TSL.L Regulatory News (TSL)

28 Sep 2007 07:02

Tissue Science Laboratories PLC28 September 2007 28 September 2007 Tissue Science Laboratories plc (TSL or The Company) Interim Results for the six months ended 30 June 2007 Tissue Science Laboratories plc (LSE: TSL), the medical technology companyspecialising in biologic tissue replacement and repair products, today announcesits interim results for the six months ended 30 June 2007. Highlights • Substantial progress by direct sales team in core US complex hernia market; • First results reported under IFRS; • Revenues increased 21% to £6.4m (H1 2006: £5.3m), and 32% on constant currency basis; o US General Surgery sales increased 68% to $7.4m (H1 2006: $4.4m); • Gross margins unchanged at 68% (H1 2006: 68%) despite significant US dollar weakness; 71% on constant currency basis; • Net loss of £1.9m (H1 2006: £1.8m); • Cash and cash equivalents of £2.6m (December 2006: £4.8m). Post Period End Update • R&D strategic review complete, with proposed spin-out of non-dermal tissue product development into a separate, independently managed and financed company; • TSL to focus on growing the general surgery and other dermal tissue business with operational and administrative overhead base reviewed in line with strategy, resulting in annual savings of £0.7m. Martin Hunt, CEO of TSL, said: "We have made excellent progress in our core general surgery market and ourinvestment in sales and marketing infrastructure is beginning to makesignificant returns. We have now defined a clear strategy for taking thebusiness through its next stages of development which in turn will maximise theopportunity for future shareholder value generation." -Ends- There will be a meeting for analysts this morning at 11.30am. Please contactSarah Richardson at Hogarth Partnership Ltd on 020 7645 3965 for registration orenquiries. Enquiries: TSL plc Tel: 01252 333 002Martin Hunt, Chief ExecutiveDavid Jennings, Finance Director Hogarth Partnership Limited Tel: 020 7357 9477Melanie Toyne-Sewell / Sarah Richardson www.tissuescience.com. CHAIRMAN'S STATEMENT Strategy Overview Since IPO in 2001 the Group has established the unique Permacol(R) manufacturingprocess as a class-leading technology within the rapidly developing biologicimplant market. Our strategy has been to address target markets where ourproduct attributes are well differentiated and where there is clear unmet orpoorly served surgical need. The first products to be developed andcommercialised from our core manufacturing technology have been derived fromporcine dermis and are used in soft tissue repair procedures in general surgery,urology/gynaecology, orthopaedics and in head and facial surgery. We initially approached the market through marketing partnerships with largemedical device corporations and distributors with the necessary sales andmarketing infrastructure required for successful market penetration. Throughthese partners, we demonstrated both the commercial potential and scalability ofour core technology. More recently, however, we have reduced our dependence onsuch partners through the development of our own direct sales team in the USgeneral surgery market. The substantial investment we have made has enabled usto create an appropriately trained, directed and supported sales team in thefield addressing surgeons' needs directly. In turn, Permacol(R) has become asignificant product in the field of complex and recurrent hernia repair, withgrowing key opinion leader endorsement and substantial and increasing annualsales revenues. In addition to deriving these and other pipeline products from porcine dermis,future product opportunities are being developed by applying our proprietarymanufacturing technology to other porcine tissues such as bone, ligament andblood vessels. As announced at our Research and Development Teach-in for analystand investors in April 2007, we have established pre-clinical proof of principlein respect of all three product areas and have identified the initial potentialmarkets and product development pathways for each. In addition, as we havedeveloped our understanding of the unique Permacol(R) manufacturing process, webelieve that the application of our core technology is not limited to thesetissues but that there is also potential for other porcine tissues to beexploited in the same way. Considering the rich potential of both our current and future product platform,and taking into account the prevailing dynamics in our existing markets and theinvestment required to maximise the potential returns from both our existingproducts and future opportunities, the Board has been working closely with bothmanagement and external advisors to consider the strategic options available.The outcome of this strategy review is as follows: Proposed Spin-Out Of Non-Dermal Product Development Whilst we believe that there is a broad consensus among our investors and thewider financial and scientific communities that there is much potential valuefor our new non-dermal tissues (bone, ligament, vascular) in the rapidlydeveloping biologic sector, the investment required to bring these productsthrough the next stages of development and ultimately to commercialisation issubstantial. We believe that the potential value of these projects has effectively beendiscounted by the financial markets because of the longer-term time frame forfuture revenue generation and the associated investment risk. We recognise thatthere is a significantly different investment risk/return profile in respect ofthe new tissues than that of our underlying core dermal product business andthat these elements should be addressed in different ways to maximise futurepotential value of both. The Board therefore proposes to separate the two elements by transferringdevelopment of new tissues into a separate, independently managed and financedcompany. The benefit to TSL will be to free the core business from the futurecost burden of developing these longer term product opportunities, therebyenabling management to focus fully on both existing markets and new applicationsfor the dermal products. A detailed proposal for the spin out of the new companywill be brought forward for shareholder consideration and approval in the nearterm. Core Dermal Products Business We are justifiably pleased with the progress we have made in establishingPermacol(R) in the soft tissue implant market. Through our partners and directsales team Permacol(R) and its related brands have established an excellentreputation for clinical efficacy, safety, product handling and performance inits target applications. We have developed a strong international business witha broad user base in the general surgery and urology/gynaecology markets. Our strategy for the dermal implant business remains focused on growing ourrevenues in the US through our direct sales team. We have increased our salesand marketing group to 46 people, and have achieved strong growth with excellentmargins in the first half of the year. Whilst we remain confident that our product will increase its share of thisimportant market and demonstrate long term superiority over alternativetechnologies, the dynamics of the general surgery market are changing rapidly.It is essential, therefore, that we continue to invest in sales and marketinginfrastructure in order to increase our market share and drive growth in sales.The divestment of the new tissue research and product development from the mainoperational group will allow TSL resources and management to be focused entirelyon developing the dermal business. In addition, TSL will have rights of firstnegotiation on products developed by the new company. As a result of thisreview, the operational and administrative overhead base of the business isbeing realigned to best meet the needs of the business going forward. Postperiod end, we have conducted a reorganisation and reallocation of resources,resulting in annualised cost savings of £0.7m. In conjunction with continuing to grow our core business we shall also seekstrategic opportunities to maximise potential shareholder value from the dermalbusiness. Summary & Outlook The confidence we have in our products and technology is undiminished. Theinvestment we have made in our sales and marketing infrastructure is beginningto deliver excellent returns. The soft tissue repair market is developingrapidly, where the sales growth and margin potential of the biologics isincreasingly recognised. We remain focused on achieving scale and critical massin complex hernia repair, where our clinically proven technology is already wellestablished in this attractive market segment. By adopting the strategy set outabove and focusing on our core business we remain confident that we can achievesignificant value growth for our investors. Patrick PaulChairman INTERIM RESULTS STATEMENT - SIX MONTHS ENDED 30 JUNE 2007 CHIEF EXECUTIVE'S REPORT Sales and Marketing General Surgery - US We have made substantial progress in the first half of the year, with 68% growthto $7.4m (H1 2006: $4.4m) in US ($) general surgery sales over the same periodlast year and sequential growth of 37% over the second half of last year. Despite a further weakening of the US dollar which has impacted our reportedsales and overall gross margins, we are benefiting from the higher margins weare able to earn on our direct sales. In addition, our average unit sellingprice in US has increased as a result of sales of our larger implant sizes. Weanticipate that the increasing proportion of direct sales versus sales ofpartnered products will continue to influence gross margins positively as ourdirect business develops. Our sales and marketing platform continues to develop well with increasedproductivity from our sales team, as their time on territory and experienceprofiles increase. We have achieved significant growth in new accounts in thefirst half with conversions to Permacol(R) as surgeons increasingly recognisethe clinical performance and product advantages that we are able to demonstrateover competing technologies. The general surgery market is dynamic, with recent developments including thelaunch of competitive porcine products by Davol (a division of CR Bard) and theannouncement by LifeCell Inc. of its intention to launch a porcine implantalongside its human cadaver-sourced product, Alloderm. These entrants to themarket are able to deploy significantly greater sales and marketing resourcethan we are currently able to. Nonetheless, we welcome this endorsement of theclinical effectiveness and value proposition that porcine-derived materialsbring to soft tissue repair. We are also pleased with the progress we are makingin this market because of the excellence of our product and the productivity ofour sales team. We believe it is a significant achievement that we have beenable to grow our revenues so rapidly with more limited resource. General Surgery - UK/EU/ROW Sales in the UK were unchanged at £0.7m (H1 2006: £0.7m). In the first quartersales were impacted by budgetary constraints in the NHS at the end of the 2006/2007 financial year. Post period end sales have performed well. Sales through our Continental European and Korean distributors grew in the firsthalf to £0.3m (H1 2006: £0.2m). Post period end, we entered into a distributionagreement for the German market for the first time. New Colorectal Product Work has continued as planned in the development of a new injectable product inthe general surgery market for anal fistula. There are some 125,000 fistulapatients annually in the US alone and, historically, this difficult to treatcondition has been inadequately served by treatment options available tocolorectal surgeons. We are in discussion with the FDA on the regulatory pathwayfor this new product which will be sold through our direct US sales channel onceapproved. Partnered Products Sales to Bard in the first half were $2.8m (H1 2006: $2.9m) and sales increasedover the second half of 2006 by 17% on stronger stocking orders from Bard in theUS. However, we do not anticipate that this trend will continue into the secondhalf of the year, as Bard is continuing to position its in-house productsalongside the established brands it markets for TSL in this application. Zimmer sales in rotator cuff repair to date have been limited by a lack of humanclinical data to support sales efforts. The US marketing study is underway withactive sites and recruitment is 30% complete. In Head and Face surgery, we are now using our US general surgery sales team toaddress the Head and Face market as a cross-selling opportunity to plasticsurgeons who are now increasingly involved in the large abdominal reconstructionprocedures. The Permacol(R) range of products was increased at the beginning ofthe year to include smaller sizes appropriate for this application. Permacol Injection - UBA and Dermal Filler Whilst these products are not a core focus for the business, the injectableproducts remain a feature of business to business development activity. We areactively working with third parties to derive value from these assets. Clinical and Technical Prophylactic parastomal reinforcement clinical studies The interest level in the UK from surgeons wanting to be involved in the studycontinues to be high with 9 sites currently approved to recruit patients and afurther 12 in the process of obtaining local site approval. It is anticipatedthat the study will take approximately 18 months to recruit the 300 patientstargeted for completion of this study. In the US, we are supporting a number of clinical studies in general andcolorectal surgery. These include a US focused prophylactic parastomalreinforcement study to gather rapid data to complement the larger UK study. Other General and Colorectal clinical studies At the moment, we have a number of clinical studies underway in the US. We arealso in discussion with the FDA and key opinion leaders to design other targetedstudies to extend our product indications and gain key competitive advantages inniche surgical areas. Parastomal hernia repair clinical study As a result of NHS constraints and difficulty in obtaining suitable patients atthe participating sites, we have taken the decision to cancel this study andfocus our clinical efforts on the higher priority prophylactic parastomalclinical study. New Tissue Development In April, we updated investors and analysts on the progress we have made in thedevelopment of products from other porcine tissues (bone, ligament and bloodvessel). We have identified the market opportunities and development pathwaysfor each product. We have achieved pre-clinical proof of principle in respect ofeach project and, as outlined, above, will be separating this element of ourbusiness into a separate entity to take these projects forward. In addition, andas discussed as our recent R&D Teach-in in April, we have filed patentapplications covering these new technologies to underpin the technicaladvancements we have made in these areas of biological product development. Summary and Outlook We have made excellent progress in our core general surgery market and ourinvestment in sales and marketing infrastructure is beginning to demonstratesignificant returns. We have now defined a clear strategy for taking thebusiness through the next stages of development which in turn will maximise theopportunity for future shareholder value generation. Martin HuntChief Executive Officer FINANCIAL REVIEW Adoption of International Financial Reporting Standards The financial results for the six months ended 30 June 2007 are the firstresults prepared in accordance with the recognition and measurement principlesof International Financial Reporting Standards ("IFRS"). Prior to these results,the Group prepared its audited financial statements under UK Generally AcceptedAccounting Practices ("UK GAAP"). The results for the six months ended 30 June 2006 and the year ended 31 December2006 included in these interim results have been restated in accordance withIFRS. The impact of the restatement is set out in note 3 in the financialstatements. The principal adjustments relate to the adoption of IAS 32'Financial Instruments: disclosure and presentation' and IAS 39 'Financialinstruments: recognition and measurement'. The effect of the transition on theincome statement for the period ended 30 June 2006 and 31 December 2006 is acharge of £12,000 and £106,000 respectively. The effect of the transition on theopening balance sheet at 1 January 2006 and the balance sheet for the periodended 30 June 2006 and the year ended 31 December 2006 is £48,000,£57,000 and £nil respectively. Revenue Group reported revenues increased by 21% to £6.4m (H1 2006: £5.3m). US dollarsales revenues were translated at an average rate of £1 = $1.97 in the year (H12006: £1 = $1.74). Overall sales growth on a consistent currency basis(translating H1 2007 revenues at the same exchange rate as used for H1 2006) was32%. General surgery revenues in the US grew strongly, increasing by 68% to $7.4m (H12006: $4.4m). General surgery sales in other markets were unchanged at £1.0m (H12006: £1.0m), where growth in our European and Korean markets was offset by aslight decline in UK sales resulting from the impact of NHS budgetaryconstraints in the first quarter. In Urology/gynaecology sales revenues from Bard in the period were $2.8m (H12006: $2.9m), whist sales through our other partners in orthopaedics (Zimmer)and head and facial surgery (Porex) were $0.1m (H1 2006: $0.2m) and $0.1m (H12006: $0.1m) respectively. Gross Margin Gross margins were unchanged at 68% (H1 2006: 68%). There was a significantadverse movement in the £/$ exchange rate over the prior year period, impactingtranslated sales revenues and hence and gross margins in the period by c£0.7m or3%. This adverse movement was offset by improvements in sales mix, as highermargin direct sales increase as a proportion of our total business. Translatingrevenues at the same exchange rate as used for H1 2006, our gross margins wouldhave been 71%. Operating Expenses Selling, distribution and marketing costs increased to £3.4m (H1 2006 £2.7m)reflecting the ongoing strategy to increase investment in our direct US salesand marketing teams. Other administrative expenses were £1.8m (H1 2006: £1.4m), and included one-offcharges of £0.2m in professional fees associated with the review of strategyoptions in respect of the new tissue development projects and other strategicprojects. Investment in research and development, which includes clinical, regulatory andnew product development expenditure, was limited to £1.0m (H1 2006: £1.4m).Costs were incurred principally in respect of product line extensions forPermacol(R) and in progressing the bone, ligament and vascular grafts to thecurrent stage of pre-clinical proof of principle. Net Loss The Group made an operating loss of £1.9m (H1 2006: £1.9m) and a net loss (afterfinance income and expense) of £1.9m (H1 2006: £1.8m), in line with management'sexpectations and previous guidance. Basic and diluted loss per ordinary sharewas 5.6p (H1 2006: 6.2p). Fixed Assets and Capital Expenditure Expenditure on capital items amounted to £0.2m in the period reflectinginvestment in our US infrastructure and development of our operationalfacilities in Leeds. As a result of the proposed spin-out of non-dermal tissue development and theincreasing productivity and production capacity of our existing manufacturingfacilities, the freehold property located at Wakefield is considered to besurplus to the needs of the core dermal business and is currently being marketedfor sale. The asset (and its associated mortgage liability) has therefore beenre-categorised as a non current asset held for sale as required under IFRS. Working Capital Investment in Group working capital in the period increased by £0.4m to £4.5m(December 2006: £4.1m) driven by an increase in inventory of £0.4m in theperiod. This investment was principally to support our US sales team in ourtarget general surgery market. Cash Cash outflow from operating activities in the period was £1.9m (H1 2006: £1.8m).As at 30 June 2007, the Group had cash and cash equivalents of £2.6m (Dec 2006£4.8m). Tissue Science Laboratories plcConsolidated Income Statement for the six months ended 30 June 2007 Note Six months Six months ended ended Year ended 30 June 30 June 31 December 2007 2006 2006 (Unaudited) (Unaudited) £000s £000s £000sContinuing operationsRevenue 2 6,352 5,333 10,522Cost of Sales (2,050) (1,711) (3,401) --------- --------- ---------Gross Profit 4,302 3,622 7,121 Selling, distribution and (3,443) (2,729) (5,910)marketing costsResearch and development costs (1,037) (1,379) (2,269)Other administrative expenses (1,750) (1,382) (2,768) --------- --------- ---------Total administrative expenses (6,230) (5,490) (10,947) --------- --------- --------- --------- --------- ---------Operating loss (1,928) (1,868) (3,826) Finance income 56 103 173Finance expenses (72) (75) (149) --------- --------- ---------Loss before tax (1,944) (1,840) (3,802) Taxation - - 152 --------- --------- ---------Loss for the period (1,944) (1,840) (3,650) ========= ========= ========= Attributable to: ---------- ---------- ----------Equity holders of the parent (1,944) (1,840) (3,650) ========== ========== ========== Earnings per shareBasic loss per share 4 5.6 6.2 12.1Diluted loss per share 4 5.6 6.2 12.1 Tissue Science Laboratories plc Consolidated Statement of Changes in Equity for the Six Months Ended 30 June2007 Share Share Shares Merger Translation Profit Total Capital Premium to be Reserve Reserve & Loss Equity Account issued Account £000s £000s £000s £000s £000s £000s £000sBalance at31 December 2005 2,946 22,075 72 545 - (14,526) 11,112 Changes in equity forthe 6 months ended 30June 2006Exchange differenceson translation of - - - - 30 - 30foreign operationsLoss for the period - - - - - (1,840) (1,840) ------ -------- ------- ------- ------- -------- -------Total recognised gains and losses for the period - - - - 30 (1,840) (1,810) ------ -------- ------- ------- ------- -------- -------Recognition of share based payment charge - - 52 - - - 52Issue of share capital 5 37 - - - - 42 ------ -------- ------- ------- ------- -------- -------Balance at 30 June 2006 2,951 22,112 124 545 30 (16,366) 9,396 ====== ======== ======= ======= ======= ======== ======= Balance at 31 December 2005 2,946 22,075 72 545 - (14,526) 11,112 Changes in equity for2006 Exchange differenceson translation of - - - - 112 - 112foreign operationsLoss for the period - - - - - (3,650) (3,650) ------ -------- ------- ------- ------- -------- -------Total recognised gains and losses for the period - - - - 112 (3,650) (3,538) ------ -------- ------- ------- ------- -------- -------Recognition ofshare based payment charge - - 108 - - - 108Issue of share capital 514 2,172 - - - - 2,686 ------ -------- ------- ------- ------- -------- -------Balance at31 December 2006 3,460 24,247 180 545 112 (18,176) 10,368 Changes in equity forthe 6 months ended 30June 2007Exchange differenceson translation of foreign operations - - - - 39 - 39Loss for the period - - - - - (1,944) (1,944) ------ -------- ------- ------- ------- -------- -------Total recognisedgains and losses forthe period - - - - 39 (1,944) (1,905) ------ -------- ------- ------- ------- -------- -------Recognition of share based payment charge - - 37 - - - 37Issue of share capital 1 3 - - - - 4 ------ -------- ------- ------- ------- -------- -------Balance at 30 June 2007 3,461 24,250 217 545 151 (20,120) 8,504 ====== ======== ======= ======= ======= ======== ======= Tissue Science Laboratories plcConsolidated Balance Sheet as at 30 June 2007 30 June 30 June 31 December 2007 2006 2006 Note (Unaudited) (Unaudited) £000s £000s £000s Non-current assetsProperty, plant and equipment 1,077 3,196 2,993 --------- --------- --------- 1,077 3,196 2,993 --------- --------- --------- Current AssetsInventories 4,256 3,319 3,875Trade and other receivables 2,362 2,282 2,422Cash and cash equivalents 2,577 4,812 4,760 --------- --------- --------- 9,195 10,413 11,057Non-current assets held for sale 5 1,762 - - --------- --------- --------- 10,957 10,413 11,057 --------- --------- --------- --------- --------- ---------TOTAL ASSETS 12,034 13,609 14,050 --------- --------- --------- Current liabilitiesTrade and other payables (816) (1,016) (762)Current portion of long-term (234) (299) (265)borrowingsShort-term provisions (1,041) (1,320) (1,140) --------- --------- --------- (2,091) (2,635) (2,167) Liabilities associated withnon-current assets held for sale 5 (1,262) - - --------- --------- --------- (3,353) (2,635) (2,167) Non-current liabilitiesLong-term borrowings (177) (1,578) (1,515) --------- --------- ---------TOTAL LIABILITIES (3,530) (4,213) (3,682) --------- --------- --------- --------- --------- ---------NET ASSETS 8,504 9,396 10,368 ========= ========= ========= EquityShare capital 3,461 2,951 3,460Share premium account 24,250 22,112 24,247Shares to be issued 217 124 180Merger reserve 545 545 545Translation reserve 151 30 112Profit & loss account (20,120) (16,366) (18,176) ---------- ---------- ----------TOTAL EQUITY 8,504 9,396 10,368 ========== ========== ========== Tissue Science Laboratories plcConsolidated Cash Flow Statement for the six months ended 30 June 2007 Note Six months Six months ended ended Year ended 30 June 30 June 31 December 2007 2006 2006 (Unaudited) (Unaudited) £000s £000s £000sCash flows from operatingactivitiesLoss after tax (1,944) (1,840) (3,650)Adjustments for:Depreciation 382 539 1,024Foreign exchange loss/(gain) 67 55 (8)Finance income (56) (103) (173)Finance expense 72 75 149Taxation expense recognised inprofit and loss - - (152)Decrease in trade and other 61 275 286receivablesIncrease in inventories (381) (1,018) (1,574)(Decrease)/Increase in trade (43) 104 (331)payablesShare based payments 37 52 108 Interest paid (73) (76) (149)Taxation - 172 324 --------- --------- ----------Net cash from operating (1,878) (1,765) (4,146)activities --------- --------- ---------- Cash flow from investingactivitiesPurchase of property, plant and (232) (389) (677)equipmentProceeds from sale of equipment 4 - -Interest received 56 106 197 --------- --------- ----------Net cash used in investing (172) (283) (480)activities --------- --------- ---------- Cash flow from financingProceeds from issue of share 4 42 2,686capitalProceeds from long-term 40 180 245borrowingsPayments of finance lease (143) (181) (341)liabilities --------- --------- ----------Net cash used in financing (99) 41 2,590activities --------- --------- ---------- --------- --------- ----------Net decrease in cash and cash (2,149) (2,007) (2,036)equivalents --------- --------- ---------- Cash and cash equivalents atbeginning of period 4,760 6,848 6,848Effect of foreign exchange rate (34) (29) (52)changes --------- --------- ---------- Cash and cash equivalents atend of period 2,577 4,812 4,760 ========= ========= ========= Notes To The Accounts 1. BASIS OF PREPARATION The financial information set out in this announcement does not constitute theGroup's statutory accounts for the six months ended 30 June 2007, and theseresults are not audited or reviewed by the auditors. Information for the yearended 31 December 2006 has been derived from the statutory accounts for thatperiod which have been delivered to the Registrar of Companies. The audit report for the year ended 31 December 2006 was unqualified. The Income Statement and Cash Flow Statements for the periods ended 30 June 2006and 31 December 2006, and the Balance Sheet at 1 January 2006, 30 June 2006 and31 December 2006, have been adjusted for the adoption of IFRS. See Note3. 2. ACCOUNTING POLICIES Basis of accounting These interim condensed consolidated financial statements are for the six monthsended 30 June 2007. They have been prepared in accordance with the requirementsof IFRS 1 "First-time Adoption of International Financial Reporting Standards"relevant to interim reports, because they are part of the period covered by theGroup's first IFRS financial statements for the year ended 31 December 2007.They do not include all of the information required for full annual financialstatements, and should be read in conjunction with the consolidated financialstatements of the Group for the year ended 31 December 2006. These financial statements have been prepared under the historical costconvention, except for revaluation of certain properties and financialinstruments. The Group has chosen not to adopt IAS 34, 'Interim financial statements', inpreparing its 2007 interim statements. These condensed consolidated interim financial statements (the interim financialstatements) have been prepared in accordance with the accounting policies setout below which are based on the recognition and measurement principles of IFRSin issue as adopted by the European Union (EU) that are effective at 31 December2007 or are expected to be adopted and effective at 31 December 2007, our firstannual reporting date at which we are required to use IFRS accounting standardsadopted by the EU. Tissue Science Laboratories plc's consolidated financial statements wereprepared in accordance with United Kingdom Accounting Standards (United KingdomGenerally Accepted Accounting Practice) until 31 December 2006. The date oftransition to IFRS was 1 January 2006. The comparative figures in respect of2006 have been restated to reflect changes in accounting policies as a result ofadoption if IFRS. The disclosures required by IFRS 1 concerning the transitionfrom UK GAAP to IFRS are given in the reconciliation schedules, presented andexplained in note 3. The accounting policies have been applied consistentlythroughout the Group for the purposes of preparation of these condensedconsolidated interim financial statements. Basis of consolidation The consolidated financial reports incorporate the financial statements of theCompany and the entities controlled by the Company (its subsidiaries) made up tothe 30 June and 31 December each year. Tissue Science Laboratories, Inc. has been accounted for using acquisitionaccounting. The Group has elected not to apply IFRS 3 Business Combinations retrospectivelyto business combinations prior to the date of transition. As a result of theapplication of merger accounting under the then prevailing UK GAAP, a separatemerger reserve arose on the acquisition of Tissue Science Laboratories (UK) Ltdby Tissue Science Laboratories plc. As the amounts included in the mergerreserve are not attributable to any other class of equity presented, they havebeen disclosed as a separate classification of equity. All intra-Group transactions, balances, income and expense are eliminated onconsolidation. Revenue Revenue is measured by reference to the fair value of consideration received orreceivable by the Group for goods supplied, excluding VAT. Revenue is recognisedupon the transfer of risk to the customer. Deferred Revenue Royalties due from customers are recognised in the months to which the royaltyrelates. A debtor is created in the accounts on recognition and is cleared uponreceipt of payment. Property, plant and equipment Property, plant and equipment are stated at cost or valuation less depreciation.Depreciation is provided at rates calculated to write off the cost or valuationof fixed assets, less their estimated residual value, over their expected usefullives, which fall between the following ranges: Plant and machinery 3-5 years Fixture and fittings 3-5 years Leased assets 3-10 years (depending on the period of the lease) Motor vehicles 3 years Freehold property 25 years Freehold improvements 25 years (in line with the property) Freehold land Not depreciated Non-current assets classified as held for sale Assets held for sale include assets that the Group intends and expects to sellwithin one year from the date of classification as held for sale. Assetsclassified as held for sale are measured at the lower of their carrying amountsimmediately prior to their classification as held for sale and their fair valueless costs to sell. Assets classified as held for sale are not subject todepreciation or amortisation. Leases In accordance with IAS 17, the economic ownership of a leased asset istransferred to the lessee if the lessee bears substantially all the risks andrewards related to the ownership of the leased asset. The related asset isrecognised at the time of inception of the lease at the fair value of the leasedasset or, if lower, the present value of the minimum lease payments plusincidental payments, if any, to be borne by the lessee. A corresponding amountis recognised as a finance leasing liability. The interest element of leasing payments represents a constant proportion of thecapital balance outstanding and is charged to the income statement over theperiod of the lease. All other leases are regarded as operating leases and the payments made underthem are charged to the income statement on a straight line basis over the termof the lease. Inventories Inventories and work in progress are valued at the lower of cost and netrealisable value. WIP includes materials, direct labour and an attributableproportion of manufacturing overheads. Inventories are held on a FIFO basis withprovisions made for slow moving stock based on past experience of sales. Foreign currencies Transactions in foreign currencies are recorded at the rate of exchange at thedate of the transaction. Monetary assets and liabilities denominated in foreigncurrencies at the balance sheet date are reported at the rates of exchangeprevailing at that date. The balance sheets of overseas subsidiary undertakings are translated at therate of exchange ruling at the balance sheet date. The exchange differencearising on the retranslation of opening net assets is taken directly toreserves. All other exchange differences are taken to the profit and lossaccount. Deferred taxation Deferred income taxes are calculated using the liability method on temporarydifferences. Deferred tax is generally provided on the difference between thecarrying amounts of assets and liabilities and their tax bases. However,deferred tax is not provided on the initial recognition of an asset or liabilityunless the related transaction affects tax or accounting profit. Deferred tax liabilities are provided in full, with no discounting. Deferred taxassets are recognised to the extent that it is probable that the underlyingdeductible temporary differences will be able to offset against future taxableincome. Current and deferred tax assets and liabilities are calculated at taxrates that are expected to apply to their respective period or realisation,provided they are enacted or substantively enacted at the Balance Sheet date. Changes in deferred tax assets or liabilities are recognised as a component oftax expenses in the Income Statement, except where they relate to items that arecharged or credited directly to equity in which case the related deferred tax isalso charged or credited directly to equity. Pensions The Group operates a defined contribution pension scheme for its permanentemployees and the pension charge represents the amounts payable by the Group tothe fund in respect of the period. Share-based payments Employees (including senior executives) of the Group receive remuneration in theform of share-based payments such as share options. The cost of share-based payments made to employees, for awards granted after 7November 2002, is measured by reference to the fair value at the date on whichthey are granted. The fair value is determined using an appropriate pricingmodel and is expensed on a straight-line basis over the vesting period. Marketrelated performance conditions are reflected in the fair value of the share.Non-market related performance conditions are allowed for using a separateassumption about the number of awards expected to vest. The transitionalarrangements on the adoption of IFRS 2 apply to options that had not vested at 1January 2005. Research and development Expenditure on research is recognised as an expense in the period in which it isincurred. Development costs incurred are capitalised when all the following conditions aresatisfied. •completion of the intangible asset is technically feasible so that it will be available for use or sale; •the Group has the ability to use or sell the intangible asset; •the intangible asset will generate future economic benefits; •the Group has adequate resources to complete the development of the intangible asset; and •the development cost of the asset can be measured reliably. Development costs not meeting the above criteria for capitalisation are expensedas incurred. 3. TRANSITION TO IFRS As stated in the Basis of Preparation, these are the Group's first consolidatedinterim financial statements for the part of the period covered by the firstIFRS annual consolidated financial statements prepared in accordance with IFRS. An explanation of how the transition from UK GAAP to IFRS has affected theGroup's financial position, financial performance and cash flow is set outbelow. IFRS 1 permits companies adopting IFRS for the first time to take certainexemptions from the full requirements of IFRS in the transition period. Exceptfor the exemption from restating business combinations prior to adoption, theseinterim statements do not apply any of these exemptions. IAS 32 and 39 - Financial instruments The Group has applied IAS 32 and 39 from 1 January 2006. The Group uses forwardexchange contracts to hedge currency transaction exposure. The Group previouslytranslated certain transactions in foreign currencies at the hedged forwardcontract rate. These contracts do not meet the relevant criteria for hedgeaccounting under IFRS and accordingly the fair value movements for thesederivatives have been accounted for through the Income Statement. The effect ofthe transition on the Income Statement for the period ended 30 June 2006 and 31December 2006 is a charge of £12,000 and £106,000 respectively. The effect ofthe transition on the opening Balance Sheet at 1 January 2006 and the BalanceSheet for the period ended 30 June 2006 and the year ended 31 December 2006 is£48,000, £57,000 and £nil respectively. Other adjustments relate to the reclassification of reserve amounts for shareoptions issued prior to 7 November 2002. The adjustment does not have anyeffect on the net asset position of the Group. (a) Income Statement Six months Year Ended 31 ended 30 June December 2006 2006 (Unaudited) As As previously As previously stated IAS 39 restated stated IAS 39 As restated £000s £000s £000s £000s £000s £000s ContinuingoperationsRevenue 5,367 (34) 5,333 10,683 (161) 10,522Cost of Sales (1,711) - (1,711) (3,401) - (3,401) -------- ------- ------- --------- -------- --------Gross Profit 3,656 (34) 3,622 7,282 (161) 7,121 Selling,distributionand marketingcosts (2,729) - (2,729) (5,910) - (5,910)Research anddevelopmentcosts (1,379) - (1,379) (2,269) - (2,269)Otheradministrativeexpenses (1,404) 22 (1,382) (2,823) 55 (2,768) -------- ------- ------- --------- -------- --------Totaladministrativeexpenses (5,512) 22 (5,490) (11,002) 55 (10,947) -------- ------- ------- --------- -------- -------- -------- ------- ------- --------- -------- --------Operating loss (1,856) (12) (1,868) (3,720) (106) (3,826) Finance income 103 - 103 173 - 173Finance (75) - (75) (149) - (149)expense -------- ------- ------- --------- -------- --------Loss before (1,828) (12) (1,840) (3,696) (106) (3,802)tax Taxation - - - 152 - 152 -------- ------- ------- --------- -------- --------Loss for theperiod (1,828) (12) (1,840) (3,544) (106) (3,650) ======== ======= ======= ========= ======= ======== Attributableto: --------- -------- -------- ---------- -------- ---------Equity holdersof the parent (1,828) (12) (1,840) (3,544) (106) (3,650) ========= ======== ======== ========== ======== ========= Earnings pershare Basic loss pershare 6.2 6.2 11.8 12.1Diluted lossper share 6.2 6.2 11.8 12.1 (b) Balance Sheet As at 1 January 2006 As previously As stated IAS 39 Other restated £000s £000s £000s £000s Non-current assetsProperty, plant and equipment 3,340 - - 3,340 --------- -------- -------- -------- 3,340 - - 3,340 --------- -------- -------- --------Current assetsInventories 2,301 - - 2,301Trade and other receivables 2,713 20 - 2,733Cash and cash equivalents 6,842 6 - 6,848 --------- -------- -------- -------- 11,856 26 - 11,882 --------- -------- -------- -------- --------- -------- -------- --------TOTAL ASSETS 15,196 26 - 15,222 --------- -------- -------- -------- Current liabilities Trade and other payables (907) (74) - (981)Current portion of long-term (322) - - (322)borrowingsShort-term provisions (1,253) - - (1,253) --------- -------- -------- -------- (2,482) (74) - (2,556) Non-current liabilitiesLong-term borrowings (1,554) - - (1,554) --------- -------- -------- --------TOTAL LIABILITIES (4,036) (74) - (4,110) --------- -------- -------- -------- --------- -------- -------- --------NET ASSETS 11,160 (48) - 11,112 ========= ======== ======== ======== EquityShare capital 2,946 - - 2,946Share premium account 22,075 - - 22,075Shares to be issued 239 - (167) 72Merger reserve 545 - - 545Profit and loss account (14,645) (48) 167 (14,526) ---------- --------- --------- ---------TOTAL EQUITY 11,160 (48) - 11,112 ---------- --------- --------- --------- As at 30 June 2006 (Unaudited) As previously As restated stated IAS 39 Other £000s £000s £000s £000sNon-current assetsProperty, plant and equipment 3,190 6 - 3,196 --------- -------- -------- -------- 3,190 6 - 3,196 --------- -------- -------- --------Current assetsInventories 3,319 - - 3,319Trade and other receivables 2,232 50 - 2,282Cash and cash equivalents 4,839 (27) - 4,812 --------- -------- -------- -------- 10,390 23 - 10,413 --------- -------- -------- -------- --------- -------- -------- --------TOTAL ASSETS 13,580 29 - 13,609 --------- -------- -------- -------- Current liabilitiesTrade and other payables (1,044) 28 - (1,016)Current portion of long-term (299) - - (299)borrowingsShort-term provisions (1,320) - - (1,320) --------- -------- -------- -------- (2,663) 28 - (2,635) Non-current liabilitiesLong-term borrowings (1,578) - - (1,578) --------- -------- -------- --------TOTAL LIABILITIES (4,241) 28 - (4,213) --------- -------- -------- -------- --------- -------- -------- --------NET ASSETS 9,339 57 - 9,396 ========= ======== ======== ======== EquityShare capital 2,951 - - 2,951Share premium account 22,112 - - 22,112Shares to be issued 291 - (167) 124Merger reserve 545 - - 545Translation reserve (87) 117 - 30Profit and loss account (16,473) (60) 167 (16,366) ---------- --------- --------- ---------TOTAL EQUITY 9,339 57 - 9,396 ========== ========= ========= ========= As at 31 December 2006 As As stated IAS 39 Other restated £000s £000s £000s £000s Non-current assetsProperty, plant and equipment 2,994 (1) - 2,993 --------- -------- -------- -------- 2,994 (1) - 2,993 --------- -------- -------- --------Current assetsInventories 3,875 - - 3,875Trade and other receivables 2,422 - - 2,422Cash and cash equivalents 4,762 (2) - 4,760 --------- -------- -------- -------- 11,059 (2) - 11,057 --------- -------- -------- -------- --------- -------- -------- --------TOTAL ASSETS 14,053 (3) - 14,050 --------- -------- -------- -------- Current liabilitiesTrade and other payables (765) 3 - (762)Current portion of long-term (265) - - (265)borrowings Short-term provisions (1,140) - - (1,140) --------- -------- -------- -------- (2,170) 3 (2,167) Non-current liabilitiesLong-term borrowings (1,515) - - (1,515) --------- -------- -------- --------TOTAL LIABILITIES (3,685) 3 - (3,682) --------- -------- -------- -------- --------- -------- -------- --------NET ASSETS 10,368 - - 10,368 ========= ======== ======== ======== EquityShare capital 3,460 - - 3,460Share premium account 24,247 - - 24,247Shares to be issued 341 - (161) 180Merger reserve 545 - - 545Translation reserve (42) 154 - 112Profit and loss account (18,183) (154) 161 (18,176) --------- -------- -------- --------TOTAL EQUITY 10,368 - - 10,368 ========= ======== ======== ======== (c) Cash Flow Statement There have been no changes to the content of the Cash Flow Statement as a resultof the adoption of IFRS. All changes relate solely to the format. 4. LOSS PER SHARE Loss per ordinary share has been calculated based on the weighted-average numberof ordinary shares in issue during the period. Six months Six months Year Ended ended ended 30 June 30 June 31 December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £000s £000s £000sLoss for the period (1,944) (1,840) (3,650)Weighted average number ofordinary shares 34,603,131 29,496,848 30,131,492Loss per share 5.6p 6.2p 12.1p 7,500 shares have been issued in the period generating finance for the Group of£4k 5. TRANSFER OF ASSET TO NON-CURRENT ASSETS HELD FOR SALE The freehold property purchased in 2005, along with improvements made to thesite since acquisition, have been transferred to non-current assets held forsale in the current period. The asset was transferred at the carrying value heldat the time and no further depreciation has been charged. The asset is not expected to sell for less than its carrying value. The mortgage relating to the asset transferred to assets held for sale has beenreclassified as a current liability as the property is expected to be soldwithin the year. This information is provided by RNS The company news service from the London Stock Exchange