Annual Report and Accounts 2006 - Optos

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Operational and Financial Review continued New Markets At the time of our initial public offering, we identified France, Spain and Japan as holding favourable fundamentals for geographic expansion. The markets in France and Spain are made up primarily of ophthalmologists. As in Germany, these practitioners operate in private practice and carry out both primary and secondary care. Market evaluation to confirm the attractiveness of the fundamentals continued during the year. We have test-marketed at the two largest respective national exhibitions in these country markets: Société Française d’Ophtalmologie (“SFO”) held in Paris, France, in May 2006, and at Sociedad Española de Oftalmología (“SEO”) in La Coruna, Spain, in September 2006. A number of devices have also been placed in ophthalmic practices in both markets to test the suitability of our business model and patient willingness to pay for the optomap® Retinal Exam at point of service. We are assessing the results from our market evaluations to determine the merits of full commercial launch. Japan is the second-largest market in the world for ophthalmic equipment after the United States. Our market research has continued and a full regulatory filing has been prepared for submission. We expect to initiate premarket evaluation in the 2007 financial year similar to that which has been carried out in the targeted European expansion markets. Broadening the Product Offering Our core product is the optomap® Retinal Exam, which is used in preventative or primary eye and healthcare, and is non-reimbursable by insurance or other third-party providers. During the year, we continued to invest in research and development in order to strengthen and expand upon our core product offering and provide practitioners with more advanced diagnostic capabilities within the reimbursable, secondary eye and health care market. We have two new products in this area designed to add strengthened dimensions to our product line; o optomap® plus Medical Retinal Exam allows the practitioner to clearly distinguish between the retinal health check offered by the optomap® Retinal Exam and the monitoring of a known retinal condition, where the interpretation, reporting and documentation of the pathology is more stringent and leads to reimbursement; and, o optomap® fa Medical Procedure is generated by the P200MA device, which received European CE marking and US FDA 510k clearance to market earlier this year, and provides retinal specialists with advanced diagnostic, monitoring and treatment capabilities for particular eye disorders, including diabetic retinopathy and agerelated macular degeneration. Our new v2.3 software will offer a number of new features to enhance the reviewing capabilities of patient images. We expect this new software will help improve patient education and strengthen the relationship between the patient and the practitioner. The product development team also localised our software to support our strategy of expanding into new geographical markets. Software has been translated into German, French, Spanish, US Spanish and Canadian French. The intellectual property represented by our technology platform is comprehensively protected through a portfolio of patents and know-how. Recently, we have strengthened and extended this position through a licence agreement with the University of Rochester (NY) for the use of adaptive optics in retinal imaging. Adaptive optics may allow for the direct observation of the impact and effectiveness of emerging pharmaceutical therapies for the leading causes of blindness and certain, major systemic diseases. As we strengthen our product offering, our hardware must meet more exacting standards of performance and support improved imaging resolution and consistency. The components that make up our device are manufactured to very demanding tolerances. During the year, we continued to work closely with our existing suppliers and identified some new suppliers to manufacture components that meet the standards our new products require. This is a continuing development project that requires a precise and careful approach consistent with meeting the standards defined by Good Manufacturing Practice. 40% Increase in revenues. $67.7 million compared to $48.4 million in the previous year. $10.8m Profit after taxation. Compared to a loss in the previous year of $2.2 million. In addition, we have found, developed and qualified US-based suppliers who have the demonstrated capability to service our local needs for the North American installed base. As part of our drive to reduce procurement costs, we have realised the benefits of a longterm programme to source optical components through a local longterm supplier who has operations in China. This programme has been highly successful in reducing costs and improving quality. We are continuing to develop this sourcing route and with a wider scope of supply. Maintaining Customer Satisfaction What we offer assists healthcare practitioners in detecting disease, saves time, enhances the experience their patients have while having a comprehensive eye examination and builds practice revenue. An 89% contract renewal rate for the full year confirmed our continued progress on this strategic objective. “During the year, we continued to work closely with existing suppliers and also identified some new suppliers to manufacture components that meet the exacting standards of our products.” Ailsa McKelvie, Software Engineer 16 Optos plc Annual Report & Accounts 2006
Operational and Financial Review continued Financial Review Revenues Revenues increased by 40% from $48.4 million in 2005 to $67.7 million in 2006. Growth was seen in all areas of the business, with the majority of the increase generated in North America, where revenues grew by 41% to $64.7 million. Gross Margins Gross margins strengthened from 65.0% to 65.6%, reflecting a modest increase in operating margins. Operating Costs and Operating Profits The business continued to invest in its field and administrative infrastructure, in both North America and Europe. Average headcount grew by 24% from 173 to 214. Investment in field-related expenditures increased by 42% to $13.7 million, and in administrative expenses by 37% to $24.2 million. Operating profit before share-based payments increased by 46% from $4.5 million to $6.5 million. Sharebased payments increased from $1.2 million to $2.2 million, largely driven by the initial public offering in February which accelerated the vesting of certain stock awards and increased the fair value of the Company’s stock. Operating profit after share-based payments increased by 32% from $3.3 million to $4.3 million. Loss on Ordinary Activities Before Tax Finance income increased from $0.1 million to $1.1 million due to interest received on the proceeds from the initial public offering in February. Finance costs comprised mainly interest arising on the Company’s vendor financing arrangements, although approximately half of the increase versus the previous year is due to the IAS32 requirement to impute interest on loan notes repaid at the time of the initial public offering. Loss on ordinary activities before tax was reduced by 58% from $2.6 million to $1.1 million. At the halfyear, unaudited results reported a loss before tax of $2.6 million, indicating that the Group generated a profit before tax of $1.5 million in the second half of the year. We recently negotiated a lower borrowing margin for our vendor financing arrangements, which is consistent with our ongoing commitment to reducing costs and improving operational efficiencies across the business. We believe this also reflects an additional level of confidence the providers have in our business model. Taxation The Group recognised a deferred tax asset of $11.9 million in the period, relating to the value of historical tax losses incurred by its US subsidiary, Optos Inc. This recognition took place after a review of the prospects for that subsidiary and the judgement of the Board that the historical losses that have arisen in that subsidiary now meet the recognition criteria as laid out under IAS12. Historical losses for the Company and its two other overseas subsidiaries were not deemed to meet the recognition criteria of IAS12, and remain unrecognised. Profit/(Loss) for the Financial Year The Group recorded a profit for the financial year after taxation of $10.8 million versus a loss in the previous year of $2.2 million. This profit reflected both reduced losses on ordinary activities driven by revenue growth described previously, as well as the recognition of historical deferred tax assets in its US subsidiary. Cash Flow Cash flow from operating activities increased 59% from $16.8 million to $26.7 million. This was driven by the increased scale and operating profitability of the business. Cash flow used in investing activities decreased Aidan Walsh, New Product Project Manager “By deepening our penetration in our existing markets, moving into new markets, strengthening our product offering and always maintaining high levels of customer satisfaction, we aim to profitably grow revenues and generate value for our shareholders.” from $37.1 million to $33.4 million. Under IFRS standards, this includes the capital costs of new P200 devices installed with customers, as well as the value of major stock and spares items previously classified under UK GAAP as inventory. Net cash flows from financing activities were heavily influenced by the initial public offering, admission to the Official List and trading on the London Stock Exchange in February 2006, and were $48.0 million. Other items within this category relate principally to the net cash movements from the Group’s vendor financing arrangements, which reduced significantly from $10.0 million to $(1.1) million. Net cash increased by $41.3 million during the year, with the cash balance at the end of the year finishing at $36.2 million versus a net overdraft of $4.7 million for the prior year. Balance Sheet The Group balance sheet strengthened considerably during the year, primarily due to the impact of the initial public offering in February 2006. Total Net Assets closed the financial year at $51.3 million compared to net liabilities of $21.0 million at the end of the same period last year. Non-Current Assets increased from $72.1 million to $97.4 million. This increase is due in part to increases in property, plant and equipment. In addition, the Group recognised an increase in the intangible asset value attributed to product development work as specified under IAS38. The Group created a provision of $11.9 million in respect of deferred tax assets as specified under IAS12. Total current assets increased considerably due to the cash raised through the initial public offering in February. Total liabilities reduced due to the repayment of the bank overdraft and conversion of loan stock instruments at the time of the initial public offering in February 2006. Financial liabilities arising under finance leases increased from $76.1 million to $81.2 million. Total shareholders’ funds increased from $(21.0) million to $51.3 million. Outlook Revenue growth is one of the primary drivers of shareholder value creation. North America will remain our core market and principal focus. Further penetration will be driven by new placements within the independently owned and operated eyecare practice sector and within the corporate retail chain network. We expect to realise additional revenue from our optomap® plus Medical Retinal Exam as we fully integrate this product into our existing and prospective customer base and from our optomap® fa Medical Procedure. We expect continued growth in Canada and in our European markets. By deepening our penetration in our existing markets, moving into new markets, strengthening our product offering and always maintaining high levels of customer satisfaction, we aim to profitably grow revenues and generate value for our shareholders. Allan Watson Chief Financial Officer 18 December 2006 Optos plc Annual Report & Accounts 2006 17
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Optos plc Annual Report & Accounts
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