Adaltis Inc.
TSX : ADS

Adaltis Inc.

November 09, 2007 08:00 ET

Adaltis Announces 2007 Third Quarter Financial Results

MONTREAL, QUEBEC--(Marketwire - Nov. 9, 2007) - Adaltis Inc. (TSX:ADS), an international in vitro diagnostic (IVD) company, today reported its third quarter 2007 financial results.

Financial Highlights:

- Revenue for the three months ended September 30, 2007 was $14.6 million compared to $12.0 million in 2006, an increase of $2.6 million, or 21.7%. This increase is driven by $1.5 million of increased sales in our higher margin products, including our infectious disease product lines buoyed by increased sales in China and other emerging countries such as Russia, Brazil, and India. It was also due to $1.4 million of growth in sales of lower margin products in Asia, and was partially offset by the unfavorable impact of foreign exchange fluctuations of $0.3 million.

- Total costs and expenses were $21.9 million for the third quarter compared to $18.9 million in the third quarter of 2006, an increase of $3.0 million or 15.9%. $2.6 million of this increase was attributable to higher sales volume, and $0.9 million was related to additional expenses related to our operational platform in China. This was partially offset by $0.3 million due to the favorable impact of foreign exchange fluctuations in addition to $0.2 million of reduced costs in North America and Europe.

- Net loss for the quarter was $8.0 million, or $0.12 on a basic and diluted per share basis compared to a loss of $8.3 million, or $0.16 on a basic and diluted per share basis for the same period in 2006.

- Revenue for the nine-month period ended September 30, 2007 was $49.0 million, or 6.5% greater than the $46.0 million reported last year. The net loss for the nine-month period ended September 30, 2007 was $20.7 million or $0.35 on a basic and diluted per share basis compared to a loss of $20.1 million, or $0.40 for the same period last year.

Recent Operational Highlights:

- Adaltis entered into an important cooperation agreement with the Chinese Medical Doctor Association ('CMDA'), an influential organization closely associated with the Chinese Ministry of Health. This cooperation agreement has been entered into in connection with the Chinese Ministry of Health's intention to automate and improve the safety of laboratory practices in the several thousands of laboratories and health clinics found in the rural areas of China. The agreement provides that the CMDA and Adaltis will work together with a core objective to support the improvement of clinical diagnostic capabilities and healthcare service levels in Chinese communities, by enhancing the safety and integrity of laboratory results through automation of laboratory practices. After several months of trials with Adaltis automated systems, Adaltis succeeded at demonstrating to the CMDA the benefits, reliability and value of our proposed automated solution. Adaltis will immediately begin to work jointly with the CMDA and, along with CMDA's active support, expects to supply its small automated instruments and reagents to community health clinics and laboratories in addition to helping train laboratory personnel on good laboratory practices.

- Adaltis received a favorable independent scientific validation of our new Syphilis New Generation product, a product released in the second quarter of 2007, from the London-based Microbiological Diagnostic Assessment Service (MIDAS institute), confirming 100% sensitivity at every stage of the disease (primary, secondary and latent) and 100% specificity. Due to the very high sensitivity of our new syphilis kit, the report's conclusions suggest its use for screening purposes. The Adaltis Syphilis New Generation will be commercialized jointly with our new HIV v.4 to penetrate the important global blood bank market segment. Adaltis' new HIV v.4 product was recently evaluated by the Paul-Ehrlich-Institute (PEI) of Germany, as one the most sensitive commercially-available HIV assays on the market.

- Adaltis has identified new distributors in growing emerging countries, and entered into distribution agreements with certain of them. Notably, Adaltis has entered into an important distribution agreement with a new distributor in Russia, with the objective of addressing the growing infectious disease segment in this country. We expect that Russia could become an important market for Adaltis in the near future, as significant investments are currently being made by the Russian government to enhance the quality of its healthcare infrastructure and services. We are observing significant growth in this market.

- Adaltis has progressed with the continued integration of its operational platform in China, with the completion of transfer of its infectious disease products, which will lead to the closure of the Canadian manufacturing facility in the fourth quarter of 2007.

"During the third quarter, characterized by a cyclical slowdown of sales activities in Europe, we continued to experience good growth in key regions such as China, Brazil and India where sales of our high-quality, low-cost infectious disease microplate products, targeting the lucrative blood bank market, have increased considerably. We are very pleased with the recent announcement of our agreement with the CMDA, which we hope will lead to an increasingly close relationship with Chinese authorities administering the Chinese community health program. In parallel, we kept our focus on the continuous improvement of our Eclectica™ system. We also made progress in our plan to consolidate operations in our manufacturing facility in China, which will allow us to close production in Canada before the end of 2007, as originally scheduled. Overall we remain committed to our mission of becoming a leading provider of in vitro diagnostic systems in emerging markets, specifically focusing on China" said Mr. Pierre Larochelle, President and Chief Executive Officer of Adaltis.

Financing Highlights:

- On September 11, 2007, Adaltis entered into a credit facility with a Canadian Bank which provides access to $9.5 million of liquidity. The new facility was structured to provide the Company with liquidity in connection with recent developments in regards to third party asset-backed commercial paper ("Third Party ABCP") held by Adaltis. This credit facility is secured by the Company's Third Party ABCP investments. Details of these holdings of Third Party ABCP are described further below, as well as in "Note 6" to the Financial Statements and in "Critical Accounting Estimates" in the Management's Discussion and Analysis.

- On November 7, 2007 Adaltis entered into a $4,242,717 (2,995,000 Euros) financing facility with an Italian finance company. This facility, bearing interest at EURIBOR plus 1.25%, is repayable on demand and is available to finance our foreign accounts receivable that are eligible for export credit insurance.

Investment in Asset-Backed Commercial Paper

Adaltis currently holds Third Party ABCP investments with a nominal and book value of $9.5 million. These investments, which were purchased in accordance with the Company's investment policy, matured in the third quarter. They were not repaid on maturity or since. These investments were rated with the highest credit rating - R1-High - by Dominion Bond Rating Service (DBRS), a recognized rating agency, at the time of their purchase. DBRS placed several Third Party ABCP issuers "Under Review with Developing Implications" following an announcement on August 16, 2007, that a consortium representing banks, asset providers and major investors had agreed in principle to a long-term proposal and interim agreement regarding Third Party ABCP. Under this proposal, the affected Third Party ABCP would be converted into term floating rate notes maturing no earlier than the scheduled termination dates of the underlying assets. A Pan Canadian Investors Committee (the "Committee") was created on September 6, 2007, to oversee the proposed structuring process of the Third Party ABCP.

Recent information in the media has reported that Mr. Purdy Crawford, Chair of the Committee, has reassured investors and repeated that the quality of the assets is high. He also mentioned that the proposal being prepared will offer to investors the option to choose short term paper, tradable on the market, in exchange for the paper they currently hold. Finally, the Committee reported that the whole process should be completed during the first quarter of 2008, if things go as currently planned.

Notwithstanding the preceding comments, it is possible that the Committee might not be able to agree on a proposal, or that the outcome of the restructuring proposal could give rise to a significant charge to the Company's earnings that cannot be currently estimated or to a significant collectability restriction, even beyond one year. Adaltis is in discussion with the relevant parties involved, and is closely monitoring the situation in order to recover the full value of the Company's Third Party ABCP investments.

These investments are presented in the short-term assets at their nominal value as "Investments in asset-backed commercial paper". On September 11, 2007, the Company entered into a credit facility with a Canadian Bank providing access to $9.5 million of liquidity (see "Note 7b" in the Financial Statements).

Going Concern:

The Company's financial statements have been prepared in accordance with Canadian GAAP using the going-concern assumption, which assumes the Company will be able to realize assets and discharge liabilities in the normal course of operations. These financial statements do not reflect the adjustment that might be necessary to the carrying amount of reported assets, liabilities and revenue and expenses and the balance sheet classification used if it were unable to continue operation in accordance with this assumption.

The Company has sustained significant losses in the current and prior years. The Company's ability to continue as a going concern is contingent on its ability to generate sales and earnings, and to obtain financing to meet its cash requirements. At this time, it has no assurance that it will obtain financing and Management is continuing its efforts to obtain additional funding.

Financial Results:

Revenue (including sales, rental income, royalties and other revenue)

Revenue for the three months ended September 30, 2007 was $14.6 million compared to $12.0 million in 2006, an increase of $2.6 million, or 21.7%. This increase is driven by $1.5 million of increased sales in our higher margin products, including our infectious disease product lines buoyed by increased sales in China and other emerging countries such as Russia, Brazil, and India. It was also due to $1.4 million of growth in sales of lower margin products in Asia, and was partially offset by the unfavorable impact of foreign exchange fluctuations of $0.3 million.

For the nine-month period ended September 30, 2007, Revenue of $49.0 million represented an increase of $3.0 million, or 6.5% over the $46.0 million reported for the same period last year. Overall, our higher margin products, including our infectious diseases product lines, grew by $3.1 million due partially to increased revenues in China and other emerging countries such as Russia and Brazil. We also benefited from the favorable impact of foreign exchange fluctuations of $1.3 million. This was partially offset by a decrease of $1.4 million in lower margin products in Asia driven by a few special project sales which occurred in the first three months of 2006, not repeated in 2007.

Cost of Sales and Rental Income

For the three-month period ended September 30, 2007, Cost of Sales and Rental Income was $13.2 million compared to $10.6 million in 2006, an increase of $2.6 million, or 24.5%. This increase was partially due to higher sales, as explained under the "Revenue" caption above, which contributed $2.6 million to Cost of Sales and Rental Income and the ramp up of our plant in Shanghai which resulted in an additional $0.2 million of cost. This was partially offset by the favorable impact of foreign exchange fluctuations of $0.2 million.

Cost of Sales and Rental Income for the nine-month period ended September 30, 2007 was $41.3 million compared to $37.6 million for the same period last year, an increase of $3.7 million, or 9.8%. However, taking into account $0.7 million of production costs which was classified as Selling and Administrative costs last year as we had not yet begun full production at our Shanghai plant, Cost of Sales and Rental Income are $3.0 million higher than the nine-month period ended September 30, 2006. This increase was partially due to higher sales, as explained under the "Revenue" caption above, which contributed $1.3 million to the increase in Cost of Sales and Rental Income and the ramp up of costs relating to our plant in Shanghai which resulted in an additional impact of $0.6 million. The unfavorable impact of foreign exchange fluctuations contributed the remaining increase of $1.1 million.

Selling and Administrative Expenses

Selling and Administrative Expenses was $7.2 million for the three-month period ending September 30, 2007, compared to $7.0 million, an increase of $0.2 million, or 2.9% compared the same period in 2006. This is a result of reduced expenses in North America and Europe of $0.2 million and $0.1 million of favorable foreign exchange fluctuations offset by $0.5 million of additional expense from our investments in our operational platform in China.

For the nine-month period ended September 30, 2007, Selling and Administrative Expenses was $21.6 million, compared to $21.4 million for the nine months ended September 30, 2006. However, taking account of $0.7 million of production cost which was classified as Selling and Administrative Expenses last year as we had not yet begun full production at our Shanghai plant in the first half of 2006, Selling and Administrative Expenses are $0.9 million, or 4.2% higher than the nine-month period ended September 30, 2006. Reductions in expenses in North America and Europe of $0.5 million were offset by $1.0 million of increased expenses as a result of our investments in an operational platform in China and by unfavorable foreign exchange fluctuations of $0.4 million.

Research and Development Expenses

Research and Development Expenses were $1.5 million for the three-month period ended September 30, 2007 compared to $1.3 million for the same period in 2006, an increase of $0.2 million, or 15.4%. For the nine-month period ended September 30, 2007, Research and Development Expenses were $4.8 million compared to $3.9 million in the corresponding period last year, an increase of $0.9 million, or 23.1%.

The $0.2 million increase for the three-month period was attributable to investments made in our R&D platform in China, whereas the increase of $0.9 million for the nine-month period was mostly attributable to investments made in our R&D platform in China as well as $0.2 million from the unfavorable impact of foreign exchange fluctuations.

Financial Expenses

Financial Expenses were $0.7 million and $2.3 million for the three-month and nine-month periods ending September 30, 2007 compared to $0.6 million and $1.3 million for the same periods in 2006, an increase of $0.1 million and $1.0 million respectively and is related to higher average levels of indebtedness compared to last year.

Stock-based Compensation

Stock-based Compensation expense, a non-cash item, was $0.2 million and $0.7 million for the three-month and nine-month periods ended September 30, 2007 compared to $0.5 million and $1.5 million for the same periods last year. The difference is primarily the result of the options granted prior to the second quarter of 2004 being completely amortized.

Foreign Exchange Gain

The Foreign Exchange Gain for the three-month and nine-month periods ended September 30, 2007 was $0.2 million and $0.9 million respectively. The gain was primarily due to the favorable impact of the weakening of the euro versus the Canadian dollar. For the same periods last year, there was a minimal loss for both the three-month and nine-month periods ended September 30, 2006.

Income Taxes

Income Taxes for the three-month period this year were minimal compared to $0.2 million for the three-month period ended September 30, 2006. The difference is due to expense incurred in 2006, primarily related to a prior year tax assessment in Italy.

Income Taxes for the nine-month period ended September 30, 2007 resulted in a credit of $0.2 million in 2007, compared to an expense of $0.3 million last year. The $0.5 million difference is primarily due to the reversal in 2007 of $0.2 million future tax liability related to the Chinese subsidiaries following a change in the enacted income tax rates in China compared to an expense of $ 0.3 million in 2006 primarily related to a prior year tax assessment in Italy.

Net Loss

For the reasons described above, for the three-month period ended September 30, 2007, we posted a Net Loss of $8.0 million or $0.12 on a basic and diluted per share basis compared to a Net Loss of $8.3 million or $0.16 on a basic and diluted per share basis for the same period in 2006.

On a year-to-date basis, we posted a Net Loss of $20.7 million or $0.35 on a basic and diluted basis compared to a Net Loss of $20.1 million, or $0.40 on a basic and diluted per share basis for the same period in 2006.

For the three-month and nine-month periods ended September 30, 2007, an amount of $0.3 and $0.8 million has been recorded respectively as an increase to the equity component of convertible debentures in the consolidated statement of deficit. This amount was taken into consideration in determining basic and diluted per share data.

Outstanding Shares

The number of outstanding shares as at September 30, 2007, was 69,912,648 (52,162,647 as at December 31, 2006).



Selected Financial Information

(In thousands of Canadian dollars, except per share amounts; unaudited)

Three-month Three-month Nine-month Nine-month
period ended period ended period ended period ended
September 30, September 30, September 30, September 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Revenue 14,606 12,036 48,967 45,976
Loss before financial
expenses, income
taxes and selected
items (1) (7,303) (6,900) (18,719) (16,938)
Net loss (8,001) (8,256) (20,725) (20,133)
Net loss per share (0.12) (0.16) (0.35) (0.40)
Cash loss per share (2) (0.10) (0.13) (0.29) (0.32)

September 30, December 31,
2007 2006
----------------------------------------------
Cash and cash
equivalents,
restricted cash,
and investment
in ABCP 19,966 7,366
Total assets 135,776 127,189
Bank indebtedness 15,791 13,480
Total long-term debt
(including current
portion) (3) 19,094 18,811
Shareholders'
equity 69,119 60,064


(1) Selected items include stock-based compensation expense, foreign exchange (gain) loss and non-controlling interest.

(2) Cash loss per share is a non-GAAP measure calculated by adding back amortization and stock-based compensation expense to the net loss in computing the loss per share calculation.

(3) Includes liability component of convertible debentures and note payable to a subsidiary of a shareholder, non interest bearing

2007 Third Quarter Financial Results Available

The complete financial statements, notes to financial statements, and Management's Discussion and Analysis for the third quarter ended September 30, 2007, will be available on the Company's website - www.adaltis.com. These documents are also filed on SEDAR, and will be accessible from the SEDAR website at www.sedar.com.

Conference Call Notice

Adaltis will host a conference call to discuss its third quarter results on Friday, November 9, 2007, at 9:30 a.m. ET. The dial-in number for the conference call is 1-866-234-7330 (Canada and United States) or 1-706-634-5011 (International). If you are unable to participate in the conference call, a replay will be available by audio webcast on Adaltis' Website (under "Investor Relations") for 30 days.

Non-GAAP Measures

The Company reports its financial statements in accordance with GAAP. However, this document uses a non-GAAP performance measure: cash loss per share.

We believe this non-GAAP measure provides useful information to stakeholders regarding the Company's financial condition and results of operations. Management believes cash loss per share is a pertinent measure of the Company's performance considering the Company's significant non cash expenses, such as amortization and stock-based compensation expenses. This non-GAAP financial measure does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. It should be considered as supplemental in nature and not as a substitute for the related financial information prepared in accordance with GAAP.

About Adaltis

Adaltis is an international in vitro diagnostic company that develops, manufactures and markets diagnostic systems. It aims to leverage its experience in Europe to become a leading provider of in vitro diagnostic products in emerging markets, with a particular focus on China.

With the assistance of its two strategic shareholders, CITIC Pacific Limited (a large Hong Kong-based conglomerate) and Picchio Pharma Inc. (a joint venture healthcare investment firm owned by FMRC Family Trust (a trust of which Dr. Francesco Bellini is a beneficiary), and Power Technology Investment Corporation, a subsidiary of Power Corporation of Canada), Adaltis has completed building its manufacturing facility in Shanghai. Now operational, the production facility manufactures high-quality products in a low-cost GMP environment, in order to service existing markets in Europe, while providing a platform to penetrate the high-growth Chinese in vitro diagnostic market.

Adaltis is headquartered in Montreal, with offices in China, Hong Kong, Italy, Germany and Mexico.

Caution Concerning Forward-Looking Statements

Certain statements made in this press release, including in particular the short and long term implications of the Corporation's holdings of Third Party ABCP, the impact of the agreement signed with CMDA, the potential market opportunity in Russia and other emerging markets where the Corporation has signed distribution agreements, and the suitability of our product offering, are forward-looking statements and are subject to important risks, uncertainties and assumptions. The Company cautions that, by their nature, forward-looking statements involve risk and uncertainty and the Company's actual actions or results could differ materially from those expressed or implied in such forward-looking statements. The forward-looking statements contained in this press release represent the expectations of Adaltis Inc. and its subsidiaries as at the date hereof and accordingly are subject to change after such date. However, Adaltis Inc. and its subsidiaries expressly disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

For additional information with respect to the risks and uncertainties and other factors that could cause the results or events predicted in these forward-looking statements to differ materially from actual results or events, please refer to the Annual Information Form of the Company filed with the Canadian securities commissions.

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