COS.L Regulatory News (COS)

9 July 2019

Collagen Solutions plc

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

Final Results

Notice of AGM

Collagen Solutions plc (AIM: COS), the developer and manufacturer of biomaterials and regenerative medicines for the enhancement and extension of human life, announces its final results for the year ended 31 March 2019.

Financial Highlights

· Group revenue and other income increased by 22% to £4.51 million (2018: £3.71 million)*

· Revenue excluding other income grew 18% to £4.15 million (2018: £3.50 million)

· Adjusted LBITDA (before separately identifiable items): £1.22 million (2018: £1.71 million)*

· Cash balances at 31 March 2019: £1.68 million (2018: £5.02 million)

*prior year reclassification - see note below

Operational Highlights during FY 2019

· Secured 29 customers and 16 new customer agreements

· Grew our North American business by 72% and our development business globally by 76%

· Our development business accounted for 33% of total revenue

· Signed two blue chip development customers

· Completed CE Mark submission for ChondroMimetic ®

· Signed four ChondroMimetic® licence and distribution agreements

· Established our tissue business unit in New Zealand and four new tissue customers secured

· Consolidated our New Zealand collagen manufacturing into our plant in Glasgow, realising c£0.20 million in annualised cash savings

· Transitioned fully our former Chinese JV and established two new channel partners, both of which have commenced first sales

Post Period End

· Fundraise: On 5 June 2019 the Company completed a fundraise of £5.96m gross of costs made up of a strategic investment by Rosen's Diversified Inc of £4.18 million, a placing with existing and new investors of £1.25 million and an open offer totalling £0.53 million.

· ChondroMimetic® update: during the last week of the first financial quarter, the Company's Notified Body informed the Company it has completed an initial review of the ChondroMimetic® CE mark application and submitted its first round of questions. The Company has reviewed the questions and is preparing a response in due course. While the Company believes the questions are addressable, with the goal to receive approval in the current financial year, the timing of any additional data that may be required and the response time or additional questions by the notified body is not certain.

· David Evans announced his intention to resign as Chairman effective 9 July due to the progression of his muscle-wasting condition. He will be succeeded by Chris Brinsmead, an existing Non-executive director.

Annual General Meeting

The Company's AGM will be held at 3 Robroyston Oval, Nova Business Park, Glasgow, G33 1AP on 28 August 2019 at 11:00am.

*A disclosure restatement has been made to the 2018 prior year figures reducing other income by £0.12 million relating to R&D tax credits from the UK SME Scheme and includes these as a credit within taxation rather than other income. The current year equivalent amount is £0.15 million.

Jamal Rushdy, Chief Executive Officer of Collagen Solutions, commented: "On behalf of the Board and management team, we are pleased to report a successful year, delivering on the priorities we set out to accomplish. With a substantial increase in our contract product development business, which will lead to higher value contract manufacturing, we have demonstrated progress moving up the value chain. We also successfully consolidated our collagen operations into Scotland and enabled our New Zealand team to focus on a new, exciting tissue business opportunity. Furthermore, we made good progress preparing for the launch of ChondroMimetic® with new distributors and recent feedback from our notified body has given us a clearer path to approval, subject to further dialogue with the Notified Body and advisors as to scope and timing of next steps. Finally, we are pleased to welcome our newest strategic investor, Rosen's Diversified Inc, anchoring our successful £6m fundraise last month.

"Lastly I would like to thank David Evans for his trust, support and guidance over the last several years. On behalf of the Company we wish him well and will miss him greatly."

Enquiries: 

CHAIRMAN'S STATEMENT

I am pleased to present Collagen Solutions' annual report and accounts for the year ended 31 March 2019.

I noted last year that I anticipated the 2019 financial year would be a significant year of growth and change, following a difficult 2018 financial year. I am pleased to report that business grew by 18% in the year and our financial performance improved both versus the prior year and market expectations.

Post year end a successful fund raise and strategic investment completed on 5 June 2019 which I believe has put us in a strong position to continue to grow.

Overview

Our Board and management team have continued to make positive progress delivering 29 new customers and 16 new customer agreements. Growth has been in spite of the expiration of a historical supply agreement to a South Korean customer that is working down high inventory levels, and a temporary withdrawal of one customer's tissue product. The latter customer has just recently had its revised product approved by the FDA. The growth despite this temporary setback has enabled us to de-risk the overall business and reduce our reliance on our top 10 customers.

We have continued to put in place the clear organisational structures and initiatives to drive our strategy, which is to build a leading global regenerative biomaterials business based on a core supply, development and manufacturing platform, enhanced by development of our own novel products such as ChondroMimetic® across a range of clinical indications.

As a Board, we also understand that the success of the Company as a whole is only possible because of the dedication and hard work of our employees. This year we have asked more of them than ever before, and on behalf of the Board I would like to acknowledge the huge effort delivered by our colleagues.

We have also managed to increasingly attract new high calibre hires who all bring something new to the Company and will help us to build the solid platform required to build our value for the future.

Financially during the last quarter of the year the core business was profitable at EBITDA level; a significant milestone for us. We will continue to make losses and burn cash for a couple of years as we require continued investment in several of our growth initiatives including the commercialisation of ChondroMimetic® and to repay the Norgine Ventures debt. However, with this important inflection in our core business and the fund raise we can be more confident about the stability of our financial foundations.

Operationally we delivered the synergies from consolidating manufacturing from New Zealand into Glasgow. This allowed us to refocus the team in New Zealand on expanding our tissue offering and customer base, which they have executed well.

Strategy - Creating Value for the Future

The Company continues to make progress in our strategy to move up the value chain as evidenced by the transition of our business from raw materials supply towards development services leading to contract manufacturing, supporting customers as they launch new products based on our innovative biomaterials products and know-how.

We believe our core business is poised for accelerated growth as a number of our existing customers start to approach the launches of their products. Currently most of our customers, but half of our revenue, comes from products that are pre-launch: the 14% by number of our customers that are post launch with their products contribute almost the same in revenue as the 86% of our customers that are pre-launch of their own products.

If these pre-launch products are successfully developed, obtain the requisite regulatory approvals and are launched we will be well-positioned to transition these development projects to contract manufacturing revenue or commercial levels of supply. As such we believe that these contracted customers represent an attractive embedded growth driver as revenues from these contracts as they move to a supply phase are expected to be larger than in the development phase and also repeatable as they are required to fulfil commercial sales.

We continued to pursue our own proprietary product portfolio during the year. In ChondroMimetic®, we see a near-term opportunity to establish and realise revenue. ChondroMimetic® is a collagen-based implant for the treatment of small osteochondral (cartilage and underlying bone) defects and has previously received CE-mark certification under its previous licensors for the treatment of small chondral and sub chondral lesions, with approximately 1,000 units previously supplied into European markets.

While we have not yet received the CE mark for which we submitted an application, we have received initial questions from our notified body and are preparing a response in due course and our plans remain subject to the external regulatory review process, the timing of which is outside our control.

Our other key projects are in wound healing and in bone graft substitutes. Both products have completed their in vitro pre-clinical testing and we are in early stage discussions with potential commercial partners regarding private label distribution and/or licensing for one of these products. These projects have been progressing positively but we plan to further advance the bone graft and wound products only via a commercial partnership.

Post Balance Sheet Fund Raise

I am pleased with the Strategic Investment by Rosen's Diversified Inc ("RDI") that we completed on 5 June 2019. This coupled with the Placing and Open Offer raised gross funds of £5.96million from RDI and new and existing shareholders. We expect the fund raise should improve our chance of reaching profitability with no need for another.

Rosen's Diversified Inc. are a multi-billion dollar, family owned business involved in food production, agrichemicals and distribution. RDI operate the 5th largest beef processing company in the US, the American Foods Group. The strategic investment in Collagen Solutions will provide accelerated access to one of their targeted growth sectors - animal tissue-related biomedical products. The Subscription with RDI is accompanied by a supply agreement with Scientific Life Solutions (a subsidiary of RDI) for the supply of tissue.

Funds will be used to further customer and our own proprietary product development, expand contract manufacturing activities and capabilities and for working capital including the repayment of the Norgine Ventures Bond Facility.

Grants

In January of 2019 we announced an award of a £1.54 million research and development grant across our qualifying projects in our product development pipeline. No grant claims have been made to date. Our ability to claim against this grant going forward will depend upon our R&D project prioritisation.

Our collaborations with various academic and industry partners continue and include our participation in two prestigious European Horizon 2020 consortiums to develop (i) a disease-modifying therapy for Parkinson's which could slow down the progression of the disease rather than offering symptomatic benefits, and (ii) cell-based tissue regeneration techniques.

Board and Management

During the year we delivered on the appointments mentioned in my report last year and Lou Ruggiero our Chief Business Officer and Tom Hyland our Chief Operating Officer both joined the Board on 3 September 2018.

On 5 June 2019, following the strategic investment made through RDI we welcomed Wade Rosen to the Board. Wade is part of the Rosen family and is a successful business leader, entrepreneur, and co-founder of two business-to-business technology companies. Wade currently serves as a Director of RDI, and as Executive Vice President at Scientific Life Solutions, a subsidiary of RDI amongst other directorships. Wade will bring a new dimension to the Board.

Focus for Financial Year 2020 and beyond

This financial year is about delivering the growth and creating the structures that we need to be the business we aim to be in three years' time. We remain ambitious and the agenda for the coming year reflects both the opportunities that we have identified and the associated challenges.

Our key targets for the current year are as follows;

· Financial Performance: Further improvements on financial performance including solidifying core business profitability

· ChondroMimetic®:  Completing ChondroMimetic® CE mark approval, subject to regulatory timings

· Core Business Growth: Unlocking the embedded value in our existing customers, delivering on existing opportunities and building a longer-term revenue stream

· Infrastructure: Building the infrastructure and capabilities that we will need to service the business we will be in three years' time

· Product Portfolio: Creating the right product portfolio for the business moving forward

Outlook

Going into the current year with the fundraise under our belt I believe we are in a strong position; the challenge for us being about continued delivery and unlocking the embedded value in the business to return our shareholders' investments for them.

I noted last year that we were still not quite at the critical mass of revenue that would enable us to weather the storm of the vicissitudes of our customers, and that I thought we were at least two years away from achieving that. This is still the case however with both funding in place and line of sight to some of the contractual arrangements that will drive growth in the medium to long term I believe we are in a much improved position.

Finally, I have taken the decision to step-down as Chairman and from the Board as a result of the relentless progression of my muscle-wasting condition and an inevitable conclusion that I can no longer give 100% to the position and that is not in Shareholders' best interests. I will be succeeded by Chris Brinsmead, one of my fellow Non-executive directors who I am confident will, under his Chairmanship, take the Company to the next level of its development.

On behalf of the Board I would like to once again thank shareholders, staff and partners for their continued support.

David Evans

Non-executive Chairman

8 July 2019

CEO'S STATEMENT

Overview

I am pleased to report double-digit growth and a significant increase in product development revenue, as well as solid execution against our stated priorities for the year.

We made substantial progress towards our goal of creating value by moving up the value chain from a raw biomaterials supplier towards being a trusted full-service partner to our customers by developing and manufacturing innovative regenerative medicine products.

Our core business strengthened as new account acquisition continued to grow at record pace and development revenue substantially increased, representing significant embedded value for future OEM contract manufacturing while diversifying our customer base to mitigate the customer concentration risks we experienced last year.

We successfully executed on our initiatives for the year including our financial performance, product development programmes, commercial and operational initiatives, and improved investor communications.

Finally, we completed key new-hires this year and invested in our global team's development to strengthen the Company's talent base.

Performance

Revenue and other income for the year was £4.51 million, including £4.15 million in sales and £0.35 million in other income. This represents growth of 22% on prior year overall, with 18% sales growth, driven largely by increases in North America and product development revenue.

We added 16 new customer agreements during the year, consistent with the number of agreements in the prior year although at a higher average value. New customer agreements came from all our geographies with five in North America, five in EMEA, and six in Asia Pacific.

Our contract development and manufacturing category posted significant growth of 79% to £1.6 million, representing 39% of revenue overall made up of 33% contract product development revenue and 6% from other sources. We believe this significant amount of contract product development revenue is a positive indicator of future contract manufacturing business as these products move from development to launch phase over the next few years. Our supply business decreased by 2.7% to £2.53 million. This slight decline is mostly due to the expiration of a historical supply agreement to a South Korean customer that is working down high inventory levels and one other customer decline, which was offset by other supply business growth such that adjusted for these losses the supply business more than doubled. Included in this supply business are revenues from our newly established tissue business unit, which has diversified our offering from mostly Australian/New Zealand-sourced bovine pericardium to a wide range of additional tissue products from both porcine and bovine sources including U.S.-based suppliers.

Geographically, revenue from North America increased substantially to £2.63 million (72% growth) mostly driven by new contract product development revenue. Our EMEA region maintained at a similar level to last year at £0.59 million, while Asia Pacific declined by 33% to £0.93 million, entirely driven by the South Korean contract expiration. However, we remain in close contact with this customer and plan to support their growth in the future once their inventory adjusts to the level required for their business.

Growth Initiatives

In anticipation of receiving the CE mark for ChondroMimetic®, we have established distribution partners in selected geographic areas. In the course of the financial year, we secured new distribution partners in Southeast Asia and Europe as well as hired a focused commercial leader with cartilage therapy expertise in Europe. Once we receive CE mark approval this team will be well poised to begin initial human surgical cases with ChondroMimetic®. We are pleased to have just received notice that our Notified Body completed an initial review of the ChondroMimetic® CE mark application. Our team is diligently preparing responses and assessing, in collaboration with our notified body and advisors what, if any, additional information or data may be required as well as the related timing.

We also advanced our other proprietary product technologies, completing the in vitro testing for our bone graft substitute targeted for spinal indications as well as our wound healing products. We believe with this additional data available we are better able to market these technologies and are currently seeking partners to complete the necessary tests and regulatory filings to commercialise these products.

Our commercial organisation delivered several achievements relative to our goals last year. Our aim was to achieve growth across all territories via improved global sales operations processes and leadership, which we achieved net of one outlier related to the expiration of the aforementioned South Korean contract.

We also set out to secure new distribution partners in China, which we accomplished and have realised our first sales from these new partners during the financial year.

Finally, we set a goal to grow and diversify our tissue business, which we did with four new customers as well as new offerings of tissue products and sourcing of porcine as well as equine tissues. 

Operations and Infrastructure

Our major operational initiative in FY 2019 was to restructure our New Zealand operations to consolidate duplicative collagen production operations into our Glasgow, Scotland plant and re-focus the tissue sourcing team in New Zealand into a global tissue business unit.

I am pleased to say we successfully completed this goal with no impact to customer orders and also significantly increased our employee engagement scores in New Zealand while broadening our tissue offering with additional products including porcine and equine sourcing, as well as establishing new U.S.-based supply. We also delivered on our cost synergy goals with over £200k of annualised savings realised.

Finally, our operations team along with our global R&D team were focused on delivering on a number of customer product development and contract manufacturing milestones, which we delivered upon during the course of the year.

Our people

We are pleased that Lou Ruggiero joined us as Chief Business Officer earlier in April 2018, bringing valuable sales experience and strong leadership to the commercial organisation.

As we grow, our organisation is changing rapidly and we remain committed to providing development opportunities for our employees and work with them on individual employee development plans to deliver the required training to allow them to progress within the business.

We value feedback from our employees and carry out periodic surveys and other feedback opportunities to measure employee engagement in a number of areas. We plan to continue to invest in our people so we can fulfill our mission through passionate delivery from our global team.

Conclusion

The management team is excited about our momentum from last year and the opportunities before us. We are focused on delivering continued growth and financial performance for the current fiscal year, and importantly building value over the next several years by successfully delivering on our customer projects and their product launches, growing our more diversified tissue business, capitalising on our geographic expansion, gaining new customers in our core business, and gaining regulatory approval in anticipation of first cases for ChondroMimetic®.

Finally, it is with a feeling of tremendous gratitude that I wish David Evans well as he steps down as Chairman and thank him for his trust, support, guidance and commitment to me and the Company over the last several years.

Jamal Rushdy

Chief Executive Officer

8 July 2019

Consolidated statement of comprehensive income

for the year ended 31 March 2019

Restated (note 6)

Consolidated statement of financial position

as at 31 March 2019

Consolidated statement of changes in equity

for the year ended 31 March 2019

Consolidated statement of cash flows

for the year ended 31 March 2019

Restated (note 6)

NOTES TO THE AUDITED PRELIMINARY ANNOUNCEMENT

1. BASIS OF THE ANNOUNCEMENT

The audited preliminary results for the year ended 31 March 2019 were approved by the Board of directors on 8 July 2019. 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 2019. 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 2019. 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 2019 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 "Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks 2016". In determining the appropriate basis of preparing the financial statements, the Directors are required to consider whether the Company and Group 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 2019 the Group had cash and cash equivalents of £1.68 million and net current assets of £0.96 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 31 March 2022 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, and in particular in view of the post balance sheet fund raise completed on 5 June 2019, 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 12 months from the date of approval of the financial statements. 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 £1,666,269 (2018: £2,569,474) and 324,516,552 (2018: 324,419,433) 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 2019 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 IAS 33.

5. SEPARATELY IDENTIFIABLE ITEMS

1. The release of the contingent consideration provision in the year ended 31 March 2018 relates to the reassessment of the earn-outs payable for the acquisitions of Collagen Solutions LLC and Collagen Solutions NZ Limited.

2. The restructuring costs during the year ended 31 March 2018 relate to the reorganisation of the New Zealand operations as announced in March 2018 and the planned transfer of most production processes to the Glasgow site and also the reorganisation of R&D operations including the relocation of the US facility from San Jose to Minnesota in late 2017. Additional costs and gains relating to the same restructuring in the year ended 31 March 2019 have been included in separately identifiable items.

1. The restructuring costs during the year ended 31 March 2018 relate to the reorganisation of commercial operations including the relocation of the US facility from San Jose to Minnesota in late 2017.

6. PRIOR YEAR RESTATEMENT

A disclosure restatement has been made to the 2018 prior year figures. This restatement reduces other income by £123,977 relating to R&D tax credits from the UK SME Scheme and includes these as a credit within Taxation. This restatement has the effect of reducing other income from £327,213 to £203,236 and increasing the tax credit in the same year from £27,376 to £151,353 for the year ended 31 March 2018. The loss before taxation increased from £2,618,939 to £2,742,916 as a result of this restatement, while the loss for the year was unchanged.

7. SHARE CAPITAL

Ordinary shares

The total number of issued shares at 31 March 2019 was 324,516,522 (2018: 324,516,552). 119,166,429 ordinary shares were issued after the balance sheet date as part of a fund raise completed on 6th June.

Deferred shares

The total number of deferred shares at 31 March 2019 was 500,000 (2018: 500,000). The deferred shares do not confer any voting rights.

Options and warrants

At 31 March 2019 the Company had 28,963,632 (2018: 22,613,632) unissued ordinary shares of 1p each under the Company's share option and warrant schemes, details of which are as follows: