Microsaic Systems Plc (LON:MSYS) CEO Glenn Tracey talks to DirectorsTalk about its unaudited interim results for the six months ended 30 June 2018. With a 96% increase in revenues and good operation progress Glenn provides us with a little more detail around the results, explains the changes he has made since being appointed as CEO 1 year ago, updates us on the move into life sciences and lets us know what to expect over the remainder of 2018.
Financial Highlights
· Total revenues of £0.25m were 96% higher than H1 2017 (£0.13m)
· Continued rigorous capital management with a gradual investment in key areas of the business:
— Operating expenses up 3% on H1 2017 (£1.56m) to £1.61m included additional investment in key areas and certain costs related to the June fundraising.
— Loss before tax in H1 2018 of £1.50m, is 2% higher than H1 2017 (£1.48m).
— Cash of £6.96m as at 30 June 2018.
· Balance sheet strengthened considerably following the fundraising which raised £5.5m in June.
Operational Highlights
· Continued good progress with the bioprocessing market strategy where point of need MS has the potential to significantly reduce analysis lead times and increase production yield. Key operational milestones in H1 2018 included:
— Successfully completed “feasibility” (Phase 1) and now progressing the “integration” (Phase 2) with a global partner in bioprocessing. The Company’s partner is co-funding R&D and has increased its resources to support this phase of the project which is anticipated to be completed in H2.
— New collaborations signed with leading science and manufacturing institutions in the US and UK to generate new data which will demonstrate the value proposition for point-of-need MS in bioprocessing workflows.
· Strong progress in traditional markets for small molecule detection:
— Instrument orders in H1 2018 equal to the total number of orders for the full year 2017.
— New OEM agreement signed with Knauer Wissenschaftliche Gerate GmbH, for the integration of Microsaic’s point of need MS detector with Knauer’s preparative-liquid chromatography system, for world-wide distribution.
— New OEM agreement signed with Unimicro Technologies Inc., for the integration of Microsaic’s point of need MS detector with Unimicro’s automated capillary electrophoresis systems, for distribution in China.
— Four new distribution agreements were signed with partners in; Malaysia, Taiwan, the UK and central Europe for the distribution of the Microsaic-branded MiD® platform.
· Launch of new product: the 4500 MiD® was introduced in H1 2018, to further enhance the Company’s product and service proposition with an instrument that delivers a broader mass range detection capability.
· Good progress with outsourcing Microsaic’s remaining in-house micro-fabrication manufacturing to its assembly partner, based in the UK.
Corporate Highlights
· On 1 January 2018 Peter Grant was appointed as Non-Executive Chairman.
· On 2 January 2018 the Company awarded directors and employees options over 9 million ordinary shares.
OUTLOOK
The Board sees significant opportunities for its point of need MS Detectors to be integrated into multiple areas of bioprocessing. The focus in 2018 is to complete the integration (Phase 2) of the research agreement that the Company signed in December 2017 with a long-standing global partner in the biopharmaceuticals market.
The Company expects the sales momentum gained in H1 2018 in the traditional small molecule detection market to continue in H2 2018 as it commercialises the relationship with new OEM customers and new distributors signed in H1.
The project to transfer the Company’s remaining assembly and testing to the Company’s manufacturing partner in the UK is well underway. This will enable the Company to scale up manufacturing for delivery against its order pipeline as well as supporting future growth opportunities.
As previously communicated operating expenses will continue at a run rate above last year in line with the Board’s 5 Year Plan as further investment is made in R&D and sales and marketing. The Board will continue to operate in a prudent manner to make the optimum use of the capital available in-line with the interests of all stakeholders.
Given the progress made in H1 against the Company’s growth strategy and the collaboration with one of the foremost players in the global market for life science instrumentation, the Board remains confident in the prospects for the business and continues to trade in-line with expectations.
Glenn Tracey, CEO of Microsaic Systems plc, commented: “I am very pleased with the progress made in the first half of the year, including revenues well ahead of the same period last year and with instrument orders in H1 equal to the total number of orders for the full year 2017. We are encouraged by this growth which is supported by the growing base of OEM partnerships and distribution agreements we are cultivating.
“In addition to increased orders in our traditional markets, we have made good progress with our bioprocessing partner on the integration phase of the project.
“The Board would like to thank its shareholders and advisers for ensuring the recent fundraising was a success. With funds available the Company is now in a stronger position to progress and implement its strategy and plans.”
Commercial strategy
The Company is focussing R&D resources on opportunities in high-value biologic drug manufacture (i.e. bioprocessing), in addition to seeking growth in its traditional small molecule detection markets. In the longer term, the Company plans to extend its focus to other large and attractive high growth markets, such as point of care diagnostics.
Bioprocessing
The Directors believe that the Company has a significant opportunity for its point of need MS in bioprocessing. In 2017, following successful completion of a feasibility phase (“Phase one”), the Company entered an integration phase (“Phase two”) with one of the foremost players in the global market for scientific instrumentation in life sciences. This second phase of collaboration is being evaluated by the Company’s partner’s key bioprocessing customers.
Traditional MS is a time-consuming technique; typically, MS instruments are held in centralised laboratories which may be remote from the bioprocessing location and turn-around times for analysis can take several weeks.
By contrast, the Company’s point-of-need, compact MS can provide analyses in minutes, versus days or weeks in the case of other MS products. This will provide cumulative time savings in analysis, which can help to reduce the time to market for new biologic drug candidates, shorten manufacturing lead times, increase yield, enhance manufacturing processes and improve quality control. Point of need MS can measure biologics in-situ, in minutes per analysis, of which there maybe hundreds per annum.
Approximately eight out of the top ten selling drugs by revenue are biologics and the demand for biologic drugs is estimated to reach revenues of approximately $445 billion in 2019. The rate of biologic production line installations represents a significant investment for this sector, and the Directors believe that the total market for bioprocessing equipment is currently in the region of $15 billion. Consequently, the Board believes that the Company’s highly differentiated technology represents a strong opportunity for its point of need MS detectors, with the potential to drive substantial revenues from new customers with global reach.
Markets
The Company is placing more R&D emphasis on new application areas, especially in bioprocessing, however, although we continue to operate in the traditional small molecule detection market and are committed to fully supporting Microsaic’s existing OEMs and attracting new OEMs which share the Company’s vision for point of use MS. The Company’s 4500 MiD® Detector was launched during H1 2018 and provides an opportunity to attract new OEMs and open new application areas previously not accessible to the Company. The compact 4500 MiD® combines the complete vacuum system, electronics and computer in one box. In addition to wider OEM engagement, and in line with its stated strategy, the Company still intends to use distributors across North America, Europe and Asia Pacific.
Technology positioning and development strategy
Building on Microsaic’s “all in one” small footprint detection, the MiD® platform is ideally placed for biomolecular confirmation throughout the bioprocessing workflow.
Microsaic’s technology does not require cumbersome external pumps, and there is no need for an external PC, allowing for complete integration with third party OEMs. The Microsaic software and hardware are designed to offer easy maintenance and ease of use so that line operators can be trained to carry out the analysis in the production line. The Board believes this will significantly improve efficiency and process control compared with traditional MS detection methods.
Future product specifications will be driven by end-user requirements. This will inform Microsaic’s product development strategy as its MS Detectors move from the lab into production, and front-line operating environments. Microsaic will ensure that its strategic product development will remain focused on meeting demanding bioprocessing applications. However, many of these enhancements are expected to also provide a pipeline of competitive features able to address a wider range of application areas in small molecule detection.
Board and Management Changes
Peter Grant was appointed as Non-Executive Chairman in January 2018. The position was previously held on an interim basis by Non-Executive Director Eric Yeatman. Mr Grant has 40 years of experience, half at listed company board level, covering both the London main market (up to FTSE 250) and AIM, including Skyepharma PLC, WorldPay Group plc, Molins PLC and various senior positions at The General Electric Co. PLC Group.
Share Options
On 2 January 2018, the Company awarded 9,000,000 options to directors (5,500,000) and employees (3,500,000) at an exercise price of 4.05p.
Options awarded to employees and Executive Directors were granted under Microsaic’s Enterprise Management Incentive Scheme, while options awarded to the Chairman were granted under the Company’s Unapproved Share Option Scheme.
The employee options vest on the third anniversary of the date of grant. For employees there are no performance conditions.
The Directors options are subject to a three year service condition plus the following performance conditions. A tranche of options relates to each performance condition:
– Equity fundraising completed;
– Commercialisation (“Phase 3”) contract signed with global partner in bioprocessing;
– Product launch with global partner in bioprocessing or another major biopharma supplier; and
– The Company reports a Net Profit pre tax for a full year.
Fundraising
The Company announced on 5 June 2018 that it had conditionally raised £5.1m through a placing of 255,000,000 new ordinary shares at a price of 2p. The placing price represented an 11.1% discount to the closing mid-market price on 4 June 2018. At the same time, to allow retail investors the opportunity to participate, the Company launched an offer for subscription to raise up to £0.4m, underwritten by N+1Singer, via PrimaryBid through the issue of 20,000,000 new ordinary shares. The Placing and PrimaryBid Offers were duly concluded on 22 June 2018, raising £5.5m before expenses and 275,000,000 new ordinary shares were admitted to trading on AIM on 25 June 2018. Following the fundraising, the Company’s issued share capital comprises 456,365,146 ordinary shares.
FINANCIAL REVIEW
Comprehensive income:
In H1 2018, total revenues of £252,904 were 96.2% higher than H1 2017 (£128,884). H1 2018 saw the Company broaden its customer base, with instrument revenues derived from four customers in comparison with one customer in 2017. Two of the four customers were signed up in H1 2018. Consumable and other revenue of £54,333 is 22.1% above H1 2017 while service income of £8,796 is down £6,971 on H1 2017.
Gross profit for the period of £109,424 is 118.8% or £59,417 above H1 2017 reflecting the increased revenues in H1 2018. The gross profit margin of 43.3% is above H1 2017 (38.8%) and full year 2017 (35.4%) due to a favourable product mix and expanded customer base.
Other operating income during the period of £37,090 represented 50% of the Phase 2 research agreement that the Company signed in December 2017 with a long standing global partner in biopharma (H1 2017: £51,004).
Operating expenses of £1,614,174 in the period were up £51,510 or 3.3% on H1 2017 (£1,562,664) due to investment in marketing (£72,812), higher travel costs (£35,648), fundraising costs charged to the profit and loss (£39,962), higher payroll and contractor costs (£52,120) off-set by lower material costs (£78,066), lower building and office costs (£22,371), lower other staff costs including recruitment (£45,289) and lower other costs (£3,306). The increase was measured and is in line with the Company’s 5 Year Plan.
The loss from operations in the period, before share-based payments, finance income and tax, was £1,467,660 and in line with H1 2017 (£1,461,653).
The share-based payment charge of £43,749 is £19,474 above H1 2017 as a result of the options granted in the period. No options were granted in 2017.
The comprehensive loss for the period of £1,502,410 is 1.7% higher than H1 2017 (£1,477,060). The basic loss per share of 0.79p is in line with H1 2017.
Statement of Financial Position:
Total assets of £7,899,536 are £3,526,670 above the position as at 31 December 2017, mainly due to a higher cash balance at 30 June 2018 of £6,957,080 following the successful fundraising in June 2018. The corporation tax receivable at December 2017 resulting from R&D tax credits was received in June 2018, whereas in 2017 it was received in July.
Total equity as at 30 June 2018 of £7,492,585 is £3,592,654 higher than 31 December 2017 (£3,899,931). The main movement since the year end has been an increase in share capital (£687,500) and share premium (£4,363,815) as a result of the fundraising, off-set by an increase in retained losses of £1,494,821 to £18,825,754.
Total liabilities of £406,951 as at 30 June 2018 is £65,984 below 31 December 2017 (£472,935). The reduction is mainly due to lower trade and other payables (£33,207) and a lower level of provisions (£32,777).
Statement of Cash Flows:
Net cash used in operating activities in H1 2018 of £1,233,369 is £389,674 lower than H1 2017.This is mainly due to the receipt of the annual tax credit (£246,946) in June 2018 one month earlier than last year and a smaller decrease in trade and other payables (£186,172).
Net cash used in investing activities in H1 2018 of £43,042 compares with £26,718 in H1 2017. The main movement between H1 2018 and H1 2017 was the increase in the purchases of property, plant and equipment of £17,494.
Net cash from financing activities of £5,051,315 net of share issue costs relates to the June fundraising. Other fundraising costs not directly related to the issue of shares amounted to £39,962 and are included in total comprehensive loss. There was no cash from financing in 2017.
The closing cash balance as at 30 June 2018 is £6,957,080, up £2,878,297 over 30 June 2017 and £3,774,904 higher than 31 December 2017.
Brexit
The Board has reviewed the potential impact of Brexit on the Company and its operations, under various scenarios. In summary, the Company’s operations and key subcontractors are based in the UK and the majority of its sales are priced in GBP to customers globally. Apart from the effect of any potential macro economic impact, the Board does not currently anticipate that there will be a significant impact of Brexit on the Company’s operations or financial performance. The Board will keep this matter under review, as more information becomes available.