Excel-tech Ltd.
TSX : NRV

Excel-tech Ltd.

December 13, 2006 07:00 ET

XLTEK Announces Third Quarter Fiscal 2007 Results

OAKVILLE, ONTARIO--(CCNMatthews - Dec. 13, 2006) - Excel-Tech Ltd. (TSX:NRV)("XLTEK") announced today its results for the three and nine months ended October 31, 2006. The Company completed its initial public offering ("IPO") on April 25, 2006.

Revenues for the three months ended October 31, 2006, in US dollars, were $7.5 million compared to $7.5 million in the comparable period last year. For the first nine months of fiscal 2007 revenues, in US dollars, were $21.6 million compared to $20.6 million last year. Approximately 94% of the Company's sales were in US dollars in fiscal 2007. In Canadian dollars, revenues were $8.4 million in the third quarter and $24.4 million in the first nine months of fiscal 2007 compared to $9.0 million and $25.1 million respectively in the same periods last year.

Gross profit as a percentage of revenues decreased to 47.0% in the third quarter and to 47.7% for the first nine months of fiscal 2007 from 51.5% and 52.8% in the same periods respectively last year. The decrease is due primarily to the decline in the average value of the US dollar relative to the Canadian dollar, and lower margins on certain neuro-diagnostic equipment sales.

Selling expenses have increased in the third quarter and the first nine months of fiscal 2007 compared to the same periods last year due primarily to planned higher selling and marketing costs relating to the Company's Front-line Neuro products. Subsequent to the third quarter, as announced on November 30, 2006, the Company has significantly reduced its sales and marketing expenses.

General and administrative expenses have increased in fiscal 2007 compared with the prior year due to increased costs associated with being a public company and higher legal costs related to patent applications during the first half of the year.

Net research and development expenditures were higher for the three and nine months ended October 31, 2006 compared to the same prior-year periods due to the development of the NeuroPATH and other Front-line Neuro products, and a decrease in tax credits as a result of becoming a public company. Effective November 30, 2006, the Company reduced the validation studies related to its Front-line Neuro products.

The Company generated a net loss of $1.9 million or $0.10 per common share in the third quarter of fiscal 2007 compared to net income of $274,000 or $0.05 per share for the same period last year. For the nine months ended October 31, 2006 the net loss was $5.1 million or $0.35 per common share compared to a net loss of $237,000 or $0.05 per common share last year. Included in the current year net loss was a one-time pre-tax $500,000 Make-Whole payment on the Subordinated Loan in connection with the IPO incurred in the first quarter of fiscal 2007.

Including the reduced sales and marketing expenses, lower costs related to the validation studies, and other cost savings measures implemented on November 30, 2006, management estimates it will realize quarterly savings of approximately CDN $1.2 million. Management also estimates it will incur a one time charge to earnings in the fourth quarter of fiscal 2007 of approximately $1.1 million, largely attributable to severance and contract termination costs.

As at October 31, 2006, the Company held a total of $16.8 million in cash and short-term investments, an increase from $6.9 million as at January 31, 2006. The increase was due primarily to the completion of the Company's IPO on April 25, 2006. Net cash used for operating activities was $4.3 million for the nine months ended October 31, 2006 compared to cash provided by operating activities of $435,000 during the same period last year. The decrease in cash flow from operations resulted primarily from a higher net loss during the latest quarter, partially offset by a positive net change in non-cash working balances related to operations. The costs savings initiatives implemented on November 30, 2006 are expected to result in considerable cash savings for the Company.

Business Update

XLTEK's core business consists of its Neuro-Diagnostic Equipment, used by neurology specialists to assist in the diagnosis and monitoring of the central and peripheral nervous systems. These core products, marketed since 1997, are sold into four main markets: the epilepsy market, the sleep disorders market, the myopathy and neuropathy market, and the surgical monitoring market. Revenue from these core market segments currently generates the majority of XLTEK's revenue.

In its core business, XLTEK received 510(k) FDA clearance in May 2006 for its EMU 40 BrainMonitor. This wireless device, worn on an epilepsy patient's belt, is used for continuous brain monitoring and surgical planning for epilepsy in various settings including inpatient, intensive care and the operating room. Sales of this product began in the United States during the second quarter.

The Company is leveraging the proprietary technology and capabilities of its core business to develop, commercialize and market its innovative Front-line Neuro products. These products are designed to assist physicians and specialists in the diagnosis, monitoring and treatment of disorders of the central and peripheral nervous system. The first sales of these products occurred during the first quarter of fiscal 2007 and revenues increased during the second and third quarters. However, successful commercialization of this product is dependent upon reimbursement to customers by government and private insurance companies.

There have been recent Local Coverage Determinations ("LCDs") trends related to restrictions on reimbursement by Medicare to physicians for automatic nerve conduction testing for the initial identification of peripheral neuropathy. In the Company's opinion, this will result in significantly reduced billings by physicians for diagnosing carpal tunnel syndrome using automated nerve conduction instruments such as XLTEK's Front-line NeuroPATH instrument. Consequently, we have taken specific actions to reduce our expenditures associated with this product.

Subsequent to October 31, 2006, the Company reduced its NeuroPATH sales and marketing staff and redeployed remaining resources to market the NeuroPATH to neurology specialists, physical medicine specialists and other healthcare professionals not expected to be impacted by these recent LCDs. The Company has also reduced to a large extent the validation studies currently underway to obtain FDA approval of our Front-line NeuroPATH as a replacement for conventional electro-diagnostic measurements. Furthermore, the Company has taken steps to reduce expenditures in its core neuro-diagnostic business in order to improve earnings.

"With the significant cost savings initiatives recently implemented, we believe we will reduce our losses and cash burn considerably," commented John Mumford, President and Chief Executive Officer. "Looking ahead, we will direct our efforts toward other opportunities in our advanced instruments business, including our promising SleepRite product line currently under development. We are also well positioned should the reimbursement environment related to our Front-line NeuroPATH carpal tunnel syndrome and distal symmetric polyneuropathy products become more favourable." SleepRite, which is currently under later stages of development, is intended for use in the diagnosis of obstructive sleep apnea by primary care physicians and in patients' homes.



Financial Highlights

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(in $000 except per share amounts) Nine months
Three months ended and period
Oct. 31 ended Oct. 31
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2006 2005 2006 2005

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Revenues (US dollars)
Neuro-Diagnostic Equipment 5,561 6,366 16,754 17,166
Consumables & Services 1,970 1,159 4,891 3,410
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Total Revenues (US dollars) 7,531 7,525 21,645 20,576
Total Revenues (Canadian dollars) 8,421 8,958 24,385 25,066
Gross Profit 3,960 4,609 11,639 13,228
Selling Expenses 3,361 2,764 9,712 8,885
General and Administrative Expenses 1,236 910 3,343 2,568
Research and Development Expenses (net) 1,376 596 3,373 1,766
Net Income (Loss) (1,865) 274 (5,124) (237)
Net Loss per Share (basic) $(0.10) $0.05 $(0.35) $(0.05)
Cash and Short-Term Investments,
net of Bank Indebtedness 16,769 6,901
Long-Term Debt (incl current portion) 2,049 7,213
Shareholders' Equity 23,334 9,026
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About XLTEK

XLTEK is a medical technology company that designs, develops and sells proprietary medical devices used to monitor the central and peripheral nervous systems and used in the diagnosis of related disorders. XLTEK is headquartered in Oakville, Ontario, Canada. The Company's common shares trade on the Toronto Stock Exchange (Symbol: NRV.TO). Additional information about XLTEK and its products may be found at www.xltek.com.

Forward-Looking Statements:

Certain statements contained in this release containing words like "believe", "intend", "may", "expect" and other similar expressions, are forward-looking statements that involve a number of risks and uncertainties. Factors that could cause actual results to differ materially from those projected in the Company's forward-looking statements include the following: market acceptance of our technologies and products; our ability to obtain financing; our financial and technical resources relative to those of our competitors; our ability to keep up with rapid technological change; government regulation of our technologies; our ability to enforce our intellectual property rights and protect our proprietary technologies; the ability to obtain and develop partnership opportunities; the timing of commercial product launches; the ability to achieve key technical milestones in key products and other risk factors identified from time to time in the Company's filings.

The consolidated financial statements and Management's Discussion and Analysis for the period can be found at www.xltek.com.



Excel-Tech Ltd.

CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars)
(unaudited)

October 31, January 31,
2006 2006
$ $
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ASSETS
Current
Cash 994 1,511
Short-term investments 15,775 5,390
Accounts receivable 5,573 6,142
Investment tax credits receivable 1,006 1,770
Inventories 5,983 4,897
Prepaid expenses 318 232
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Total current assets 29,649 19,942
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Corporate transaction costs - 591
Property, plant and equipment, net 4,257 4,408
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33,906 24,941
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 5,313 6,209
Current portion of deferred revenue 1,667 1,677
Current portion of long-term debt 218 5,218
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Total current liabilities 7,198 13,104
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Deferred revenue 1,543 816
Long-term debt 1,831 1,995
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Total liabilities 10,572 15,915
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Commitments and contingencies

Shareholders' equity
Share capital 38,975 19,785
Contributed surplus 1,096 854
Share purchase loan (298) (298)
Deficit (16,439) (11,315)
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Total shareholders' equity 23,334 9,026
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33,906 24,941
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CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(in thousands of Canadian dollars, except per share data)
(unaudited)

Three months ended Nine months ended
October 31, October 31,
--------------------------------------
2006 2005 2006 2005
$ $ $ $
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Revenues 8,421 8,958 24,385 25,066
Cost of sales 4,461 4,349 12,746 11,838
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Gross profit 3,960 4,609 11,639 13,228
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Expenses
Selling 3,361 2,764 9,712 8,885
General and administrative 1,236 910 3,343 2,568
Research and development, net 1,376 596 3,373 1,766
Financial
Investment income (177) (21) (400) (112)
Interest expense 48 152 231 447
Make-whole payment on convertible
subordinated loans - - 500 -
Foreign exchange loss (gain) (19) (66) 4 (89)
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5,825 4,335 16,763 13,465
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Net income (loss) for the period (1,865) 274 (5,124) (237)

Deficit, beginning of period (14,574) (11,504) (11,315) (10,993)
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Deficit, end of period (16,439) (11,230) (16,439) (11,230)
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Earnings (loss) per share
Basic $(0.10) $0.05 $(0.35) $(0.05)
Diluted $(0.10) $0.02 $(0.35) $(0.05)
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Weighted average shares outstanding
(000's)
Basic 19,025 5,081 14,786 5,081
Diluted 19,025 14,526 14,786 5,081
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
(unaudited)

Three months ended Nine months ended
October 31, October 31,
---------------------------------------
2006 2005 2006 2005
$ $ $ $
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OPERATING ACTIVITIES
Net income (loss) for the period (1,865) 274 (5,124) (237)
Add (deduct) items not involving cash
Amortization of property, plant and
equipment 117 114 311 312
Amortization of corporate
transaction costs - 8 7 22
Unrealized income on short-term
investments (144) (16) (246) (57)
Stock option compensation expense 82 99 174 174
Deferred share unit compensation
expense 68 - 68 -
Net change in non-cash working capital
balances related to operations (160) 2,151 492 221
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Cash provided by (used in) operating
activities (1,902) 2,630 (4,318) 435
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INVESTING ACTIVITIES
Redemption of short-term investments 2,231 - 7,839 1,290
Purchase of short-term investments - - (17,978) -
Purchase of property, plant and equipment (67) (87) (160) (250)
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Cash provided by (used in) investing
activities 2,164 (87) (10,299) 1,040
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FINANCING ACTIVITIES
Issuance of common shares, net - - 19,264 -
Repayment of bank indebtedness - (705) - -
Repayment of convertible subordinated
loan - - (5,000) -
Repayment of other long-term debt (55) (54) (164) (164)
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Cash provided by (used in) financing
activities (55) (759) 14,100 (164)
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Net increase (decrease) in cash during
the period 207 1,784 (517) 1,311
Cash, beginning of period 787 - 1,511 473
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Cash, end of period 994 1,784 994 1,784
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Supplemental cash flow information
Interest paid 47 91 527 267
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