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RNS Number : 5376U Surgical Innovations Group PLC 29 March 2023
Surgical Innovations Group plc
("Surgical Innovations", the "Company" or the "Group")
Final Results
Audited results for the year ended 31 December 2022
Surgical Innovations Group plc (AIM: SUN), the designer, manufacturer and
distributor of innovative technology for minimally invasive surgery, reports
its audited financial results for the year ended 31 December 2022. During the
year, the business achieved a strong recovery with sales up 24.3%
year-on-year exceeding pre-pandemic levels. The return to profitability
positions the Group well to deliver robust organic growth in 2023 and
beyond.
Financial highlights:
· Revenues increased by 24.3% in 2022 to £11.34m (2021: £9.13m) and 6%
ahead of the comparable pre-pandemic period in 2019 (£10.73m)(1)
· Underlying gross margin (before net manufacturing cost) slightly higher
and within target range at 42.5% (2021: 42.3%)
· Adjusted EBITDA(2) profit of £0.70m (2021: £0.50m)
· Adjusted operating profit before tax(2) of £0.01m (2021: loss of
£0.33m)
· Adjusted EPS(2) amounted to a profit of 0.036p per share (2021: loss
of 0.022p)
· Net cash generated from operations £0.48m (2021: net cash used in
operations £0.43m)
· Increased investment activities £1.24m (2021: £0.66m) and higher
inventory holdings reflecting ongoing supply chain issues
· Net cash(3) at end of period of £0.99m (as at 31 Dec 2021: £1.76m)
with additional undrawn headroom of a £1.0m invoice discounting facility
Commercial and operational highlights:
· Strong sales in UK, Japan and key EU markets
· Investment in sales and marketing team driving commercial opportunity
· Geographical expansion into India and Germany gaining traction
· Ongoing capex investments driving efficiencies and cost reductions
through manufacturing
· Regulatory investment in people and processes position the Company
for early MDR transition in 2023
· Continued investment into new product development, with launch of
YelloPort Elite(TM) 5mm and a new Optical trocar
Current trading and outlook:
· Revenues in the current year to date for SI brand and Distribution
sales are 9.2% ahead of the corresponding period last year
· The forward order book is strong, notwithstanding some deferral of Q1
revenue into Q2 due to longer lead times in sourcing certain OEM components
· The Group is expected to continue to trade profitably at the level of
adjusted EBITDA supported by the continual investment in operations during
2023
1. Comparative information is shown for the year ended 31 December
2021, except where otherwise stated. Further comparative information for the
year ended 31 December 2019 has been included to provide a pre-pandemic
benchmark for trading.
2. Adjusted EBITDA, adjusted operating profit/(loss) before tax and
Adjusted EPS are stated before deducting non-recurring/ exceptional costs of
£0.03m (2021: £0.08m), impairment of intangible costs of £nil (2021:
£0.15m) and share based payment costs of £0.04m (2021: £0.03m).
3. Net cash equals cash less bank debt only.
Chairman of Surgical Innovations, Nigel Rogers said: "Whilst the backlog of
patients requiring treatment in the UK continues to increase, standing at 7.2m
in December 2022, sales remain strong. Revenue in the current year to date
for SI brand and Distribution sales are 9.2% ahead of corresponding period
last year and the future order book is looking positive going into Q2. There
is a similar picture globally however the unique selling proposition of our
product portfolio, which are high performing, sustainable and cost-effective
solutions, leave us well placed to address this pent-up demand and make a
positive impact on the environment.
"New geographical markets are providing some significant prospects for the
forthcoming year. In India, where registration was obtained earlier this year,
evaluations with key surgeons in a group of Delhi based hospitals are
progressing well. A new partner in Germany has seen the conversion of a new
account with further evaluations scheduled. In the US the partnership with
Microline is seeing progress with a number of hospital conversions and again
further evaluations are underway. The Company continues to work with key
partners to strengthen the overall growth opportunities.
"Given the multiple factors driving improved prospects for growth, the Board
has increased confidence in not only the outlook for 2023 but also the
longer-term growth trajectory for the Group."
For further information please contact:
Surgical Innovations Group plc www sigroupplc com (http://www.sigroupplc.com/)
David Marsh, CEO Tel: 0113 230 7597
Charmaine Day, CFO
Singer Capital Markets (Nominated Adviser & Broker) Tel: 020 7496 3000
Aubrey Powell / Oliver Platts
Walbrook PR (Financial PR & Investor Relations) Tel: 020 7933 8780 or si@walbrookpr.com
Paul McManus / Lianne Applegarth Mob: 07980 541 893 / 07584 391 303
About Surgical Innovations Group plc
Strategy
The Group specialises in the design, manufacture, sale and distribution of
innovative, high quality medical products, primarily for use in minimally
invasive surgery. Our product and business development is guided and supported
by a key group of nationally and internationally renowned surgeons across the
spectrum of minimally invasive surgical activity.
We design and manufacture and source our branded port access systems, surgical
instruments and retraction devices which are sold directly in the UK home
market through our subsidiary, Elemental Healthcare, and exported widely
through a global network of trusted distribution partners. Many of our
products in this field are based on a "resposable" concept, in which the
products are part reusable, part disposable, offering a high quality and
environmentally responsible solution at a cost that is competitive against
fully disposable alternatives.
Elemental also has exclusive UK distribution for a select group of specialist
products employed in laparoscopy, bariatric and metabolic surgery, hernia
repair and breast reconstruction.
In addition, we design and develop medical devices for carefully selected OEM
partners and have also collaborated with a major UK industrial partner to
provide precision engineering solutions to complex problems outside the
medical arena.
We aim for our brands to be recognised and respected by healthcare
professionals in all major geographical markets in which we operate and
provide by development, partnership or acquisition a broad portfolio of cost
effective, procedure specific surgical instruments and implantable devices
that offer reliable solutions to genuine clinical needs in the operating
theatre environment.
Further information
Further details of the Group's businesses and products are available on the
following websites:
www.sigroupplc.com (http://www.sigroupplc.com)
www.surginno.com (http://www.surginno.com)
www.elementalhealthcare.co.uk (http://www.elementalhealthcare.co.uk)
To receive regular updates by email, please contact si@walbrookpr.com
Surgical Innovations Group plc
Chairman's Statement
For the year ended 31 December 2022
I am pleased to report that the Group has achieved a strong recovery during
2022, delivering sales which exceeded pre-pandemic levels and are slightly
ahead of market expectations, providing a return to profitability in the
second half of the year. Opportunities have been created to win new business
despite the challenges of recent events, particularly as the sustainability
benefits of our products are becoming more widely recognised. The improving
market environment is gathering pace as healthcare providers around the world
are returning to normalised levels of activity and planning to address
backlogs in surgery, and we are well positioned to deliver robust organic
growth in 2023 and beyond.
Market Overview
Global healthcare markets are gradually returning to pre-pandemic levels of
elective surgery, and are now striving to reduce the increasing backlog of
patients requiring treatment by increasing capacity. In the UK market, the
process of recovery has been hampered by staff shortages, industrial action
and difficulties discharging patients due to restricted social care provision.
Despite the combined effect of these factors SI brand and Distribution
products have achieved revenue growth over the prior year of 30%. This
highlights our success in gaining market share through new hospital
conversions based on the quality and sustainability benefits our products
deliver to customers.
The rates of recovery in the volume of patients treated across our
international markets have been variable, but we enter 2023 in more normalised
market conditions in all of our key markets.
Supply chain challenges have continued to impact the Company's ability to
deliver some key products on time. Whilst this has had only minimal impact on
ongoing business, in some new markets the launch of key products was delayed,
slowing overall growth as a consequence. This has also affected input costs,
and it has been necessary to pass an equitable proportion of these on in
selling prices. Order backlogs were largely cleared by the end of the
financial year, as a result of robust actions to address component shortages
including elevated levels of safety stock. Sporadic issues continue to arise,
however, and vigilance coupled with contingency planning continue to be
important in mitigating the impacts of these issues.
Financial Overview
Revenues for the year exceeded market expectations at £11.34m, an increase of
more than 20% versus the prior year (2021: £9.13m) and 6% ahead of the
pre-pandemic reference year (2019: £10.73m). Sales continued to strengthen in
the second half of the year, being 10% higher than the first half (2022 H1:
£5.41m).
Underlying trading margins(1) were within target range at 42.5% (2021: 42.3%)
of revenues, despite inflationary cost pressures. Mitigating these costs and
passing them on where possible has been a key focus throughout the year.
Supply chain disruption continued to present challenges in the second half of
the year and across the industry, but these were overcome by maintaining
adequate buffer inventories, and consequently customer back orders were
managed down to normal levels by the end of the year. Inventories remain above
normalised levels to provide ongoing protection, although it is anticipated
that supply chain pressures will abate and reductions in inventory will be
achievable during 2023.
Operating expenses were kept under control, but intentionally increased to
£3.88m (2021: £3.61m) predominantly due to the increased investment into
high-calibre sales and marketing and regulatory headcount. Overall, the Group
delivered a positive adjusted EBITDA(1) of approximately £0.70m in line with
market expectations (2021: £0.50m), and a return to overall profitability in
the second half of the year. This resulted in a modest adjusted profit before
tax(1) for the full year of £0.01m compared with a loss of £0.33m in 2021.
Adjusted Earnings Per Share(1) amounted to 0.036 pence (2021: loss of 0.022
pence).
The Group generated cash from operations for the full year which, in addition
to targeted recruitment also supported further capital expenditure investment
of £0.66m (2021: £0.21m). Product innovation continues to be an essential
strategic pillar, total investment in research expenses during the year was
10.3% of revenue. The closing net cash(1) balances of the Group stood at
£0.99m at 31 December 2022 (31 December 2021: £1.76m), with available gross
cash resources at 31 December 2022 of £3.20m (31 December 2021: £4.06m)
including an undrawn invoice discounting facility of £1.0m.
1. Reconciliation to adjusted KPI measures included in the Operating
and Financial Review
Strategy and Development
The Group specialises in the design, manufacture, sale and distribution of
innovative, high quality medical products, primarily for use in minimally
invasive surgery. We design and manufacture and source our branded port access
systems, surgical instruments and retraction devices which are sold directly
in the UK home market through our subsidiary, Elemental Healthcare, and
exported widely through a global network of trusted distribution partners.
Many of our products in this field are based on a "resposable" concept, in
which the products are part re-usable, part disposable, offering a high
quality and environmentally responsible solution at a cost that is competitive
against fully disposable alternatives.
Elemental also has exclusive UK distribution for a select group of specialist
products employed in laparoscopy, bariatric and metabolic surgery, hernia
repair and breast reconstruction. In addition, we design and develop medical
devices for carefully selected OEM partners and have also collaborated with a
major UK industrial partner to provide precision engineering solutions to
complex problems outside the medical arena.
We aim for our brands to be recognised and respected by healthcare
professionals in all major geographical markets in which we operate. Through
internal development, partnership or acquisition, we provide a broad portfolio
of cost-effective, procedure-specific surgical instruments and implantable
devices that offer reliable solutions to genuine clinical needs in the
operating theatre environment.
The senior leadership team has carried out activities to clarify and focus our
understanding of our vision, mission and strategic pillars in order to achieve
our objectives. This strengthens the attainment of long-term sustainable
growth and promotes the delivery of value to all stakeholders. Cultural values
are important in propagating shared goals and behaviours of the business and
as we move into 2023 there will be further updates on progress in this regard.
Regulatory and new product development
The Company has made significant advances to obtaining MDR approval with one
of the three product categories already receiving certification along with the
key Quality Management System (QMS), with another product group to be
imminently approved. The QMS approval was vital to allow the Company to
continue new product development and plans to launch a range of instruments to
complement the Logi™ Resposable® portfolio are in place for Q4 2023. The
decision by the EU to extend the transition time for MDR is only applicable
for companies who are on the pathway for MDR and this further raises the
barrier to entry for not only new entrants but also many existing medtech
competitors.
In addition to the extension of the Logi™ Resposable ™ portfolio there are
a number of projects focused on improving both manufacturing efficiencies,
expanding overall capacity and reducing costs. This initiative has been
enabled by the ongoing investment programme in plant and tooling. Further
investment in manufacturing and regulatory is planned for the coming year,
providing opportunities to further support the growth, improve the
efficiencies, and overall enhance the profitability of the business.
Current trading and outlook
Whilst the backlog of patients requiring treatment in the UK continues to
increase, standing at 7.2m in December 2022, sales remain strong. Revenue in
the current year to date for SI brand and Distribution sales are 9.2% ahead of
corresponding period last year and the future order book is looking positive
going into Q2. There is a similar picture globally however the unique
selling proposition of our product portfolio, which are high performing,
sustainable and cost-effective solutions, leave us well placed to address this
pent-up demand and make a positive impact on the environment.
The launch of the new YelloPort Elite(TM) 5mm in Q2 2022, designed in a
collaboration with CMR Medical, alongside the introduction of the Optical
trocar provides increased opportunity in USA, Japan and India where there is a
significant requirement for an Optical 5mm trocar. The planned launch of the
additions to the Logi(TM) range were delayed as a consequence of the MDR
process and will now be launched later in the year. In addition, a number of
cost down R&D projects will provide the opportunity for margin improvement
throughout 2023 and into next year.
New geographical markets are providing some significant prospects for the
forthcoming year. In India, where registration was obtained earlier this year,
evaluations with key surgeons in a group of Delhi based hospitals are
progressing well. A new partner in Germany has seen the conversion of a new
account with further evaluations scheduled. In the US the partnership with
Microline is seeing progress with a number of hospital conversions and again
further evaluations are underway. The Company continues to work with key
partners to strengthen the overall growth opportunities.
Given the multiple factors driving improved prospects for growth, the Board
has increased confidence in not only the outlook for 2023 but also the
longer-term growth trajectory for the Group.
Nigel Rogers
Non-Executive Chairman
28 March 2023
Operating and Financial Review
Operational overview
People
In the first half of the year there were challenges in retaining key skilled
manufacturing personnel, with employee turnover at its highest level for a
number of years, combined with the well publicised challenges of attracting
new staff. To address these issues, the Company introduced a number of
initiatives, with the trial implementation of a four-day working week which
started at the beginning of August, being the most significant. The trial is
supported by the UK pilot programme and has been carefully managed to ensure
five-day continuity of service and support. The scheme is set to benefit from
improved productivity levels from improved employee wellbeing. Efficiency
initiatives are also being rolled out to ensure that the trial remains
operationally effective. In addition, financial packages were increased to be
comparable with market rates which have been exacerbated by the current
inflationary pressures. Since the trial has started, there have been
successful hires and employee turnover has lowered. The trial has been
extended for a further two months and will be continually reviewed.
Supply chain
Supply chain disruptions continued throughout 2022 but have started to ease;
lead times on materials and parts needed for new machinery have been lengthier
than historical norms. As a consequence, this has impacted manufacturing
efficiencies and delayed sales orders. Inventory holdings have remained at
higher levels to alleviate the pressure. Investment in new skilled labour and
plant and machinery have allowed some of the manufacturing processes to be
brought back in house which will improve both efficiency and capacity. The
supply chain and people challenges remain but are under better control and it
is anticipated that these obstacles will gradually recede through 2023.
Regulatory
The regulatory pathway continues to be on track with the EU Medical Device
Regulation (MDR), and additional resource towards the end of the year has been
brought in to support the process. In August, the Company successfully
completed a quality management system (QMS) audit. The regulatory environment
continues to be fluid, including a recent change to the deadlines for most of
the Company's competitors to achieve certification under MDR from 2024 until
2028. The Company has, however, been quicker to adapt to the changing
landscape and remains well placed to achieve MDR during 2023.
Financial overview
Revenue
The board reviews the revenue in terms of year-on-year growth and with to
reference to the 2019 financial year as a pre-pandemic comparative period,
which provides a measure of the revenue recovery since the effects of Covid-19
on the Company's operating markets.
The Group recorded strong revenue growth in 2022, increasing by 24.3% to
£11.34m. This compares with the full year revenues of £9.1m in 2021, £6.3m
in 2020 and £10.7m in 2019 as a pre-pandemic comparative.
Revenues from the sale of Surgical Innovations Brand (SI Brand) products
increased by 15.6% to £5.56m (2021: £4.81m) and recovered to 95.2% of
pre-pandemic levels (2019: £5.84m).
Distribution sales represent third party products that complement the
portfolio of manufactured products. This segment represents 37.2% of the
revenue for 2022 (2021: 34.1%, 2019: 28.9%). This represents growth of 30.2%
compared to 2019.
The UK distribution sales had a strong finish to the year £4.04m (2021:
£3.12m) with sales up 13.1% in the second half of the year (2022H1: £1.90m,
2022H2: £2.15m).
The robust revenue growth in the second half of the year was predominantly UK
led. New hospital conversions were underpinned by the Company's sustainability
strategy and led to annual sales for the UK (excluding OEM) which at £5.72m
were up 30% (2021: £4.42m) and 20% above pre-pandemic levels (2019: £4.72m).
The more pronounced level of sales growth seen in the second half has
continued into the current year, with new business wins contributing to
year-on-year growth.
OEM sales grew overall to £1.73m, up 45% (2021: £1.20m) and are now very
close to pre-pandemic levels (2019: £1.79m). The underlying drivers of growth
have been an expansion of both new and existing relationships.
SI brand revenues for Europe were up 28% to £1.38m (2021: £1.08m) and were
7.4% ahead of those achieved in 2019. Investment in supporting the dealer
network has improved distributor relations helping them to grow their
territories.
Revenues from the US (excluding OEM) are slightly down year-on-year to £1.24m
(2021: £1.33m) and are not yet back to the level seen in 2019 (£1.85m).
Restricted hospital access affected evaluations at the beginning of the year
with increases in US activity in the second half of the year.
Further investment into supporting the dealer network through additional sales
training, and the new product launches will improve the revenue growth in
2023.
The APAC region continues to generate strong revenue growth to £0.93m, a
24.6% increase on 2022 (2021 £0.74m) and surpassing levels seen in 2019
(2019: £0.46m). We continue to work closely with our Japanese distributor as
they gain market share. The focus on sustainability continues to gain traction
here also, initial stocking orders have been placed for launching the Logic
reusable instrument range.
Margins
Commercial or underlying margins remained within target range at 42.5%, a
reduction from the reported numbers in the first half of the year (2022H1:
45.3%). A review was undertaken to analyse the overhead absorption rate. As
operating expenses have increased with inflationary pressures the overhead
rate has been uplifted reflecting this cost pressure. In addition, pressures
from material suppliers continue and both are mitigated and passed on where
possible.
The reported gross margin of 34.6% (2021: 34.3%) which includes the net cost
of manufacturing, reflects the operational challenges the business has
experienced over the course of the year, shortage of skilled labour and
extended supply chain lead times on both material and new plant and equipment
have hampered manufacturing productivity and therefore costs were
under-recovered.
Analysis of gross margin
The Group has disaggregated margins in the following table:
2022 2021
£'000
£'000
Revenue 11,340 9,126
Cost of Sales (6,525) (5,268)
Underlying Gross Margin 4,815 3,858
Underlying Gross Margin % 42.5% 42.3%
Net Cost of Manufacturing(2) (893) (727)
Contribution Margin 3,922 3,131
Contribution Margin % 34.6% 34.3%
2.Underlying net cost of manufacturing with the Government support of the CJRS
scheme of £2,000 in 2021 allocated in other income added back to adjust the
net costs of Manufacturing to £725,000 results in an underlying contribution
margin of 34.33%.
Use of adjusted measures
Adjusted KPIs are used by the Board to understand underlying performance and
exclude items which distort comparability, as well as being consistent with
broker forecasts and measures. The method of adjustments are consistently
applied but are not defined in International Financial Reporting Standards
(IFRS) and, therefore, are considered to be non-GAAP (Generally Accepted
Accounting Principles) measures. Accordingly, the relevant IFRS measures are
also presented where appropriate.
Adjusted EBITDA
Adjusted EBITDA is a measure of the business performance. The Group uses this
as a proxy for understanding the underlying performance of the Group. This
measure also excludes the items that distort comparability including the
charge for share-based payments as this is a non-cash expense normally
excluded from market forecasts.
Adjusted EBITDA increased in 2022 to £0.70m due to the increased sales
activity and was in line with expectations (2021: £0.50m).
Operating expenses increased to £3.88m (2021: £3.61m) predominately due to
the increased investment into sales and marketing to drive the sales activity
and regulatory heads to undertake the challenges with the MDR (Medical Device
Regulation) transition. Inflationary pressures and the ability to attract and
retain key employees also affected the incremental overheads throughout 2022
as the Group aligned with market rates and compensation packages were reviewed
accordingly.
Other expensed/non-recurring items relate to employee termination payments
amounting to £32,000 (inclusive of NI and legal fees).
CAPEX Investment
Capital expenditure on tangible assets increased with the investment into
improving the manufacturing facilities £0.12m as well as the capacity and
capabilities, with a new Laser Welder, a financed Citizen L32 Lathe and an
Injection Moulder, totaling £0.55m. Property, plant and equipment additions
were £0.66m (2021: £0.21m) set against a depreciation charge of £0.17m
excluding Right of use assets (2021: £0.26m).
In addition, there is continual investment into new tooling of £0.08m
(included in additions above) with a further committed spend of £0.07m which
will improve efficiencies in 2023.
The Group continues to review CAPEX plans and will continue to strengthen its
investment plans in 2023, expected to be around £0.5m which is anticipated to
include £0.08m of committed spend on deposits for larger items of plant and
machinery due to be delivered in 2024 circa £0.5m for a replacement Grinder
and an additional Lathe.
Investment into new product development has continued as part of the strategy
and the Group successfully launched the YelloPort™ 5mm Elite and Optical
Trocar during the year. Cash into development expenditure was £0.42m (2021:
£0.45m). Development expenditure was tested for impairment, it was decided
that the current projects all continue to provide economic benefit and
therefore no impairment was recognised (2021: £0.15m).
In addition to the product launches the research and development team have
played a pivotal role in the work undertaken for MDR which impacts the amount
of time spent on capitalised projects and increases the cost of research
expenses.
A review of the goodwill arising on the acquisition of Elemental Healthcare
was tested for further impairment. The trading environment in the UK market
was significantly impacted by the pandemic throughout 2020 and this continued
into 2021, which impacted the cumulative impairment by £2.76m. In the second
half of 2021 the UK market showed strong signs of recovery, and this has
continued into 2022. With greater visibility on the outlook the Directors
anticipate improved forecasting of future net inflows on this cash generating
unit (CGU) and on this basis, the recoverable amount of the CGU exceeds its
carrying value by £4.5m.
Inventory holdings remain at higher levels, increasing throughout the year by
£0.20m to £3.16m (2021: £2.97m). Continued disruption in supply chain with
extended lead times have compounded the need to retain higher Inventory
levels. This level of holding will be frequently reviewed throughout 2023.
Trade receivables were higher at the year-end £1.76m (2021: £1.4m), affected
by the increased revenue, with negligible bad debts or overdue balances. Trade
creditors increased over the same period, which reflected the Group's
optimisation of working capital (2022: £1.42m, 2021: £1.09m).
Net cash generated from operations was £0.49m (2021 used in: £0.43m)
reflecting the improvement in the profitability of the business. The Group
closed the year with net cash balances of £0.99m (excluding leases) compared
with opening net cash of £1.76m. The movement being impacted by a combination
of the increased investment activities £1.08m (2021: £0.66m) and refinancing
of the bank borrowings £0.96m (2021: £0.53m).
In March 2022 the Board refinanced the existing debt including the additional
undrawn revolving credit facility of £0.5m and replaced it with an invoice
discounting facility of £1.00m and in addition extended the CBILS loan of
£1.5m to May 2026. The refinance provides greater flexibility than the
existing debt and continues to provide ample headroom for the Group. Total
bank borrowings as of 31 December 2022 were £1.21m, in addition £0.1m was
used to purchase a new Lathe on a finance lease in early 2022. The Group
continues to have access to the £1m invoice discounting facility which
remains undrawn at the date of this announcement.
The Group recorded a corporation tax credit of £0.32m relating to an enhanced
Research and Development claim in respect of 2020 and 2021 (2021: credit of
£0.13 relating to 2019 ) and a deferred tax credit of £nil (2021: £nil).
The tax charge on Elemental Healthcare this year has been relieved through
Group losses. Overall, the Group continues to hold substantial tax losses on
which it holds a cautious view, and consequently the Group has chosen not to
recognise those losses fully.
Key Performance Indicators ("KPIs")
The Group considers the key performance indicators of the business to be:
2022 2021 Target Measure
Underlying Gross Profit Margin Gross profit (before net manufacturing cost)/ revenue 42.5% 42.3% >40%
Direct Gross Profit Margin Gross profit / revenue 34.6% 34.3% >40%
Net Cash/(Net Debt)(1) Cash less debt £0.99m £1.76m N/A
1. Net debt comprised of bank borrowings £1.21m (2021: £1.8m), excluding
leases under the adoption of IFRS16.
Reconciliation of adjusted KPI / measures;
EBITDA(2) Profit before taxation
As stated £0.63m £(0.06)m
Share based payments £0.04m £0.04m
Other expense/non-recurring items £0.03m £0.03m
Adjusted Measure £ 0.70m £ 0.01m
2. EBITDA is defined as earnings before interest, taxation,
depreciation and amortisation (including impairment). EBITDA is calculated as
operating profit of £0.04m adding back depreciation £0.36m, amortisation
£0.23m and impairment £nil.
Earnings per share EPS
Basic EPS 0.028p
Profit attributable to shareholders £0.26m
Add: Share based payments £0.04m
Add: other expense/non-recurring items £0.03m
Adjusted profit attributable to shareholders £0.33m
Adjusted EPS 0.036p
Principal risks and uncertainties
The management of the business and the nature of the Group's strategy are
subject to a number of risks which the Directors seek to mitigate wherever
possible. The principal risks are set out below.
Issue Change vs. prior year Risk and description Mitigating actions
Funding risk At same level The Group currently has a mixture of borrowings comprising a balance of Liquidity and covenant compliance is monitored carefully across varying time
£1.20m CBILS arrangement, a small finance lease of £0.1m to fund capex along horizons to facilitate short term management and also strategic planning. This
with additional headroom of an undrawn £1.0m invoice discounting facility. monitoring enables the management team to consider and to take appropriate
The Group remains dependent upon the support of these funders and there is a actions within suitable time frames.
risk that failure in particular to meet covenants attaching to the CBILS could
have financial consequences for the Group.
In March 2022 the Board refinanced the existing debt including the additional
undrawn revolving credit facility of £0.5m and replaced it with an invoice
discounting facility of £1m and in addition extended the CBILS loan to May
2026. The refinance provides greater flexibility than the existing debt and
continues to provide ample headroom for the Group. In aggregate total
borrowing at 31 December 2022 was £1.31m (2021: £1.88m). The invoice
discounting facility remains undrawn to date.
The bank continue to be a supportive stakeholder.
Shortage of skilled labour Increased In the early part of the year the Group has struggled to attract and retain The Board reviewed the compensation and other benefits throughout the year to
key skilled personnel. ensure salaries were competitive to market rates.
In addition, the Company joined the 4-day week UK trial in August 2022 for a
period of 6- months. The Group has continued to extend this trial further in
2023.
Overall, the additional package and benefits have allowed the business to
attract key staff and continues to retain employees, with staff turnover rates
decreasing.
Customer concentration At The Group exports to over thirty countries and distributors around the The majority of distributors, including the most significant, are well
same level world, but certain distributors are material to the financial performance and established and their relationship with the Group spans many years. Credit
position of the Group. As disclosed in note 2 to the financial statements, one levels and cash collection is closely monitored by management, and issues are
customer accounted for 8.2% of revenue in 2022 and the loss, failure or quickly elevated both within the Group and with the distributor.
actions of this customer could have a severe impact on the Group.
Foreign At same level The Group's functional currency is UK Sterling; however, it makes significant The Group monitors currency exposures on an on-
purchases in Euros and US Dollars.
exchange risk
going basis and enters into forward currency arrangements where considered
appropriate to mitigate the risk of material adverse movements in exchange
rates impacting upon the business. Euro and US Dollar cash balances are
The US Dollars and Euros are generally mitigated by US Dollar sales by monitored regularly and spot rate sales into sterling are conducted when
creating a natural hedge. significant currency deposits have accumulated. The accounting policy for
foreign exchange is disclosed in accounting policy 1d in the Annual Report.
Regulatory At same level As an international business a significant proportion of the Group's products The Group has a dedicated Compliance department which assists product
require registration from national or federal regulatory bodies prior to being development teams with support as required to minimise the risk of regulatory
approval offered for sale. The majority of our major product lines have FDA approval in approval not being obtained on new products and ensures that the Group
the US and we are therefore subject to their audit and inspection of our operates processes and procedures necessary to maintain relevant regulatory
manufacturing facilities. approvals.
There is no guarantee that any product developed by the Group will obtain and
maintain national registration or that the Group will always pass regulatory
audit of its manufacturing processes. Failure to do so could have severe Whilst there is no guarantee that this will be sufficient, the Group has
consequences upon the Group's ability to sell products in the relevant invested in people with the appropriate experience and skills in this area
country. which mitigates this risk significantly.
The Group has untill March 2023 to transition the current product portfolio to We have increased resource into the regulatory team and continued throughout
fall under the Medical Device Regulations (MDR), currently held under Medical 2022 to ensure internal deadlines are met.
Device Directive (MDD). Time constraints of BSI the notified body are out of
our control.
MDR transitions are well underway, and we are actively working with our
Notified Body regarding the extension to current MDD certificates recently
approved by the EU.
Economic factors Increased Current wider economic factors are impacting inflationary rates. The cost of As part of the recruitment and retention strategy the Group reviewed the
living across the UK during 2022 has increased sharply. The annual inflation market rates and compensated employees accordingly during 2022. Additional
reached 11.1% in October 2022, a 41 year high, before easing in subsequent benefits have also been implemented; this will be continually reviewed
months to 9.2% in February 2023. throughout 2023.
The pressures on employment costs, energy and raw materials have impacted the Energy bill have been less affected due to a fixed rate deal; however, this
business and continue to do so in 2023. will come to end in July 2023. The Group are constantly reviewing the current
tariffs. Energy rates are reducing but will be expected to be at least double
the rate of the existing tariff.
Supply chain delays in raw materials, finished goods and plant and equipment
have impacted the business during 2022, this has eased in the second half of
the year but has continued to impact the business albeit to a lesser extent in Raw material purchases are reviewed, and economies of scale are applied.
2023. Supply chain increases are passed on where possible to the customer. Margins
are reviewed on a continual basis.
Inventory levels remain high to mitigate the supply chain delays.
Going concern
The Directors have prepared forecasts for the period to March 2024 based on an
evaluation of financial forecasts, sensitised to reflect a rational judgement
of the level of inherent risk.
In March 2022 the Group refinanced the existing debt, this included the
additional undrawn revolving credit facility of £0.5m. The debt was replaced
with an invoice discounting facility of £1.0m and an extension of the CBILS
loan of £1.5m repayable over four years till May 2026. The refinancing
provides greater flexibility for further investment in terms of covenant
testing than the prior debt and continues to provide ample headroom for the
Group. (Covenant information is provided at disclosure note 13 to the
financial statements in the Annual Report). Financial headroom as at 31
December 2022 was £3.2m with the invoice discounting facility remaining
undrawn.
The Group continues investment in capital expenditure predominantly on plant
and machinery circa £0.35m in the next twelve months. Decisions to take
additional finance in the form of hire purchase or use of the existing debt to
finance the projects will impact both the cash and the covenant testing and
the decisions to utilise such funding will very much depend on the performance
of the business.
The Board is satisfied that there is ample headroom including testing any
sensitivities under reasonably possible scenarios, and the Directors conclude
that it continues to be appropriate to prepare the Annual Report and Accounts
on a going concern basis.
Consolidated statement of comprehensive income
for the year ended 31 December 2022
2022 2021
£'000 £'000
Revenue 2 11,340 9,126
Cost of sales 2 (7,418) (5,995)
Gross profit 3,922 3,131
Other operating expenses 2 (3,881) (3,611)
Other Income - 25
Operating profit / (loss) 41 (455)
Finance costs (98) (130)
Finance income - -
Loss before taxation (57) (585)
Taxation credit 321 129
Profit/(Loss) and total comprehensive Income 264 (456)
Profit/(loss) per share, total and continuing
Basic 0.03p (0.05p)
Diluted 3 0.03p (0.05p)
The Consolidated statement of comprehensive income above relates to continuing
operations.
Profit/(Loss) and total comprehensive income relate wholly to the owners of
the parent Company.
Consolidated statement of changes in equity
for the year ended 31 December 2022
Share Share Capital Merger Retained
capital premium reserve reserve earnings Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance as at 1 January 2021 9,328 6,587 329 1,250 (6,404) 11,090
Share based payment - - - - 30 30
Total - transactions with owners - - - - 30 30
Loss and total comprehensive income for the period - - - - (456) (456)
Balance as at 31 December 2021 9,328 6,587 329 1,250 (6,830) 10,664
Share based payment - - - - 35 35
Total - transactions with owners - - - - 35 35
Profit and total comprehensive income for the period - - - - 264 264
Balance as at 31 December 2022 9,328 6,587 329 1,250 (6,531) 10,963
Consolidated balance sheet
at 31 December 2022
2022
2021
£'000 £'000
Assets
Non-current assets
Property, plant and equipment 858 366
Right of use assets 918 832
Intangible assets 4 6,403 6,216
8,179 7,414
Current assets
Inventories 3,162 2,965
Trade and other receivables 2,055 1,695
Cash at bank and in hand 2,199 3,644
7,416 8,304
Total assets 15,595 15,718
Equity and liabilities
Equity attributable to equity holders of the parent company
Share capital 7 9,328 9,328
Share premium account 6,587 6,587
Capital reserve 329 329
Merger reserve 1,250 1,250
Retained earnings (6,531) (6,830)
Total equity 10,963 10,664
Non-current liabilities
Borrowings 5 825 -
Dilapidation provision 165 165
Lease liability 722 750
1,712 915
Current liabilities
Trade and other payables 6 1,886 1,614
Accruals 420 488
Borrowings 382 1,880
Lease liability 232 157
2,920 4,139
Total liabilities 4,632 5,054
Total equity and liabilities 15,595 15,718
Consolidated cash flow statement
for the year ended 31 December 2022
2022 2021
£'000 £'000
Cash flows from operating activities
Profit/(Loss) after tax for the year 264 (456)
Adjustments for:
Taxation (321) (129)
Finance income - -
Finance costs 98 130
Other Income-CBILS interest grant - (23)
Depreciation of property, plant and equipment 167 258
Amortisation and impairment of intangible assets 4 232 402
Depreciation Right of Use assets 188 187
Share-based payment charge 35 30
Foreign exchange (82) 12
Increase in inventories (197) (802)
Increase in trade and other receivables (360) (412)
Increase in payables 6 204 276
Cash generated/ (used in) from operations 228 (527)
Taxation received 321 129
Interest paid (63) (35)
Net cash generated/ (used in) from operating activities 486 (433)
Cash flows from investing activities
Payments to acquire property, plant and equipment (659) (212)
Acquisition of intangible assets (419) (445)
Net cash used in investing activities (1,078) (657)
Repayment of bank loan (375) (300)
Repayment of CBILS 5 (294) -
Repayment of lease liabilities (266) (232)
Net cash used in financing activities (935) (532)
Net decrease in cash and cash equivalents (1,527) (1,622)
Cash and cash equivalents at beginning of year 3,644 5,278
Effective exchange rate fluctuations on cash held 82 (12)
Cash and cash equivalents at end of year 2,199 3,644
Notes to the consolidated financial statements
1. Group accounting policies under IFRS
(a) Basis of preparation
Surgical Innovations Group PLC (the "Company") is a public AIM listed company
incorporated, domiciled and registered in England in the UK. The registered
number is 02298163 and the registered address is Clayton Wood House, 6 Clayton
Wood Bank, Leeds, LS16 6QZ.
The consolidated financial statements have been prepared in accordance with
the requirements of the Companies Act 2006 and UK-adopted international
accounting standards. 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.
Going concern
The Directors have considered the available cash resources of the Group and
its current forecasts and have a reasonable expectation that the Group has
adequate cash resources and support to continue in operational existence for
the foreseeable future, considered to be at least 12 months for the date of
approval from the financial statements. Further details of the Directors'
assessment are provided in the Chairman's Statement, the Operating and
Financial Review and Directors' report and disclosed in note 1.(p) of the
financial statements in the Annual Report.
2. Segmental reporting
Information reported to the Board, as Chief Operating Decision Makers, and for
the purpose of assessing performance and making investment decisions is
organised into three operating segments. The Group's operating segments under
IFRS 8 are as follows:
SI Brand - the research, development, manufacture and distribution of SI branded
minimally invasive devices
OEM - the research, development, manufacture and distribution of minimally invasive
devices for third party
medical device companies through either own label or co-branding. As well as
Precision Engineering, this includes the research, development, manufacture
and sale of minimally invasive technology products for precision engineering
applications
Distribution - Distribution of specialist medical products sold through Elemental Healthcare
Ltd
The measure of profit or loss for each reportable segment is gross margin less
amortisation of product development costs. Assets and working capital are
monitored on a Group basis, with no separate disclosure of asset by segment
made in the management accounts, and hence no separate asset disclosure is
provided here. The following segmental analysis has been produced to provide a
reconciliation between the information used by the chief operating decision
maker within the business and the information as it is presented under IFRS.
SI Brand Distribution OEM Total*
£'000
£'000
Year ended 31 December 2022 £'000 £'000
Revenue 5,557 4,044 1,739 11,340
Expenses (4,223) (2,410) (1,017) (7,650)
Result
Segment result 1,334 1,634 722 3,690
Unallocated expenses (3,649)
Other Income -
Profit from operations 41
Finance income -
Finance costs (98)
(Loss) before taxation (57)
Tax credit 321
*There were no revenues transactions between the segments during the year
Included within the segment/operating results are the following significant
non-cash items:
SI Brand Distribution OEM Total
Year ended 31 December 2022 £'000 £'000 £'000 £'000
Amortisation of intangible assets 232 - - 232
Impairment of intangible assets - - - -
Unallocated expenses for 2022 include sales and marketing costs (£577,000),
research and development costs (£1,164,000), central overheads (£745,000),
Direct (Elemental Healthcare) sales & marketing overheads (£1,096,000),
share based payments (£35,000), Other expensed/Non recurring (£32,000) note
3 to the financial statements in the Annual Report and Accounts.
SI Brand Distribution OEM Total*
£'000
£'000
Year ended 31 December 2021 £'000 £'000
Revenue 4,813 3,116 1,197 9,126
Expenses (3,770) (1,837) (790) (6,397)
Result
Segment result 1,043 1,279 407 2,729
Unallocated expenses (3,209)
Other income 25
(Loss) from operations (455)
Finance income -
Finance costs (130)
(Loss) before taxation (585)
Tax charge 129
(Loss) for the year (456)
*There were no revenues transactions between the segments during the year
Included within the segment results are the following items:
SI Brand Distribution OEM Total
Year ended 31 December 2021 £'000 £'000 £'000 £'000
Amortisation of intangible assets 257 - - 257
Impairment of intangible assets 145 - - 145
Unallocated expenses for 2021 include sales and marketing costs (£246,000),
research and development costs (£973,000), central overheads (£797,000),
Direct (Elemental Healthcare) sales & marketing overheads (£1,085,000),
share based payments (£30,000), Other expenses/non-recurring (£78,000) are
as set out in Note 3 of the notes to the financial statements in the Annual
Report and Accounts.
Disaggregation of revenue
Year ended 31 December 2022 SI Brand Distribution OEM Total
£'000 £'000 £'000 £'000
United Kingdom 1,683 4,044 1,315 7,042
Europe 1,377 - - 1,377
US 1,240 - 424 1,664
APAC(1) 926 - - 926
Rest of World 331 - - 331
5,557 4,044 1,739 11,340
Year ended 31 December 2021 SI Brand Distribution OEM Total
£'000 £'000 £'000 £'000
United Kingdom 1,306 3,116 1,008 5,430
Europe 1,075 - - 1,075
US 1,333 - 189 1,522
APAC(1) 743 - - 743
Rest of World 356 - - 356
4,813 3,116 1,197 9,126
The Group has disaggregated revenues in the following table:
1. Asia-Pacific
Revenues are allocated geographically on the basis of where revenues were
received from and not from the ultimate final
destination of use. During 2022 £933,000 (8.2%) of the Group's revenue
depended on one distributor in the OEM segment (2021: £901,000 (9.9%), and
£921,000 (8.1%) in the SI Brand segment (2021: £1,050,000 (11.5%).
Sales of goods were £11,306,000 (2021: £9,062,000) and sales relating to
services in the UK were £34,000 (2021: £64,000).
3. Earnings per ordinary share
Basic profit/(loss) per ordinary share
The calculation of basic earnings per ordinary share for the year ended 31
December 2022 was based upon the profit attributable to ordinary shareholders
of £264,000 (2021: loss of £456,000) and a weighted average number of
ordinary shares outstanding for the year ended 31 December 2022 of 932,816,177
(2021: 936,564,122).
Diluted profit/(loss) per ordinary share
The calculation of diluted earnings per ordinary share for the year ended 31
December 2022 was based upon the profit attributable to ordinary shareholders
of £264,000 (2021: loss of £456,000) and a weighted average number of
ordinary shares outstanding for the year ended 31 December 2022 of 935,945,943
(2021: 938,784,384).
Adjusted profit/(loss) per ordinary share
The calculation of adjusted earnings per ordinary share for the year ended 31
December 2022 was based upon the adjusted profit attributable to ordinary
shareholders (profit before non-recurring costs and amortisation and
impairment costs relating to the acquisition of Elemental Healthcare,
impairment of capitalised development costs and share based payments) of
£331,000 (2021: loss of £203,000) and a weighted average number of
ordinary shares outstanding for the year ended 31 December 2022 of 932,816,177
(2021: 936,564,122).
No. of shares used in calculation of earnings per ordinary share ('000s)
2022 2021
No. of Shares No. of Shares
Basic earnings per share 932,816 936,564
Dilutive effect of unexercised share options 3,129 2,220
Diluted earnings per 935,945 938,784
share
4. Intangible assets Capitalised development costs Single use product knowledge transfer Exclusive Supplier Agreements
Goodwill Total
£'000 £,000 £'000 £'000 £'000
Cost
At 1 January 2021 13,702 225 8,180 1,799 23,906
Additions 445 - - - 445
At 1 January 2022 14,147 225 8,180 1,799 24,351
Additions 419 - - - 419
At 31 December 2022 14,566 225 8,180 1,799 24,770
Accumulated amortisation
At 1 January 2021 (12,952) (225) (2,757) (1,799) (17,733)
Charge for the year (257) - - - (257)
Impairment provision* (145) - - - (145)
At 1 January 2022 (13,354) (225) (2,757) (1,799) (18,135)
Charge for the year (232) - - - (232)
Impairment provision* - - - - -
At 31 December 2022 (13,586) (225) (2,757) (1,799) (18,367)
Carrying amount
At 31 December 2022 980 - 5,423 - 6,403
At 31 December 2021 793 - 5,423 - 6,216
At 1 January 2021 750 - 5,423 - 6,173
Goodwill and intangibles are allocated to the cash generating unit (CGU) that
is expected to benefit from the use of the asset.
Capitalised development costs
Capitalised development costs represent expenditure incurred in developing new
products that fulfil the requirements met for capitalisation as set out in
paragraph 57 of IAS38. These costs are amortised over the future commercial
life of the product, commencing on the sale of the first commercial item, up
to a maximum product life cycle of ten years, and taking account of expected
market conditions and penetration.
Capitalised development expenditure was tested for impairment, it was decided
that the current projects all continue to provide future economic benefit and
therefore no impairment was recognised (2021: £0.15m).
Goodwill
The Group tests goodwill at each reporting date for impairment and whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. The recoverable amount of a cash generating unit (CGU) is
determined based on value in use calculations. These calculations use cash
flow projections based on five-year financial budgets approved by management.
Cash flows beyond the five-year period are extrapolated using estimated long
term growth rates.
An impairment review is carried out annually for goodwill. Goodwill arose on
the acquisition of Elemental Healthcare Limited in 2017 and is related to both
the Distribution and SI Brand segments of the Group. Elemental Healthcare
Limited is considered to be a separate cash-generating unit (CGU) of the Group
whose recoverable amount has been calculated on a value in use basis by
reference to discounted future cash flows over a five-year period plus a
terminal value. Principal assumptions underlying this calculation are the
growth rate into perpetuity of 1.5% (2021:1.5%) and a pre-tax discount rate of
15.7% (2021:13.2%) applied to anticipated cash flows. In addition, the value
in use calculation assumes a gross profit margin of 43.3% (2021:39.5%) using
past experience of sales made and future sales that were expected at the
reporting date based on anticipated market conditions.
The trading environment in the UK market was significantly impacted by the
pandemic throughout 2020 and this continued into 2021, which impacted the
cumulative impairment by £2.7m. In the second half of 2021 the UK market
showed strong signs of recovery and this has continued into 2022. With greater
visibility on the outlook the directors anticipate improved forecasting of
future net inflows on this CGU and on this basis, the recoverable amount of
the CGU exceeds its carrying value by £4.5m.
5. Borrowings
2022 2021
Bank Loan £'000 £'000
Current liabilities 382 1,880
Non-current liabilities 825 -
Lease liabilities
Current liabilities 232 157
Non-current liabilities 722 750
2,161 2,787
In March 2022, the Group refinanced its existing debt with Yorkshire bank
consisting of the following:
· Extension to the CBILS of £1.5m repayable in May 2026, interest
is calculated at rate of 2.94% repayable monthly over the Bank of England base
rate. Monthly installments are £0.029m.
· Covenants attached to the CBILS comprise of EBITDA to debt
servicing costs at a minimum of 1.25x. First test 30 June 2022 (last 6
months), then September 22 (9 months), then rolling 12-month basis afterwards.
· Additional headroom with an Invoice Discounting facility of
£1.0m across the Group, which replaced loan A and the RCF; 2.5% on margin
with a maximum of nominal administration fee of a maximum of £0.018m if not
utilised. As at the date of this announcement this facility remains undrawn.
Changes in liabilities arising from financing activities Non-current loans and borrowings Current loans and borrowings Total
At 1 January 2021 1,879 298 2,177
Cash flows - (350) (350)
Transfer between non-current and current (1,879) 1,879 -
Interest accruing in the period - 53 53
At 31 December 2021 - 1,880 1,880
Cash flows for repayment of bank loan - (304) (304)
Cash flows for refinance-CBILS (294) (294)
Transfer between non-current and current 825 (825) -
Interest paid in the period - (57) (57)
Interest accrued in the period (18) (18)
At 31 December 2022 825 382 1,207
6.Trade and other payables 2022 2021
£'000
£'000
Trade payables 1,420 1,090
Other tax and social security 172 230
Other payables 294 294
1,886 1,614
The Group and Company's financial liabilities have contractual maturities
(including interest payments where applicable) which are summarised below.
Amounts due in Amounts due in Amounts due in
As at 31 December 2022 Less than 1 year 2-5 years 5-10 years Total financial liabilities
£'000 £'000 £'000 £'000
Trade payables 1,420 - - 1,420
Other payables 294 - - 294
Bank borrowings-Current 382 - - 382
Bank borrowings-Non-current - 825 - 825
2,096 825 - 2,921
Amounts due in Amounts due in Amounts due in
As at 31 December 2021 Less than 1 year 2-5 years 5-10 years Total financial liabilities
£'000 £'000 £'000 £'000
Trade payables 1,090 - - 1,090
Other payables 294 - - 294
Bank borrowings-Current 1,904 - - 1,904
Bank borrowings-Non-current - - - -
3,288 - - 3,288
7. Share Capital
Shares in issue reconciliation (Authorised, allotted, called up and fully
paid)
2022 2021
Opening no of shares in issue 932,816,177 932,816,177
Issued in satisfaction of share options exercised - -
Closing number of shares in issue 932,816,177 932,816,177
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