Adaltis Inc.
TSX : ADS

Adaltis Inc.

May 08, 2008 09:40 ET

Adaltis Announces First Quarter Financial Results

- Adaltis also Announces Closing of the Sale of Certain Assets in Europe

MONTREAL, QUEBEC--(Marketwire - May 8, 2008) - Adaltis Inc. (TSX:ADS), an international in vitro diagnostic (IVD) company, today reported its first quarter 2008 financial results and the formal closing of the sale of its European assets to a European-based company.

Financial Highlights:

Financial highlights discussed below are presented for continuing operations, unless mentioned otherwise.

- Revenue for the quarter ended March 31, 2008 for continuing operations, was $9.1 million, a decrease of $2.9 million compared to $12.0 million for the same period in 2007. The revenue shortfall was primarily attributable to lower sales of lower margin products in Asia, to the negative impact of foreign exchange fluctuations and our decision to delay our sales of Eclectica™ until the second half of the year.

- Total costs and expenses for continuing operations were $13.7 million in the first quarter compared to $17.7 million in the first quarter of 2007, a decrease of $4.0 million, or 22.6%. The decrease in cost and expenses was partially due to a $1.2 million positive impact in Italy of the reversal of a write-down to net realization value of inventory, as well as the reduction in sales.

- Net loss for the quarter was $9.3 million, or $0.14 on a basic and diluted per share basis compared to a loss of $6.7 million, or $0.13 on a basic and diluted per share basis for the same period in 2007. The net loss for the quarter included $2.4 million from the impact of foreign exchange fluctuations on continuing operations primarily due to the weakening of the Canadian dollar in comparison to the foreign currencies we operate in.

Sale of European Operations:

Also today, we closed the sale of certain assets of our European business to Radim SpA of Rome, Italy. As previously disclosed on March 10, 2008, this transaction includes the sale of specific assets and commercial operations in Italy, as well as our German subsidiary Adaltis Deutschland GmbH. The selling price will result in a slight profit over the book value of the assets sold. The sale is for a total consideration of $15.1 million (Euro 9.6 million) less assumption of bank debt of $3.9 million (Euro 2.5 million). Net proceeds will be used by Adaltis to complete the streamlining of its operations in Europe and to retire certain short term bank indebtedness.

"The closing of the sale of our European Operations is a major milestone of our plan, announced in March of this year, to accelerate the creation of a leading China-based IVD company. Consistent with our strategy to focus on China and emerging markets, Adaltis had decided to exit these markets where we had experienced a slight decline of sales over the last three years. This transaction is a significant milestone in the streamlining our cost structure. Regarding the continuous consolidation of our operations in China, we announced earlier the hiring of Frederick Leung, formerly General Manager China, Diagnostics Division, for Abbott Laboratories, as Chief Operating Officer - China and will make further announcements related to the consolidation of leadership of key functions in Shanghai over the next few weeks" said Mr. Pierre Larochelle, President and Chief Executive Officer.

Mr. Larochelle also provided an update on Eclectica , a system targeting small and medium size laboratories. "We completed the key development activities related to the improvement of the reliability and performance of Eclectica™, and initiated the internal validation process. These steps must be completed prior to the re-launch of Eclectica™ globally, which is planned for the second half of 2008".

Mr. Larochelle concluded that "with the support of our key strategic shareholders, we are very focused on our objective to become a China-based provider of high quality, low cost in vitro diagnostic systems, uniquely positioned to compete in China and other key emerging markets."

Operational Highlights:

In line with our strategy to focus on China and emerging markets and our decision to accelerate the consolidation of our operations in China, we have achieved the following specific operational milestones during and subsequent to the first quarter of 2008:

- On May 8, 2008, the Company concluded the sale of certain of the assets of its European business to Radim SpA. The transaction includes the sale of specific assets and commercial operations in Italy, as well as the sale of its German subsidiary Adaltis Deutschland GmbH.

- Initiated the downsizing of the European operations, which will result in a decrease of close to 50% of the headcount of our European organization.

- Continued to strengthen the management of the China organization including the hiring of Mr. Frederick Leung, whose background includes senior management positions for large players in the industry.

- Completed the key development activities related to the reconfiguration of Eclectica and initiated the internal validation process, prior to our objective to re-launch Eclectica globally.

Financing Highlight:

On March 27, 2008, we announced a $14.9 million rights offering. In connection with this rights offering, we have entered into a stand-by purchase agreement with key strategic shareholders, which have agreed to subscribe for up to $10.0 million of common shares not otherwise subscribed for under the rights offering.

Under the terms of the rights offering, shareholders of Adaltis resident in Canada and eligible shareholders in other jurisdictions (collectively, the "Eligible Shareholders"), as of the close of business on the record date of April 18, 2008 will receive one right for each common share of Adaltis held. One and a half (1.5) rights will entitle Eligible Shareholders to purchase one common share of Adaltis at $0.32 (the "Subscription Price") prior to 5:00 p.m. (Eastern time) on May 16, 2008. If not exercised prior to such time, the rights will have no value. The Subscription Price represents a 25% discount off the volume weighted average price of Adaltis' common shares on the Toronto Stock Exchange during the five (5) trading days immediately preceding the announcement of the rights offering. The rights offering is subject to regulatory approval, including that of the Toronto Stock Exchange.

Net proceeds from the rights offering will be used for working capital, including repayment of certain bank debt, and general operating purposes.

In connection with the rights offering, we have entered into a stand-by purchase agreement with Power Technology Investment Corporation ("PTIC"), a subsidiary of Power Corporation of Canada, and TNG Capital Inc. ("TNG"). Under this agreement, PTIC and TNG have each agreed, subject to certain terms and conditions, to subscribe at the Subscription Price for up to, but not exceeding, $8,640,000 and $1,360,000 (the "Committed Amount"), respectively, of common shares of Adaltis not otherwise subscribed for under the rights offering. In consideration for entering into the stand-by purchase agreement, each of PTIC and TNG will receive a fee from Adaltis payable in common shares of Adaltis, the number of such common shares to be equal to 3% of the applicable Committed Amount of PTIC and TNG, divided by the Subscription Price.

Financial Results:

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

Revenue for the three months ended March 31, 2008, was $9.1 million compared to $12.0 million in 2007, a decrease of $2.9 million or 24.2% . The decrease was attributable to lower sales of lower margin products in Asia of $1.0 million, $1.0 million from Eclectica™ and infectious disease product lines, and $0.9 million due to the effect of foreign exchange fluctuations. The lower sales in our lower margin business was due to various reasons including our decision to rationalize this activity. The lower sales in Eclectica™ stems from our decision to delay our rollout of Eclectica™ until the second half of the year as well as lower revenues from instrument related sales compared to the same period last year.

Cost of Sales and Rental Income

For the three-month period ended March 31, 2008, cost of sales and rental income was $6.7 million compared to $10.6 million in 2007, a decrease of $3.9 million or 36.8% . The decrease was due to the reduction in sales as well as a $1.2 million positive impact in Italy from the reversal of a write-down to net realization value when there is a subsequent increase in the value of inventory, as required by the implementation of CICA standard Section 3031 as at January 1, 2008. This favorable variance was also increased by $0.7 million due to the impact of foreign exchange fluctuations.

Selling and Administrative Expenses

Selling and administrative expenses were $6.2 million for the three-month period ending March 31, 2008, an increase of $0.3 million, or 5.1% compared to the same period in 2007. The increase was due to higher pension expenses of $0.4 million, $0.2 million due to higher amortization costs primarily due to the commencement of amortization of our ERP system in China, and $0.2 million due to higher recruiting costs as we invest in our China infrastructure. This was partially offset by $0.3 million of favorable variance from foreign exchange fluctuations and $0.2 million in savings in Europe and North America.

Research and Development Expenses

Research and development expenses were $0.9 million for the three-month period ended March 31, 2008 compared to $1.2 million for the same period in 2007, a decrease of $0.3 million or 25.0%. The decrease was due to less reliance on consultants for $0.2 million and $0.1 million from foreign exchange fluctuations.

Financial Expenses

Financial expenses were $0.7 million for the three-month period ending March 31, 2008, approximating the expense for the same period last year.

Stock-based Compensation

Stock-based compensation expense, a non-cash item, was $0.1 million for the three-month period ending March 31, 2008 compared to $0.3 million in the same period last year.

Foreign Exchange Loss (Gain)

The foreign exchange loss for the three-month period ending March 31, 2008 was $2.4 million compared to a gain of $0.2 million last year. The foreign exchange loss was primarily due to the strengthening of foreign currencies versus the Canadian dollar in the first quarter, primarily as it relates to translating our net monetary assets and liabilities at current rates.

Loss in Investment in Asset-Backed Commercial Paper

We have recognized an additional provision for losses of $0.2 million during the three-month period ended March 31, 2008, with respect to our holdings in Third Party ABCP having a total nominal value of $9.5 million, for a total provision of $1.3 million (13.7% of the nominal value). This additional provision reflects the changes in the market conditions during the period. Our valuation is based on a discounted cash flow valuation technique performed on the restructured notes.

We continue to evaluate its options to recover the full value of our Third Party ABCP investments.

Income Taxes

Income taxes resulted in a nil value compared to a credit of $0.3 million in 2007. The difference is primarily due to the reversal in 2007 of a portion of the future tax liability related to the Chinese subsidiaries following a change in the enacted income tax rates in China.

Loss from Discontinued Operations

The losses from discontinued operations were $1.2 million compared to a loss of $0.5 million for the same period last year, an increase of $0.7 million. The increase in losses arises from adjustments to the value of inventory of $0.4 million, less margin on reduced sales amounting to $0.1 million, and the impact of foreign exchange fluctuations of $0.3 million. This was partially offset by less operating expenses of $0.1 million.

Net Loss

For the reasons described above, for the three-month period ended March 31, 2008, we posted a net loss of $9.3 million or $0.14 on a basic and diluted per share basis compared to a loss of $6.7 million or $0.13 on a basic and diluted per share basis for the same period in 2007.

For the three-month periods ended March 31, 2008 and 2007, an amount of $0.3 million has been recorded 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 March 31, 2008, was 69,912,648 (69,912,648 as at December 31, 2007).



SELECTED FINANCIAL INFORMATION
(In thousands of Canadian dollars,
except per share amounts) Three month period Three month period
ended March 31, ended March 31,
2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue 9,063 12,044
Loss before financial expenses,
income taxes and
selected items (1) (4,670) (5,606)
Net loss from
continuing operations (8,044) (6,135)
Net loss from
discontinued operations (1,225) (545)
Net loss (9,269) (6,680)
Loss per share for
continuing operations (0.12) (0.12)
Loss per share for
discontinued operations (0.02) (0.01)
Net loss per share (0.14) (0.13)
Cash loss per share (2) (0.11) (0.10)


March 31, 2008 December 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents,
investment in ABCP and
restricted cash 17,168 16,938
Total assets 129,081 128,158
Bank indebtedness 20,088 12,060
Total long-term debt
(including current portion) (3) 19,471 19,179
Shareholders' equity 42,387 51,669

(1) Selected items include stock-based compensation expense, foreign
exchange loss, loss in investment in asset-backed commercial
paper, income taxes, and non-controlling interest.

(2) Cash loss per share is a non-GAAP measure based on adding back
stock-based compensation expenses, and other non-cash charges back
to the loss per share calculation.

(3) Includes liability component of convertible debentures.


Corporate Update

The Company is holding its annual meeting of shareholders today at 11:00 a.m. at Le Palais des congres de Montreal, room 512-D, located at 159 Saint-Antoine St. West, Montreal, Quebec. The Company will discuss these first quarter results at the shareholders meeting.

2008 First Quarter Financial Results Available

The complete financial statements, notes to financial statements, and Management's Discussion and Analysis for the first quarter ended March 31, 2008, are 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.

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

Statements made in this report, other than statements of historical fact, that describe our objectives, projections, estimates, expectations, or predictions of the future may be "forward-looking statements" within the meaning of the securities laws. These statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "should", "estimates", "anticipates", or the negative thereof or other variations thereon, although not all forward-looking statements contain these identifying words.

We caution you that forward-looking statements, by their very nature, involve risk and uncertainty and that our actual actions or results could differ materially from those expressed or implied in such forward-looking statements or could affect the extent to which a particular projection is realized. Although this is not an exhaustive list, we caution you that statements concerning the following subjects in particular are, or are likely to be, forward-looking statements: our expectations regarding the improvements to and the re-launch and the commercial prospects of Eclectica™, the impact of the sale of certain assets of our European business, the impact of our accelerated streamlining efforts in Europe and elsewhere, the registration of our products in China, the consequences of our relationship with the Chinese Medical Doctor Association ('CMDA') in China, the short and long-term implications and the value of our holdings of asset-backed commercial paper, and any statements concerning the successful development, market penetration and sales of our products.

Important factors that could cause such differences include factors, such as obtaining regulatory registrations, affecting our ability to achieve our strategy in China and other emerging markets, the successful and timely completion of our ongoing development efforts in particular related to Eclectica™, the launch of new products, the uncertainties of market factors and regulatory processes to which our business is subject, and the successful completion and the values resulting from the restructuring of the asset-backed commercial paper market. For additional information with respect to certain of these and other factors, refer to our Annual Information Form (Risk Factors) filed with the Canadian Securities Commissions.

THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PRESS RELEASE REPRESENT THE EXPECTATIONS OF ADALTIS INC. AND ITS SUBSIDIARIES AS AT MAY 8, 2008, 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.

Contact Information