The Group's revenues outside the UK increased by 75% from £4m to £7m, largelyreflecting increased US sales in the bio-decontamination sector. The increased turnover from the Bio-decontamination division was seen across abroad range of sector and territories, although growth in Clarus equipment andRBDS (Room Bio-Decontamination Service) revenues was particularly strong inNorth America. Significant growth was also seen in the Group's defence businesswhich supplies specialist CBRN (Chemical, Biological, Radiological and Nuclear)filtration and environmental control equipment. Turnover in the Group's originallaboratory equipment and after-sales service businesses was basically unchanged.The consolidated gross margin showed a further increase of 2% to 39% reflectingthe higher value equipment and service revenues. Demand remained strong for the specialist testing, regulatory and complianceservices provided by businesses within the TRAC division, particularly fromclients in the defence, aerospace and telecoms sectors. The integration of thefive separate testing businesses into one division is proceeding well and we arealready seeing tangible commercial benefits from increased levels of sales fromacross the enlarged division's client base. The TRAC division's gross marginincreased by two percentage points to 38%, reflecting the higher marginsgenerated by the businesses acquired late in 2005. Gross expenditure on product development in the year was £1.0 million (2005:£1.2 million). This reflects the continuing high levels of expenditure on newproducts, such as the recently launched BIOQUELL Z, as well as new wound healingtechnology which the Group is developing. It also reflects the ongoing researchwe are undertaking in the eradication of "superbugs" from hospitals in the UKand internationally. Sales and marketing costs were unchanged at approximately £3 million but thesedeclined as a proportion of Group revenues from 18% (2005) to 12%, reflectingboth cost cutting and the revenue effect of acquisitions. Profit before tax was £1.2 million (2005: loss before tax of £0.5 million). The£1.7 million improvement in profitability reflects a number of factors includingthe higher revenues from both divisions, increased operational efficiencies andgross margins across the Group, lower costs at the Andover facility followingthe reduction in costs associated with the original laboratory equipmentbusiness and a full year's contribution from the acquired businesses in the TRACdivision. The full profit effect of the substantial increase in BIOQUELL'srevenues from the United States in 2006 was suppressed due to the significantdecline in the US dollar against sterling in the second half. The Group does not expect to incur a tax charge in the year, principally due tothe use of tax allowances relating to capital expenditure and research anddevelopment costs. The Group had approximately £4 million of deferred UK taxassets at 31 December 2006. Earnings for the year were £1.2 million (2005: £(0.3) million); basic earningsper share were 2.9p (2005: (0.8)p). The Group's net debt at 31 December 2006 was £0.6 million, some £1 million lowerthan at 30 June, 2006 and 31 December 2005 when it had been £1.6 million. Thisreduction in net debt shows the significant improvement in cash generated by theGroup's businesses, notwithstanding substantial levels of ongoing research anddevelopment and capital expenditure. Capital expenditure was £1.5 million (2005: £1.2 million) relating largely toinvestment in specialist testing and move-related equipment for the TRACdivision. Depreciation of property, plant and equipment was £1.0 million (2005:£1.0 million); amortisation of intangibles was £0.6 million (2005: £0.4million). Net cash from operating activities was £3.5 million (2005: £1.7million.) Cash inflow after expenditure on product development and beforecapital investment was £2.5 million (2005: £0.5 million). Net assets at 31 December 2006 were £11.5 million (2005: £10.6 million); gearingwas 5% (2005: 16%). Bio-decontamination divisionThe Bio-decontamination division had a good year in 2006 and has entered 2007with order momentum and new products. The new technology products - particularlythe Group's hydrogen peroxide vapour bio-decontamination technology - performedwell showing, as noted above, strong revenue growth in the UK and overseas. Wecontinue to see further opportunities and applications for BIOQUELL'sbio-decontamination technology in a range of sectors. Although we are firmly ofthe view that a substantial opportunity for this technology relates tohealthcare applications - particularly the eradication of "superbugs" - we arealso pleased by the increasing revenues being generated from other sectors suchas pharmaceutical, bio-technology, research, food and universities. The "superbug" opportunity remains both a large opportunity and a source offrustration. We continue to find, as a general rule, that most hospitals moveslowly in terms of adopting new technology and the scale of the "superbug"problem is, in some senses, overwhelming as it affects so many different aspectsof a hospital's operations. Moreover, hospitals are generally extremelyreluctant to admit to having a "superbug" problem due to, among other things,the associated liability and public relations issues. However, we typically findthat once hospitals have experienced BIOQUELL's technology in a stressfuloutbreak situation we tend to secure repeat business and client referrals. Weare seeing increasing levels of interest in BIOQUELL's technology fromhealthcare providers in a number of countries and are in discussions withseveral hospitals relating to the deployment of a BIOQUELL "implant" team (whichcomprises BIOQUELL technicians and equipment permanently located at thehospital). Our first implant team has now been continuously in place at a UShospital for nearly two years. We are expecting the publication shortly offurther research involving BIOQUELL's technology successfully reducing"superbug" related infection rates in a hospital. In addition, the launch of theBIOQUELL Z will extend the Group's product offering further into the healthcaresector. In 2006 the Group saw increased levels of demand from defence customers in theUK and overseas for its CBRN filtration and environmental control equipment,including substantial sales to US vehicle manufacturers supplying vehiclesdeployed in Iraq and Afghanistan. Demand for this equipment has increasedfurther in the first quarter of this year and we expect defence-relatedcontracts to contribute significantly to turnover in the Bio-decontaminationdivision in 2007. TRAC division The TRAC division also performed well in 2006 with strong increases in turnoverand profitability from the businesses acquired in late 2005. The property movesare proceeding well and the division has three well equipped 'centres ofexcellence' as well as some highly competent and successful regional officesproviding effective levels of customer service. The senior management of Capewas changed during 2006 and we are expecting Cape's performance to improvesignificantly in 2007, in part due to a substantially reduced cost base.Activity from companies operating in the defence sector increased, particularlygiven the increased levels of governmental investment in electronic-basedwarfare and counter-terrorism technologies. In addition, activity from aerospaceclients remains at high levels. We are seeing the success of 2006 continuinginto 2007 - in part assisted by the increasing market recognition of the 'TRACGlobal' brand. Prospects Your Board anticipates that the improvements and developments seen in 2006 willcontinue into 2007. The benefits of a more extensive international sales networkon the back of new products should be seen this year - as well as increasedinterest in BIOQUELL's technology from the healthcare and defence sectors. Inparticular, demand for the Group's CBRN technology has been strong so far thisyear. We also expect the performance from the TRAC division to improve duringthe year. The prospects for the Group, across both divisions, continue toimprove both in the UK and internationally. John SalkeldChairman26 March, 2007 REVIEW OF ACTIVITIES Bio-Decontamination division RBDS and bio-decontamination equipment During 2006 the Group saw strong growth in turnover from its specialistbio-decontamination equipment and services. Significant activity was seen fromthe pharmaceutical and bio-technology sectors with, for example, substantialinterest seen from manufacturers of avian flu vaccine. We anticipate that thisgrowth will continue due to a number of factors including the increasinginternational market position which BIOQUELL enjoys (including increasing levelsof client referrals), the banning of formaldehyde (a confirmed human carcinogenwhich until recently was used to decontaminate production and researchfacilities) and the extension of BIOQUELL's product range, particularly takinginto account the launch of the BIOQUELL Z. The BIOQUELL Z has just been launched and represents an easy-to-use butsophisticated product which enables zone, rooms or buildings to bebio-decontaminated rapidly, reliably and safely using BIOQUELL's hydrogenperoxide vapour technology. The design and engineering of this new product drawsheavily upon BIOQUELL's experience gained from providing a roombio-decontamination service ("RBDS") internationally for the last three years aswell as the latest technical innovations incorporated in BIOQUELL's Clarus rangeof bio-decontamination equipment. This new product has been designed to be soldby BIOQUELL's distributors in volume around the world, due, in large part, toits ease of use. In particular, it uses a patent-protected algorithm to controlthe critical bio-decontamination process to help give reliable, repeatablecycles. We believe that the new BIOQUELL Z will help promote sales of the RBDSservice internationally, particularly in emerging markets in Asia, as we havealready seen that bio-decontamination service promotes bio-decontaminationequipment sales and vice versa; and a number of clients now take both. Demand continues to increase for the RBDS service and, in addition to the US andEurope, BIOQUELL has deployed teams in recent months as far away as Taiwan andAustralia. We anticipate that during 2007 demand for RBDS will increase, in partdue to the overseas RBDS licensees we are in the process of signing up; theselicensees are beginning to promote RBDS and the BIOQUELL Z in their territories.Healthcare and "superbugs". We continue to carry out work for hospitals in Europe and North America, andcontinue to add to our expertise in deploying BIOQUELL's technology in thedemanding and complex hospital environment. We have recently developed new, highspeed catalytic conversion equipment which enables us to sterilize a hospitalroom in approximately two hours (reduced from some four hours). We believe thatthe shortened cycle times for hospital side rooms will assist significantly theadoption of the Group's technology in the healthcare sector. We are also continuing research into the use of BIOQUELL's technology to reducethe level of "superbug" environmental contamination and the associated rate ofHospital Acquired Infection ("HAI"). We remain convinced that the presentationand publication of ongoing high quality research is the best way of educatingand influencing healthcare professionals working in the field of "superbugs" onthe merits of BIOQUELL's technology. The level of work we undertake forhospitals to counter "superbugs" or HAI continues to increase; however, thehealthcare market is conservative and relatively slow to adopt new technologies. The "superbug" problem continues to increase. Hospitals in North America andEurope are continuing to see increasing levels of the new hyper-virulent strainof Clostridium difficile ("C.diff"), PVL toxin producing MRSA and multi-drugresistant Acinetobacter. In the US substantial litigation-related settlementsare being seen - with individual settlements in one State of $10 million, $22million and $32 million. In addition, 'Pay for Performance' in the US is beingextended during 2008 which, in essence, is likely to result in the US governmentfunded Medicare and Medicaid not paying the full costs associated with patientscontracting certain "superbugs" in healthcare facilities. This would cost manyUS hospitals substantial sums. In addition, based on previous analogousdevelopments it is likely that the private sector health insurers will adopt asimilar no-payment, or reduced payment, regime for costs associated withhospital acquired infection. We believe that the new BIOQUELL Z will achieve significant levels of sales intothe healthcare sector, in particular in markets such as France where there iscurrently little appetite for outsourcing or service provision. We also expectthat the sale of the BIOQUELL Z will help develop BIOQUELL's relationships withhospitals which, in turn, will also help promote the sale of BIOQUELL's RBDSservice for outbreaks or the bio-decontamination of large, complex facilitiessuch as Intensive Care Units. In short, we are positioning the Group so thathospitals contact BIOQUELL in the case of a "superbug" outbreak or endemicproblem; and we are starting to roll this strategy out internationally. The Group's overseas sales and service offices in France and the US achievedstrong growth in 2006 and made important contributions to Group profitability.They also help us gain direct visibility as to market developments. Weanticipate that the BIOQUELL Z will enable these international subsidiaries toincrease further their revenues. Defence We are seeing increasing interest from the defence sector in the Group'shydrogen peroxide vapour bio-decontamination technology - particularly inrespect of remediation of sensitive electronic equipment following biological orchemical agent attack. We intend to pursue these defence-related opportunitiesduring 2007 and anticipate responding, with a US partner, to the forthcomingRequest For Proposals from the US Government's Department of Defense for a JointMaterials Decontamination System. MDH Defence, the Bio-decontamination division's defence business, has a currentproduct range based around specialist CBRN (Chemical, Biological, Radiologicaland Nuclear) filtration and environmental control for military vehicles (andother military assets). Increasing concern over biological, chemical or dirtybombs has caused an increased level of interest in CBRN technologies. At thesame time many of the vehicles deployed in Iraq or Afghanistan have eitherproven to be poorly equipped to stand up to explosive devices and/or have nocrew cooling. Over the last five years MDH Defence has redesigned its range ofproducts and services and is now selling sophisticated, specialist equipmentdirectly to a range of international customers including US vehiclemanufacturers. We have also secured a contract to provide crew cooling on aretrofit basis to certain vehicles belonging to the UK's Ministry of Defence. Weanticipate further growth, particularly from the US, in 2007. Laboratory equipment Until 2003 the laboratory division, with the Astec Microflow range of equipment,had the highest business segment turnover in the Group - but had the lowestmargins. Over the last four years we have deliberately reduced the size of thisbusiness, focussing on retaining profitable business with strategicallyimportant customers as opposed to competing for market share irrespective ofmargin. We have also been aggressively taking costs out of products andassociated product support. In 2006, notwithstanding the strength of sterling wesaw the export sales from this business segment increase, largely due to thesuperior technology and service associated with the Group's laboratoryequipment. We also saw an improved net contribution from this division in 2006and we anticipate that this improved trading will continue, although we are notexpecting significant levels of growth. Service and EBDS The Group's after sales service and Equipment Bio-Decontamination Service (EBDS)improved its profitability in the year although revenues remained broadly flat.We continue to focus on more profitable accounts and are avoiding marginallyprofitable business. On certain pharmaceutical sites the Group's unique EBDSservice helps to secure large, higher margin contracts. Although historically the Group's Service business provided after sales serviceand support to the Group's lower margin laboratory equipment clients, we arealso beginning to see improved returns due to the increased proportion ofrevenues associated with the Group's higher margin bio-decontaminationequipment. We anticipate that these higher margin revenues will continue togrow, in part due to the increased volume of Clarus equipment in the field andalso due to increased demands for training as the BIOQUELL Z starts to takemarket share. In addition, we are beginning to bio-decontaminate equipment forthird parties at our Andover facility. Wound Healing Extensive development work continues with BIOQUELL's wound healing technology.The pre-production model is substantially complete and the productionengineering and optimisation of the consumables, accessories and principal unitis underway. Following discussions with the relevant UK regulators, we are modifying theapproach we are taking to obtain regulatory approval for the Group's woundhealing technology. In summary, we have decided to consolidate two clinicaltrials into one and have started preparing the necessary documentation. This hasthe advantage of reducing the costs of the clinical trials and should alsoshorten the timetable for regulatory approval, although we have already lostseveral months as a result of our protracted discussions with the UK regulatoryauthorities. The UK regulatory environment for clinical trials appears to havebecome significantly more demanding over the last year and this has had aconsequential effect on BIOQUELL's overall clinical trial and regulatoryapproval timetable. The chronic wound market which BIOQUELL is planning to target with itstechnology is substantial, international and growing, due in large part to theageing population. BIOQUELL is clear on the optimal route to market for the UKbut has yet to determine the best route for other markets including the criticalUS market. However, before routes to market are planned and, as appropriate,partners selected, it is important for BIOQUELL to complete a successfulRandomised Controlled Trial (with the appropriate regulatory approvals) todemonstrate irrefutably the efficacy of BIOQUELL's wound healing technology. Weanticipate that this research, and the development of BIOQUELL's wound healingequipment, should be completed in 2007. Regulatory The Group is spending more time interacting with international regulatory bodiesaround the world which in large part reflects the growing complexity of itsproducts and the increasingly global nature of its sales and marketing. It isclear that regulatory issues will continue to represent an important issue forthe Bio-decontamination division and the Group is looking to increase the sizeof its team dealing with such regulatory affairs. TRAC division OverviewThe Group's testing service businesses have been positioned under the TRAC -Testing, Regulatory and Compliance - divisional brand. The division was formedin October 2005 to include Cape, EMC Projects, the two acquired businesses (TRLCompliance and KTL) and the recently formed KTL Inc. During 2006 significantwork was undertaken in melding the five separate businesses into a coherent andeffective division, with a particular focus on winning large contracts fromsubstantial multi-national groups. This integration work is ongoing but alreadysignificant progress has been made with some large contracts. In addition, theproperty consolidation started following the acquisitions in late 2005 is welladvanced. Critically, most of TRAC's businesses are primarily involved in thetesting of new products or devices in the product development stage - and littlework is related to clients' actual manufacturing processes (which for manyproducts is often carried out in the Far East). TRAC effectively has threecentres of excellence in Malvern (EMC), Hull (telecoms) and Warwick(environmental). EMCElectromagnetic compatibility ("EMC") remains a major cause of concern forregulators as well as large aerospace and military companies. Simplisticallyelectronic devices can give out or can be susceptible to electromagneticradiation which can cause devices to interact and/or malfunction. As a resultspecialist EMC testing is needed and such testing is particularly onerous formilitary and aerospace equipment. Over recent years the scale of this testinghas increased with new activities such as lightning testing or testing at higherfrequencies increasing the turnover of the Group's businesses. The costs ofpurchasing such specialist testing equipment is high and as a result there aresignificant barriers to entry as such costs make it difficult for the smallerEMC laboratories to fund the investment in such new technology or find thenecessary trained and skilled testing engineers. TRL Compliance Limited is the TRAC division's principal EMC testing businesswhich is moving its headquarters to Malvern. The Malvern facilities comprise anEMC centre of excellence with state-of-the-art equipment including seven highcapacity EMC chambers including one which can accommodate larger vehicles suchas main battlefield tanks. The Malvern site is equipped for the new EuropeanMilitary EMC standard which is expected to be published in 2007. TRL Complianceaddresses the EMC market in the North of England via its facilities inLancashire which, in addition to EMC testing, also provide specialist ATEX andDSEAR testing for explosive atmospheres. EMC Projects Limited, located close toRingwood, Hampshire covers the important South of England market which includesa number of aerospace groups. Over recent months there has been increasinglevels of collaborative work between TRL Compliance and EMC Projects relating tothe optimal way of addressing the EMC market in the UK. TRAC's EMC business experienced strong growth in revenues from the militaryaerospace sector with TRL Compliance's new facilities in Malvern alreadyachieving high utilization rates. With an increasing proportion of modernmilitary and aerospace equipment linked to electronic devices, we anticipatecontinued strong growth in EMC-related revenues in 2007. Telecoms KTL Limited ("KTL") is headquartered in Hull. (The business was originally theKingston Telecommunications test laboratory.) KTL has worldwide expertise in abroad range of analogue and digital telecoms testing to ensure interoperability- essentially the ability of the telecoms device to communicate successfullywith the telecoms network without causing interference. In addition, KTL hasinternationally recognised expertise in DSL technology - digital subscriber line- which enables high speed, high capacity broadband internet access to betransmitted down conventional copper wire telephone lines which are installed inmost houses in Europe and North America. Given the significant increase inbroadband internet access globally, KTL continues to carry out a high volume ofDSL testing. This work is being extended by new DSL standards - including ADSL,ADSL2+ and VDSL - which will increase data transmission speeds and capacityresulting in, for example, the download of films or TV programmes over theinternet or to mobile phones. KTL is also looking at other new technologieswhere it can exploit its specialist telecoms-related testing skills includingWiMAX (broadband wireless internet), ZigBee (the use of wireless technology tocontrol industrial and domestic appliances including electronics and lighting)and VoIP (voice over internet protocol, used to facilitate telephone calls overthe internet). In 2005 KTL Inc was established with its unique digital testing facilities inSilicon Valley, California. KTL Inc draws upon KTL's telecoms expertise, with aparticular focus on DSL, and sells specialist testing services to hardwaremanufacturers based in Silicon Valley. Although we experienced growth from KTLInc in 2006, this was somewhat behind our own estimates and we have recentlyadjusted the management team, equipment range and strategic direction of KTL Incin order to help ensure that the business is well positioned for growth in 2007. Environmental Cape Engineering is the Group's original testing business, headquartered inWarwick and less than one hour's drive from TRL Compliance's headquarters inMalvern. Environmental testing comprises vibrating, heating and otherwiseexerting environmental stress on components or products. Environmental testingtends to require larger facilities than EMC or telecoms testing and is in manyrespects a more mature business. However, the high replacement costs of theseassets and the requisite expertise to "drive" them represents a substantialbarrier to entry. Cape's facilities at Warwick comprise an environmental centreof excellence able to provide substantially all of the specialist environmentaltests required by clients. In addition, Cape has a specialist environmentaltesting facility at Wimborne (some 10 miles from EMC Projects) in the South ofEngland which is co-located on the facilities of a large aerospace group. Capealso provides 'Cape-on-Call' where clients are able to call upon Cape'sspecialist testing experts to assist at the clients' facilities. Although environmental testing does not benefit from the same regulatory driverswhich tend to increase the underlying demand for EMC and telecoms testing, it isclear that most clients who require EMC testing will require environmentaltesting - and vice versa. Accordingly TRL Compliance, EMC Projects and Cape areworking extremely closely to maximise the revenue potential of their respectiveclient bases - particularly the large, multinational military aerospace groups -assisted by TRAC division marketing campaigns. During the year Cape has increased the volume of captive, outsourced work aslarge engineering groups have continued to close down their test facilities andplace their testing requirements with Cape. Given the high fixed costs of Cape,we anticipate that the higher baseline load of work should increase theprofitability of Cape during 2007. N.M.T. AdamsChief Executive OPERATIONS AND FINANCE REVIEW Finance and control The Group continues to grow in size and complexity, including an increasingproportion of turnover generated overseas. Mindful of this we have a rollingprogramme of investment in new systems and hardware to ensure the managementteams and Head Office are provided in a timely manner with the key indicatorsused to monitor the trading performance of each business. We have also strengthened our accounting capabilities in the US as BIOQUELL Inccontinues to grow and represents an increasing large proportion of the Group'sbusiness. We expect BIOQUELL Inc to grow further in 2007. As a result of the increasing level of US dollar receipts generated by theGroup, from both BIOQUELL Inc, KTL Inc and the direct sale of equipment andservices into the US market by other businesses within the Group, we have lookedcarefully at our foreign exchange hedging strategy. Accordingly, we monitor theforward dollar / sterling rates prevailing in the market at any time. As ageneral policy we seek to hedge all our contracted dollar revenues and asignificant proportion of our anticipated net US dollar receipts, taking intoaccount the prevailing rates in the market. However, the timing of thenon-contracted receipts is not always easy to predict. Further, the significantreduction in the value of the US dollar over the last twelve months has forcedus to consider a number of ways to ameliorate the effect of the relatively weakUS dollar on Group's profitability. For example, we are considering ways ofsourcing more components from suppliers located in the US. Notwithstanding the significant increase in Clarus bio-decontamination revenuesover the year, we expect that the Group will also continue to achieve strongincreases in service-related revenues and accordingly we are looking at the nextstage of our controls / systems investment programme to be linked to certain ofour service businesses. Moreover, the new service systems available in "shrinkwrap" format on the market have greatly improved in functionality andsignificantly reduced in cost over recent years.Cash and working capital We are particularly pleased with the cash collection and working capital profilethat the Group achieved in 2006, resulting in net debt of £0.6 million andgearing of 5% at the year end. We believe that this is as a direct result ofimproving financial control across the Group as well as being testimony to thequality of the Group's products and services: in short, clients tend to pay ontime if they are happy with the product or service. Focus on cash collectionremains high and already in 2007 the Group has been in a net cash positiveposition on a number of occasions. We are mindful that we have some largeinvestment programmes including the move of the Andover facilities, thecompletion of the research and development programme for the new wound healingtechnology and the completion of the moves within TRAC. However, we expect to beable to complete such investments comfortably within our overdraft limits.Facilities for the Bio-decontamination division The headquarters of the Bio-decontamination division and the PLC offices arelocated in Andover on a site which is over 40 years old - and where we only useapproximately half of the space. We have started negotiations with our landlordto, in summary, move approximately half a mile to a smaller and more modern sitewhich would be renovated to fulfil BIOQUELL's specialist requirements. Thereshould be minimal net increase in rent due to the reduced size of the newbuilding offsetting the increased price per square foot. Following this move theBio-decontamination division will be located in a facility which isappropriately equipped and significantly more efficient, both in terms ofmanagement and the environment. Given the increasing level of US defence orders we are winning - and theincreased number of US defence-related quotations and proposals we aresubmitting - there are a number of strong commercial reasons for BIOQUELL toopen a manufacturing facility in the United States. A detailed feasibility studyis being prepared. B.M.BodekerChief Operating Officer and Finance Director Consolidated income statementfor the year ended 31 December 2006 -------- --------- --------- Notes 2006 2005 £'000 £'000 -------- --------- ---------Revenue 25,238 17,220Cost of sales (15,521) (10,925)------------------------------- -------- --------- ---------Gross profit 9,717 6,295 39% 37% -------- --------- ---------Operating expenses: (2,952) (3,118)Sales & marketing cost------------------------------- -------- --------- ---------Administration costs before share based paymentsand non-recurring inventory write off (3,922) (2,507) Share based payments (160) (196)Non-recurring inventory write off on business - (101)disposal ------------------------------- -------- --------- ---------Administration costs (4,082) (2,804)R&D and Engineering costs (1,362) (767)------------------------------- -------- --------- ---------Profit/(loss) from operations 1,321 (394)------------------------------- -------- --------- ---------Finance costs 3 (164) (100)Pension scheme net interest (7)------------------------------- -------- --------- ---------Profit/(loss) before tax 1,157 (501)Tax 4 4 177------------------------------- -------- --------- ---------Profit/(loss) for the year 1,161 (324)------------------------------- -------- --------- ---------Profit/(loss) per share - basic 5 2.9p (0.8)p- diluted 5 2.6p (0.8)p------------------------------- -------- --------- ---------All amounts are derived from continuing operations Consolidated statement of recognised income and expensefor the year ended 31 December 2006 2006 2005 £'000 £'000 --------- ---------Net profit/(loss) for the year 1,161 (324)Actuarial gain/(loss) on defined benefit pension scheme 56 (57)Exchange differences on translation of foreign operations (225) 105-------------------------------------- --------- ---------Total recognised (expense)/income since last annual report 992 (276)-------------------------------------- --------- --------- Consolidated balance sheetAs at 31 December 2006 2006 2005 Notes £'000 £'000Non-current assets: 730 665Goodwill 6,108 5,666Other intangible assets 3,596 3,263Property, plant & equipment------------------------------- -------- --------- --------- 10,434 9,594 -------- --------- ---------Current assets: 1,415 2,147Inventories 5,570 5,573Trade and other receivables 100 55Deferred tax 306 113Cash and cash equivalents------------------------------- -------- --------- --------- 7,391 7,888 -------- --------- ---------Total assets 17,825 17,482------------------------------- -------- --------- ---------Current liabilities: (4,072) (4,451)Trade and other payables (205) (30)Obligations under finance leases - (1,189)Bank overdraft (1,136) (820)Provisions------------------------------- -------- --------- ---------Net current assets 1,978 1,398Non-current liabilities (955) (847)Total non-current liabilitiesTotal liabilities (6,368) (7,337)------------------------------- -------- --------- ---------Net assets 11,457 10,145------------------------------- -------- --------- ---------Equity 6 4,069 4,032Share capital 7 10,506 10,393Share premium account 8 525 365Equity reserve 9 255 255Capital reserve 10 (274) (31)Translation reserve (3,624) (4,869)Retained earnings------------------------------- -------- --------- ---------Equity attributable to equity holders of the parent 11,457 10,145------------------------------- -------- --------- --------- Consolidated cash flow statementfor the year ended 31 December 2006 2006 2005 £'000 £'000 --------- ---------Net cash from operating activities 3,505 1,691------------------------------ --------- ---------Investing activitiesProceeds on disposal of property, plant & equipment 20 46Purchases of property, plant & equipment (933) (1,192)Expenditure on product development (1,031) (1,182)Acquisition of trade and assets - (364)------------------------------ --------- ---------Net cash used in investing activities (1,944) (2,692)------------------------------ --------- ---------Financing activitiesProceeds on issue of ordinary shares 150 124Repayment of borrowings (20) (25)Repayment of obligations under finance leases (132) (35)------------------------------ --------- ---------Net cash (used in)/from financing activities (2) 64------------------------------ --------- ---------Net increase/(decrease) in cash & cash equivalents 1,559 (937)------------------------------ --------- ---------Bank overdraft at beginning of year (1,076) (139)Effect of foreign exchange rate changes (177) -Bank cash/(overdraft) at end of year 306 (1,076)------------------------------ --------- --------- Notes to the consolidated financial statements 1. Basis of PreparationThe financial information set out in the preliminary announcement does notconstitute statutory accounts within the meaning of Section 240 of the CompaniesAct 1985, but is derived from those accounts. While the financial information inthis preliminary announcement has been prepared in accordance with InternationalFinancial Reporting (IFRS), this announcement does not itself contain sufficientinformation to comply with IFRS. The IFRS accounting policies applied in respectof the current and prior years have previously been disclosed in the Group'sAnnual Report for the year ended 31 December 2005. Statutory accounts for theyear ended 31 December 2005 have been delivered to the Registrar of Companies.Those for the year ended 31 December 2006 will be delivered following theCompany's Annual General Meeting. The statutory accounts for the year ended 31December 2006 will be despatched to shareholders by 30 March for approval at theAnnual General Meeting on 29 May 2007. The auditors have reported on theseaccounts - their reports are unqualified and did not contain statement underSection 237(2) or (3) of the Companies Act 1985. 2. Business and geographical segmentsFor management purposes, the Group is currently organised into two divisions -Bio-decontamination Solutions and Testing, Regulatory and Compliance. Thesedivisions are the basis on which the Group reports its primary segmentinformation. Segment information about these businesses is presented below Year ended 31 December 2006 Bio- Testing, Consolidated decontamination regulatory & compliance £'000 £'000 £'000----------------------- ------------ ----------- -----------RevenueTotal revenue 14,607 10,631 25,238ResultSegment result 749 913 1,662----------------------- ------------ ----------- -----------Unallocatedhead office costs (341) -----------Profit from operations 1,321Finance costs and pensionnet interest (164) -----------Profit before tax 1,157Tax 4 -----------Profit for the year 1,161 =========== Other information----------------------- ------------ ----------- -----------Capital additions 1,250 1,278 2,528Depreciationand amortisation 969 662 1,631----------------------- ------------ ----------- ----------- Notes to the consolidated financial statementsfor the year ended 31 December 2006 continued 2. Business and geographical segments continued Balance sheet as at 31 December 2006 Bio- Testing, Consolidated decontamination regulatory & compliance £'000 £'000 £'000---------------------- ------------- ----------- -----------AssetsSegment assets 11,558 6,196 17,754 ------------- ----------- -----------Unallocatedcorporate assets 71 -----------Consolidated total assets 17,825 =========== LiabilitiesSegment liabilities (2,409) (2,814) (5,223) ------------- ----------- -----------Unallocatedcorporate liabilities (1,145) -----------Consolidatedtotal liabilities (6,368) =========== Year ended 31 December 2005 Bio- Testing, Consolidated decontamination regulatory & compliance £'000 £'000 £'000---------------------- ------------- ----------- -----------RevenueTotal revenue 11,483 5,737 17,220ResultSegment result (309) 795 486---------------------- ------------- ----------- -----------Unallocatedhead office costs (880) -----------Loss from operations (394)Finance costs (107) -----------Loss before tax (501)Tax 177 -----------Loss after tax (324) =========== Other information---------------------- ------------- ----------- -----------Capital additions 1,642 1,909 3,551Depreciationand amortisation 1,021 371 1,392---------------------- ------------- ----------- ----------- Notes to the consolidated financial statementsfor the year ended 31 December 2006 continued 2. Business and geographical segments continued Balance sheet as at 31 December 2005 Bio- Testing, Consolidated decontamination regulatory & compliance £'000 £'000 £'000----------------------- ------------- ----------- -----------Assets ------------- ----------- -----------Segment assets 12,018 5,362 17,380 ------------- ----------- -----------Unallocatedcorporate assets 102 -----------Consolidatedtotal assets 17,482 =========== Liabilities ------------- ----------- -----------Segment liabilities (4,083) (2,273) (6,356) ------------- ----------- -----------Unallocatedcorporate liabilities (981) -----------Consolidatedtotal liabilities (7,337) =========== Geographical segmentsThe Group's Bio-decontamination equipment is manufactured within the UK and soldinto the UK, Europe and Rest of World markets. The Testing, Regulatory andCompliance segment offers services from bases within the UK and the USA.The following table provides an analysis of the Group's sales by geographicalmarket, irrespective of the origin of the goods or services: Sales revenue by geographical market Year ended 31 Year ended 31 December 2006 December 2005 £'000 £'000--------------------------------- ----------- ----------- UK 14,822 10,727Rest of Europe 3,368 2,520Rest of World 7,048 3,973--------------------------------- ----------- ----------- 25,238 17,220--------------------------------- ----------- ----------- Notes to the consolidated financial statementsfor the year ended 31 December 2006 continued 2. Business and geographical segments continued The following is an analysis of the carrying amount of segments assets, andadditions to property, plant and equipment and intangible assets, analysed bythe geographical area in which the assets are located: Carrying amount of segment assets Additions to property, plant & equipment and intangible assets Year ended 31 Year ended 31 Year ended 31 Year ended 31 December 2006 December 2005 December 2006 December 2005 £'000 £'000 £'000 £'000------------------- ---------- ---------- ---------- ---------- UK 15,521 15,480 2,342 3,085Rest of Europe 932 869 9 3Rest of World 1,372 1,133 177 463------------------- ---------- ---------- ---------- ---------- 17,825 17,482 2,528 3,551------------------- ---------- ---------- ---------- ---------- 3. Finance costs -------- -------- 2006 2005 £'000 £'000 -------- --------Interest on bank loans and overdrafts 147 83Interest on obligations under finance leases 24 6Dividend payable on 7.5% preference shares 11 11Fair value gains on hedging (18) - -------- -------- 164 100 -------- -------- 4. Tax -------- -------- 2006 2005 £'000 £'000 -------- --------Current tax credit (41) 177Deferred tax charge 45 - -------- -------- 4 177 -------- -------- Corporation tax is calculated at 30% (2005: 30%) of the estimated assessableprofit for the year. Taxation for other jurisdictions is calculated at the ratesprevailing in the respective jurisdictions. Notes to the consolidated financial statementsfor the year ended 31 December 2006 continued 4. Tax continued The charge for the year can be reconciled to the profit per the income statementas follows -------- -------- 2006 2005 £'000 £'000 -------- --------Profit/(loss) before tax 1,157 (501) -------- --------Tax at the UK corporation rate of 30% (2005: 30%) (347) 150Adjusted for:Tax effect of expenses not deductible in determining taxable (44) (92)profitEffect of accelerated capital allowances not previously 265 -recognisedTax effect of utilisation of tax losses not previously 109 76recognisedUtilisation of tax losses brought forward 19 70R&D tax credit 95 (44)Tax effect of different tax rate of subsidiaries operating inother 2 17jurisdictionsDeferred tax not recognised on other timing differences (54) -Prior year adjustment (41) - -------- -------- 4 177 -------- -------- 5. Earnings per share The calculation of the basic and diluted earnings per share is based on thefollowing data: Earnings Year ended 31 Year ended 31 Dec 2006 Dec 2005 £'000 £'000Earnings/(loss) for thepurposes of basic earningsper share being netprofit/(loss) attributableto equity holders of theparent 1,161 (324) ========== =========== Number of shares Year ended 31 Year ended 31 Dec 2006 Dec 2005Weighted average number ofordinary shares for thepurposes of basic earningsper share 40,495,439 40,225,216 ----------- ------------Effect of dilutive potentialordinary shares: 3,707,000 -- share options ----------- ------------Weighted average number ofordinary shares for thepurposes of diluted earningsper share 44,202,439 40,225,216 =========== ============For a profit making company with outstanding share options, net profit per shareis decreased by the exercise of share options. Therefore diluted earnings pershare are calculated by including 'live' share options in the denominator. Notes to the consolidated financial statementsfor the year ended 31 December 2006 continued 6. Share capital 2006 2005 Number £'000 Number £'000 --------- ------- --------- -------Authorised 55,947,780 5,595 55,947,780 5,595Ordinary shares of 10p eachRedeemable deferred ordinary sharesof £1 each 255,222 255 255,222 255 --------- ------- --------- ------- 5,850 5,850 --------- ------- --------- -------Called up, allotted and fully paidOrdinary shares of 10p each 40,694,545 4,069 40,320,220 4,032 --------- ------- --------- ------- 4,069 4,032 --------- ------- --------- ------- During the year the Company issued a total of 374,325 ordinary shares of 10peach for £150,000 on the conversion of options under the executive share optionschemes, which is being used to provide additional working capital. 7. Share premium account £'000 ------------Balance at 1 January 2005 10,285Premium arising on issue of equity shares 108--------------------------------------- ------------Balances at 31 December 2005 10,393Premium arising on issue of equity shares 113--------------------------------------- ------------Balance at 31 December 2006 10,506--------------------------------------- ------------ 8. Equity reserve £'000 -----------Balance at 1 January 2005 169Credit to equity for share-based payments 196---------------------------------------- -----------Balance at 31 December 2005 365Credit to equity for share-based payments 188Debit to equity on exercise of share options (28)---------------------------------------- -----------Balance at 31 December 2006 525---------------------------------------- ----------- 9. Translation reserve £'000 -----------Balance at 1 January 2005 (136)Effects of foreign exchange in the period 105---------------------------------------- -----------Balance at 31 December 2005 (31)Effects of foreign exchange in the period (225)Fair value gain on hedging (18)---------------------------------------- -----------Balance at 31 December 2006 (274)---------------------------------------- ----------- Notes to the consolidated financial statementsfor the year ended 31 December 2006 continued 10. Retained earnings £'000 -----------Balance at 1 January 2005 (4,488)Net loss for the year (324)Actuarial loss on defined benefit pension scheme (57)---------------------------------------- -----------Balance at 1 January 2006 (4,869)Net profit for the year 1,161Actuarial gain on defined benefit pension scheme 56Exercised share options 28---------------------------------------- -----------Balance at 31 December 2006 (3,624)---------------------------------------- ----------- This information is provided by RNS The company news service from the London Stock Exchange