Financial Review

“We remain confident about the future growth prospects of the business as our existing SI branded products continue to gain international clinical recognition.”


Doug Liversidge CBE, Chairman




Summary of Chairman’s statement


Reported revenue for 2012
increased 0.5% to £7.64 million
(2011: £7.60 million).


Gross margin from the core MIS
business increased to 49.9%
(2011: 47.1%).


Adjusted EBITDA increased from
£2.83 million to £2.89 million.







Reported revenue for 2012 increased 0.5% to
£7.64 million (2011: £7.60 million). A segmental
analysis of revenue is provided opposite which
illustrates the strong growth performance from
the SI brand, offset by a decline in sales of OEM
products. Further commentary on performance
by segment in provided in the Operating review.


Gross margin

Gross margin from the core MIS business
increased to 49.9% (2011: 47.1%). This improvement
is a consequence of manufacturing improvements
and favourable shifts towards higher margin
consumable elements of the Resposable® range.
For 2012 SI Brand represented 70% of MIS
business (2011: 67%).


Operating expenses

Operating expenses increased by £709,000 during
the period to £2.54 million (2011: £1.83 million).
This increase primarily resulted from exceptional
items in the period (£294,000, see below),
increased amortisation of product development
intangible assets (£150,000), charges for
share-based payments (£66,000) and initial
investment into new areas of MIS (£123,000).
Notwithstanding this increase, the Group
continues to rigorously control costs.


Exceptional items

During the first half of 2012 we incurred one-off
costs of £294,000 (2011: £nil) as a consequence
of restructuring various operational areas
of the business. In order to provide a more
accurate picture of the underlying performance
of the business the profitability figures quoted
below and in the Chairman’s statement and
Operating review are adjusted to exclude
these non-recurring costs.


Finance costs

As noted below, we utilised an overdraft provided
by our bankers for the majority of 2012 and
accordingly finance income was negligible.
Interest payable on the bank overdraft
amounted to £31,000 (2011: £15,000).

The majority of the finance cost of £94,000
arose in respect of finance lease obligations
where the charge for the year totalled £63,000
(2011: £58,000). Following the major investment
of recent years, capital expenditure in 2012
was minimal and this cost is expected to
reduce next year.


EBITDA and operating profit

We are pleased to report that EBITDA (excluding
exceptional items) increased from £2.83 million
to £2.89 million in line with the slight increase in
revenue which represents a strong signal that
we are continuing to carefully manage our costs.
We believe EBITDA is the most appropriate
measure of profitability for the business as it
excludes the impact of significant non-cash
charges for depreciation and amortisation which
mask underlying performance at operating
profit level.

Operating profit for the year reduced to
£1.32 million (2011: £1.77 million) due to the
increase in amortisation of product development
costs of £150,000 and the exceptional items
of £294,000.



The Group recognised a tax charge of £547,000
(2011: £33,000 credit) reflecting a deferred tax
charge of £834,000 offset by a corporation tax
credit of £287,000. The effective rate of tax of 44%
is distorted by a one-off adjustment to the
deferred tax asset in respect of trading losses of
£441,000. The underlying effective tax rate is below
the headline rate of corporation tax and we expect
this to be the case in the future due to the Patent
Box and Research and Development regimes.

During 2012 the Group submitted enhanced
Research and Development claims in respect
of 2011 and 2010 and elected to exchange tax
losses for a cash refund. At 31 December the
balance sheet included an asset of £287,000,
the majority of which has been received at the
date of these financial statements.


Earnings per share (EPS)

The Group achieved 0.17p (2011: 0.44p) basic EPS in 2012 which is distorted by the exceptional items in the period of £294,000 and the adjustment to deferred tax of £441,000 referred to above. Adjusting for these, underlying EPS would be 0.35p.


Intangible and tangible assets

As in previous years, we have continued our
investment in product development. The Board
is confident with this investment strategy and,
accordingly, £1.85 million (2011: £2.50 million)
of costs have been capitalised during the year,
increasing the total amount of capitalised costs
to £8.33 million (2011: £6.48 million).


The amortisation charge against capitalised costs
increased significantly to £700,000 (2011: £550,000) reflecting that products developed in recent years are now launched and selling to customers.


The amortisation charge will undoubtedly continue
to increase in future reporting periods, reducing
reported profits. No impairments have been
identified at 31 December 2012 following review
by the Board.


Capital expenditure during the year was minimal
at £183,000 (2011: £1.41 million) following
the major investment programme during
2010 and 2011 to implement our strategy
of in-house manufacturing.


Foreign currency

During 2012 the Group has continued to generate
significant surplus US Dollars through sales to
customers. These have either been sold into
Sterling at spot rates or market risk has been
eliminated through the use of forward contracts.
In respect of the Euro, the Group has largely
achieved a natural hedge with Euro denominated
receipts being in line with Euro payments.


The Group will continue to monitor the need for
forward contracts depending upon the level of
natural hedging achievable and the extent to which
surplus currencies are expected to be generated.


Cash flow and net debt

Cash flows generated from operations before
working capital movements were strong at
£2.66 million (2011: £2.83 million). However,
the significant working capital increase during
the year of £1.96 million (see below) reduced
cash generated from operations to £706,000
(2011: £1.85 million). As expected, cash used
in investment activities reduced during the
year to £1.98 million (2011: £2.84 million).


At 31 December net debt, which is defined as
cash and cash equivalents less bank overdraft
and obligations under finance leases, stood at
£2.63 million (2011: £1.11 million). In addition to
existing finance lease facilities, the Group secured
a £2 million overdraft facility from HSBC for
the period through to 30 September 2013.
At 31 December 2012, £1.42 million of this
facility was utilised.


Working capital

Working capital increased by £1.96 million to
£6.60 million (2011: £4.64 million). £747,000 of
this increase is attributable to inventory levels,
however approximately £0.5 million of this
increase reversed in the first week of 2013
when the sales referred to in the Chairman’s
statement were recognised. Trade receivables
increased by £1.28 million compared to the
prior year which reflects the impact of sales of
YelloPort+plus™ on extended credit (£637,000)
and also the phasing of sales with significant
revenue recognised in December 2012.


We are committed to improving our manufacturing
processes through lean manufacturing, and we
believe that this will yield benefits over the course
of the year. Our distributors operate in many
different countries where credit terms and local
practices vary significantly. Consequently, relatively high trade receivables are a feature of our business that we do not expect to change
in the short term.


Mike Thornton
Chief Financial Officer
8 April 2013