Surgical Innovations Regulatory News (SUN)

16 March 2016

Surgical Innovations Group plc

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

Final results for year ended 31 December 2015

Surgical Innovations Group plc (AIM: SUN), the designer and manufacturer of innovative medical technology for minimally invasive surgery, reports significantly improved financial results for the year ended 31 December 2015. Revenues and margins continue to show encouraging progress, whilst significant reductions in net operating costs, working capital and net indebtedness have been achieved. 

Highlights:

· Revenues up 36% to £5.47m (2014: £4.03m)

· Gross margin improvement in second half of the year (2015: 14.0%, H1: 8.4%, H2: 19.2%)

· Adjusted EBITDA of £0.24m (2014: Adjusted EBITDA loss of £0.05m)

· Inventory reduction programme well advanced (2015: £1.92m, 2014: £4.30m)

· Net cash generated from operations of £1.57m (2014: £0.69m net cash consumed)

· Net indebtedness reduced to £2.26m (2014: £3.33m)

· New Board of directors and key management team in place

· New sales channels and products coming on stream in 2016

Executive Chairman, Nigel Rogers, said:

"In a year of transition for the Company, there have been many positive changes. Relationships with our distribution partners have been strengthened and revenues have returned to growth on solid foundations. Manufacturing and operating costs have been reduced, and working capital has been brought into line with the current needs of what is now a cash generative business. 

"With these changes delivered and a solid platform secured for future growth, we now have a Board and management structure intended to drive the future direction and development of the business. 

"There has been further improvement in performance in the current financial year to date. Although there remain some challenges in building on the improvements delivered in 2015, we look forward with renewed confidence."

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Surgical Innovations Group plc

Chairman's Statement

I am pleased to report an improved trading performance in the second half of the year, and financial results in line with the Board's expectations. In a year of transition for the Company, there have been many positive changes. Relationships with our distribution partners have been strengthened and revenues have returned to growth on solid foundations. Manufacturing and operating costs have been reduced, and working capital has been brought into line with the current needs of what is now a cash generative business.

In the final quarter of the year, the issues of Board composition and management were addressed, and relationships with our bankers were regularised. Overall, trading and prospects have improved substantially during the period, and with the new Board now in place we have a solid platform from which to deliver continued growth in the future.

Brand identity, innovation and global reach

SI is recognised as a provider of high quality products offering surgeons robust, reliable and ergonomic solutions. Our reputation is built upon meeting or exceeding stringent quality and regulatory standards, and designing and manufacturing devices and instruments that fulfil all of the requirements of a demanding customer base. We have an excellent track record in supporting the development of advanced clinical techniques due to the valued input of our Clinical Advisory Board, led by Prof. Mike McMahon.

Through strong relationships with a loyal distribution base in more than 30 countries, we have a global reach that ensures more than 70% of SI branded product is exported. We aim to continue to serve the increasing needs of our marketplace through consultation with clinicians, distributors and procurement specialists, and by building on our strong product portfolio and brand recognition.

Financial Overview

Revenue increased by 36% to £5.47m (2014: £4.03m), with branded product sales up by 42% to £4.18m (2014: £2.95m). The programme of inventory reduction initiated in 2014 was sustained throughout the year with substantial benefits to working capital and debt reduction. There was an adverse impact on reported gross margins due to reduced levels of manufacturing output. The effects of lower manufacturing recoveries and efficiencies was less pronounced in the second half of the year, and we expect this improvement to continue as output increases in the coming year.

Adjusted EBITDA for the full year (being profit before taking account of exceptional costs, interest, depreciation, amortisation and taxation) amounted to £0.24m, which compares favourably with adjusted EBITDA losses of £0.05m for 2014, and of £0.05m for the first half of 2015. The net operating loss for the year was £1.97m (2014: £9.78m) which was stated after taking account of exceptional costs relating to long term debtor provisions, stock provisions, impairment of intangibles and restructuring costs of £1.29m (2014: £8.39m). The net loss and total comprehensive deficit for the year amounted to £2.03m (2014: £9.46m), resulting in a net loss per share of 0.42p (2014: 2.19p).

At the end of the year, Group net indebtedness had reduced to £2.26m (2014: £3.33m). The Group had available cash resources of £0.98m, and was in full compliance with all financial covenants.

People

The transformational benefits delivered in 2015 required strong leadership, hard work and dedication across the entire organisation. Management and staff have been tireless in striving to achieve the financial and commercial objectives which will facilitate improved longer term returns for all of our stakeholders.

I take this opportunity to express thanks to Doug Liversidge CBE for his many years of committed service to the Company as Non-Executive Chairman of the Board.

Chris Rea, who stood down as a director in October 2015, provided the experienced direction, management and financial resources that the Company needed during a particularly difficult period, and deserves both credit and gratitude for his invaluable role.

Finally, I welcome Alistair Taylor and Paul Hardy, who each joined the Board as Non-Executive Directors in January 2016.

Current trading and outlook

There has been a further improvement in performance in the current financial year to date. Revenues are significantly ahead of the corresponding period last year, and the benefits of increased manufacturing output and efficiencies continue to enhance gross margin.

In February 2016, a distribution agreement was entered into with a privately owned group based in the USA to generate sales in additional territories not previously covered. Progress is evident in the development of additional branded products for launch in 2016, and our collaboration on OEM products is also yielding improved results.

There remain some challenges in building on the improvements delivered in 2015, not least in sustaining revenue growth to consistently generate positive returns. We believe that we have the opportunities and resources required to achieve this, and look forward with renewed confidence.

Nigel Rogers

Executive Chairman

16 March 2016

Surgical Innovations Group plc

Strategic report

Strategy

The core strategy of the Group remains the sale of SI branded products within laparoscopic surgery. Within this field, SI has traditionally developed and manufactured devices to address access, manipulation and retraction into and within the abdominal cavity.

Our philosophy of providing cost-effective, quality instrumentation remains a key component of our value-added proposition and our aim is, wherever possible, the development of Resposable devices. These comprise a re-usable element with accessories that are disposable following each procedure. Such devices consistently provide overall cost savings against mainstream disposable alternatives. The Group will continue to concentrate on the development of new and innovative products, but this will be focused on achieving a commercial return.

The Group distributes SI branded products through a network of global dealers in over 30 developed countries. We are committed to our distribution network, and we are focused on strengthening these relationships through excellent customer service and working in partnership to successfully develop the Group's business.

The Group will continue to build strategic alliances with selected partners to design and manufacture OEM products that complement the group's core offer.

During the second half of 2014 the Board implemented a programme of reform to rebalance the business. Focus was redirected towards delivering sustainable revenues with strong cash flows and better margins underpinned by an appropriate cost base. Greater emphasis was also placed on new product introduction ("NPI") procedures, integration of NPI with manufacturing, and continuous improvements in quality and operating effectiveness.

This programme has delivered significant improvements in the 2015 results, and financial position. The Board continues to believe that this approach will continue to provide greater shareholder value in the long term and has placed the business in a position to exploit opportunities.

Operating and financial review

Revenues

Group revenues increased by 36% to £5.47m (2014: £4.03m) reflecting the rebuilding of distributor confidence following the rapid destocking of the prior year.

*Precision Engineering (formerly Industrial)

SI Brand

SI Brand sales rose by £1.23m (42%) to £4.18m (2014: £2.95m) with the strongest growth areas in our major markets of the UK and US.

The USA is the largest market in the world for laparoscopic surgery, however the Group had previously experienced severe challenges in completing national coverage. In 2015, close attention was focused on stabilising customer service and rebuilding our strong reputation for quality and reliability. With revenues across ten active US states almost doubled to £1.54m in the year, we have recently engaged an additional distributor to cover the remainder of the US.

OEM

OEM sales increased by 51% to £1.24m (2014: £0.82m), primarily due to the launch of the hernia fixation device designed and manufactured for our valued partner, Advanced Medical Solutions Plc.

Precision Engineering (PE)

The Group reported revenue of £0.05m from the final instalment of a feasibility project to develop bespoke on-wing inspection devices with our long standing precision engineering partner, Rolls-Royce (2014: £0.26m). The first phase of this activity is now complete, and we are currently evaluating our participation in phase two activities.

Gross margin

Gross margin for the full year reduced to 14.0% (2014: 29.4%) as a direct consequence of the additional focus on inventory reduction and the resulting benefit to cash generation. In particular, manufacturing activity was significantly reduced in the final quarter of 2014, and continued at the minimum level required to support sales demand not fulfilled from available stock. More than one third of total sales demand in 2015 was satisfied from inventory reduction, which had a substantial adverse effect on manufacturing overhead recovery.

During the final quarter of 2015, volume manufacturing recommenced at more normalised levels, although gradual reductions in inventory continued to be delivered. Gross margin for the second half of the year improved to 19.2% (H1: 8.4%). This improvement is expected to continue throughout 2016, as production to replenish inventory levels is more evenly balanced to customer demand.

Operating expenses

Excluding exceptional items, operating expenses reduced sharply during the year to £1.45m (2014: £2.58m), mainly as a result of substantial cost reduction activity in the final quarter of 2014. The charge for depreciation and amortisation reduced substantially to £0.93m (2014: £1.34m), reflecting the diminution in the carrying value of tangible and intangible assets recognised in the prior year. There were also significant reductions in administrative overheads, including Board costs, insurance and other fixed costs.

Exceptional items

The results for 2015 include further exceptional costs of £1.29m (2014: £8.39m), of which £1.15m were non- cash items (2014: £8.22m). These related to further write-down of long term debtors, inventory and impairment of fixed assets and intangibles reported at the interim stage.

EBITDA and operating loss

The Company achieved a positive adjusted EBITDA (excluding exceptional items) of £0.24m for 2015, against a comparable loss of £0.05m in 2014, and also a similar loss in the first half of 2015. Taking account of the exceptional costs outlined above, and of depreciation and amortisation, the operating loss for the year was £2.03m (2014: £9.46m).

Finance costs

Interest on bank and finance lease obligations for 2015 resulted in interest payable of £0.15m (2014: £0.18m). In 2014, the Company benefited from finance income of £0.14m from the unwinding of discounts on non-current trade receivables that did not recur in 2015.

Taxation

The Group recorded a corporation tax credit of £0.09m (2014: £0.12m) and a deferred tax credit of £nil (2014: £0.26m). In overall terms the Group has substantial tax losses which have cautiously not been recognised and results in an overall effective rate of tax of 4.3% credit (2014: 3.8% credit). During 2015 the Group submitted enhanced Research and Development claims in respect of 2013 and elected to exchange tax losses for a cash refund of £0.09m which was received in January 2016. Further claims in respect of 2014 and 2015 are pending, and have not been recognised.

Intangible and tangible assets

As noted above, during 2014 and the first half of 2015 the Board conducted an impairment review of capitalised product development costs and concluded that an impairment charge of £0.49m (2014: £5.97m) was necessary. As a result, the level of capitalised development costs at 31 December 2015 is further reduced at £1.36m (2014: £2.00m). Research and development expenditure continues to be incurred, and a portion is capitalised in respect of specifically identifiable products amounting to £0.27m (2014: £1.26m) which are due for launch in the current year.

Capital expenditure on tangible assets continued to reflect a policy of required replacement only during the year at £0.17m (2014: £0.34m) and there are no major capex plans currently under consideration.

Working capital

Working capital further reduced by £1.70m to £3.00m (2014: £4.70m). In particular, the strategic drive to focus on cash and to rebalance the business gave rise to a reduction in inventory of 55% to £1.92m (2014: £4.30m), whilst current trade receivables were reduced to £1.30m (2014: £1.28m) despite 36% growth in turnover. Trade creditors reduced by £0.37m to £0.41m reflecting a significant fall in vendor spend on reduced manufacturing activity. This is expected to increase in 2016 in line with the rise in spending on materials to support increased manufacturing activity.

Cash flow and net debt

The Group generated cash from operations of £1.57m (2014: outflow of £0.69m) primarily as a result of the working capital movements described above. Cash used in investment was restrained to £0.45m (2014: £1.60m) resulting in a cash inflow before financing of £1.06m (2014: net outflow of £2.09m).

This inflow was enhanced by the proceeds of the issue of new convertible unsecured loan notes of £0.50m in March 2015. The £3m term loan facility provided by Yorkshire Bank was subject to changes of terms in September 2015, and again in December 2015 which involved early repayments totalling £1.00m and favourable revisions to prospective financial covenants. The remaining balance of £2.00m of the term loan is subject to quarterly repayments of £0.10m during 2016/17, and the remaining balance of £1.30m is due for repayment on 31 October 2017. Its ongoing availability is dependent upon covenant compliance.

At 31 December 2015, total gross indebtedness was £3.24m (2014: £4.01m) and the Company had available cash resources of £0.98m (2014: £0.68m).

Going concern

The Directors have prepared forecasts for the period to March 2017 which assess the ability of the Group to remain compliant with current banking facilities. These facilities comprise a committed £2m term loan and hire purchase liabilities. The commitment of the term loan is subject to compliance with financial covenants which measure profitability, debt service and net worth with measurement starting quarterly from December 2015. Whilst the £2m term loan is due for repayment in October 2017, the directors are satisfied that the financial forecasts indicate compliance with banking covernance and accordingly believe that the Group will be able to secure appropriate banking facilities when required.

Based on the forecasts, the Board has a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. The Board has also concluded that there are no material uncertainties and that the going concern basis should be adopted in preparing these financial statements

Melanie Ross

Group Finance Director

16 March 2016

Consolidated statement of comprehensive income

for the year ended 31 December 2015

Adjusted EBITDA is defined as earnings before interest, taxation, depreciation, amortisation and exceptional items.

Consolidated statement of changes in equity

for the year ended 31 December 2015

Consolidated balance sheet

at 31 December 2015

Notes to the consolidated financial statements

1. Basis of preparation

The financial statements have been prepared in accordance with IFRS as adopted for use by the European Union, including IFRIC interpretations, and in line with those provisions of the Companies Act 2006 applicable to companies reporting under IFRS. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The financial statements have been prepared under the historical cost convention, are presented in Sterling and are rounded to the nearest thousand.

The Directors have considered the available cash resources of the Group and its current forecasts and are satisfied that the Group has adequate resources to continue in operational existence and that there are no material uncertainties casting doubt over the going concern status of the Group. Accordingly, the financial statements are prepared on a going concern basis.

There are no IFRSs or IFRIC interpretations that are effective for the first time for the year ended 31 December 2015 that have had a material impact on the Group. There are no IFRSs or IFRIC interpretations issued but not effective that are expected to have a material effect on the Group.

2. Geographical analysis of revenues

Revenues are allocated geographically on the basis of where revenues were received from and not from the ultimate final destination of use. During 2015 £1,140,000 (20.8%) of the Group's revenue depended on one customers in the SI Brand segment (2014: £836,000 (20.7%)).

3. Earnings per ordinary share

Basic earnings per ordinary share

The calculation of basic earnings per ordinary share for the year ended 31 December 2015 was based upon the loss attributable to ordinary shareholders of £2,033,000 (2014: loss of £9,457,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2015 of 485,070,920 (2014: 431,453,877).

Diluted earnings per ordinary share

The calculation of diluted earnings per ordinary share for the year ended 31 December 2015 was based upon the loss attributable to ordinary shareholders of £2,033,000 (2014: loss of £9,457,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2015 of 485,070,920 (2014: 431,453,877).

Bank loan

The sterling bank loan provided by Yorkshire Bank on 17 November 2014 matures as follows:

· seven quarterly amounts of £100,000 at the end of each quarter commencing Q1 2016, and

· a final payment of £1,300,000 on 31 October 2017.

The bank loan bears interest at 3.5% above LIBOR and is subject to compliance with financial covenants which measure cash flow to debt service, EBITDA, and tangible net worth. The bank loan is secured by a fixed and floating charge over the assets of the Group.

Loan notes 2017

On 17 November 2014 the Company created up to £1,000,000 of fixed rate convertible unsecured loan notes. Also on that date, Mr C J Rea and Getz Bros & Co (BVI) Inc each subscribed for £250,000 of these loan notes and made an irrevocable commitment to subscribe for a further £250,000 each before 31 March 2015, which was subsequently executed. The principal amount of the loan notes, together with accrued interest, is due for repayment on 17 November 2017. The interest accruing on the loan notes was 3% per annum until 17 November 2015, and 7.5% per annum thereafter, the quantum of which totals £51,000 as at the 31 December 2015 and is included in accruals.

As per the resolution passed at the 2015 Annual General Meeting, the loan notes include a conversion option for the noteholder to convert the principal amount and any accrued interest into equity shares. The conversion rate will be the lower of 2.5p or the market price on the day prior to which the noteholder provides notice of their intention to convert.

5. Statutory accounts

The financial information set out in this preliminary announcement does not constitute the company's Consolidated Financial Statements for the financial years ended 31 December 2015 or 31 December 2014 but are derived from those Financial Statements. Statutory Financial Statements for 2014 have been delivered to the Registrar of Companies and those for 2015 will be delivered following the company's AGM. The auditors, KPMG LLP, have reported on those financial statements. Their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under Section 498(2) or (3) of the Companies Act 2006 in respect of the financial statements for 2014 or 2015.

The Statutory accounts will be available on the company's website at www.siggroupplc.com with effect from 16 March 2016 and will be posted to selected shareholders at the end of April. Shareholders wishing to request a copy can contact the company's registered office.