26th Mar 2007 07:01
Servocell Group PLC26 March 2007 SERV.L Servocell Group PLC ("Servocell" or the "Company") Preliminary results for the period ended 31 December 2006 Servocell is a provider of Active Latch technology that controls with low energy inputs the movement or motion of mechanisms, such as locks KEY POINTS • Results in line with expectations • Active Latch technology well received by global lock manufacturers • Clients include Beloxx GmbH, Yamaha and Master Locks • Sales Director appointed to drive technology commercialisation • 'Ready To Go' strategy creating a potentially bigger market place via its 'generic' appeal • 2007 sales pipeline comprises a broader spectrum of lock manufacturers and distributors • Board strengthened with the appointment of David Lindsay as Non Executive Director • Directors confident of steady progress during 2007 Chairman, Michael Hartley, commented: "This has been a year of laying foundations in Servocell's transition from aresearch and development business into a volume manufacturing and sales businessfocused on the commercialisation of its Active Latch technology. Excellentproduct reference sites are in place with the global lock market recognisingboth the opportunity and demand for intelligent and secure access securitysolutions. The Company sales strategy has also evolved via the introduction of a 'Ready toGo' sub-assembly product range with the aim of reducing the time scales involvedfrom product trials to volume production. This is proving to be of exceptionalinterest to our target market and we expect to make steady progress during 2007.I look forward to updating shareholders with further news in due course" For further information please contact: Simon Powell, Chief Executive Officer, Servocell Group plc 01279 621 500Steven Weaver, Chief Financial Officer, Servocell Group plc Michael Hartley, Chairman, Servocell Group plc 01279 621 500 Gregor Paterson, Analyst, Bell Lawrie 0141 221 7733Jon Fitzpatrick, Corporate Finance (NOMAD), Bell Lawrie Shane Dolan, Biddicks 0207 448 1000 Chairman's Statement This has been a year of laying foundations in Servocell's transition from aresearch and development business into a volume manufacturing and salesbusiness. In March, £5.5 million was raised on the London Stock Exchange's AIMmarket, selling 27 per cent of the company to new investors, to fund workingcapital and future growth. The strengths of the Servocell business lie in its proven technology applied tothe global locks industry, strong Intellectual Property (IP) base, excellentnetwork of third party suppliers and creative problem solving technicalexpertise. This is complemented with a strengthened Board of Directors andmanagement team bringing a broad range of financial, commercial, sales andmarketing expertise to the business in an international setting. A revised business model was introduced at the end of 2006 to address theinherent issue of technology suppliers working with large international lockmanufacturers and the time scales involved in converting product trials intoproduction. In 2007 Servocell's sales strategy will focus on completesub-assembly electronic lock solution systems for lock manufacturers anddistributors, thereby adding value and market accessibility. Servocell willcontinue to develop fixed price prototypes for the largest global customers as acontinuation of its high volume component supply programme. Working withcomplementary technology suppliers, Servocell will develop a global network ofpartner companies, to fully exploit its proprietary Active Latch technology,which delivers electronic lock solutions based on low power consumption, highsecurity with full audit traceability. During the year David Lindsay was appointed to the Board as Non ExecutiveDirector and Chairman of the Audit Committee. David brings more than 20 yearsfinance experience, latterly as Financial Director of AEA Technology, aninternational and environmental services technology group listed on the OfficialList of the London Stock Exchange. In November 2006, Francisco Lopez joined the Operational Board of Servocell asSales and Marketing Director. He was previously Sales and Marketing Director ofDione, a leading UK supplier of Point of Sale solutions for Chip and PINverification, where he successfully secured key account relationships with majorfinancial and retail organisations. He brings extensive international sales andmarketing experience gained with De La Rue, Currency Software Solutions andBanking Automation Limited. I would like to express my thanks to the whole team at Servocell who have workedso hard and creatively to transform ideas into the foundations of a globalbusiness. Outlook The sales pipeline for 2007 shows considerable potential. With the addedadvantage of a robust sales and marketing strategy now in place, there issubstantial opportunity to improve further during the course of the year. Newproduct development continues at an energetic pace as the market recognises thegrowing opportunity and demand for intelligent and secure access securitysolutions. Having substantially raised Servocell's profile in 2006 through the successfullisting on AIM, established a track record in proven technology and sound newproduct development, together with a more balanced business model, the Board isconfident the business is well placed to make positive progress in 2007. Michael G HartleyChairman Chief Executive's Statement Strategy Servocell's corporate strategy is to secure profitable and growing sales in theglobal electro-mechanical locks market by exploiting the benefits of itspatented piezo-electric lock modules. The global locks market is reported to be worth some $30 billion, with the mostsignificant growth being within the electro-mechanical sector. Servocell'sobjective is to deliver into this market low power, high durability and highintegrity electro-mechanical components and products based on its patentedtechnology. The Group's devices are underpinned by piezo ceramic actuators, which are wellestablished in many applications such as reversing sensors for motor vehicles.Through significant investment, Servocell has developed a unique low-costmethodology for creating actuators which give relatively large movement at a lowpower input. The Company has applied this technology into modules under theActive Latch brand for sale into lock manufacturers' products. More recently, to accelerate application of the technology, the Group has beendeveloping a range of "Ready to Go" sub-assembly products under the CabinetLatch and Active Escutcheon brands. These are being sold to both lockmanufacturers and major distributors. The decision to move into more completelocks was announced in the Company's interim statement, and customer feedback todate has been very positive. The business' mission statement is 'Urban 500'. This is a bold ambition,targeting the widespread distribution of Servocell technology so that, withinany town or city across the globe, an observer will be within 500 metres of aServocell product. This mission is testimony to the broad diversity of the rangeof applications to which the Active Latch range can extend: from doors andwindows, commercial and hospitality locks, transportation, safes, high security,drop-off boxes and automotive, to street furniture, multipoint locks, padlocks,networked access control systems, lockers and cabinet racks, white and browngoods appliances, luggage and a range of industrial interlock systems. Performance Customers buying Active Latch technology products during the period include: • German lock manufacturer, Beloxx GmbH. Servocell was engaged to manufacture the entire Be-Code product, which incorporates the Active Latch 1 ("AL1") technology in an easily fitted cabinet handle, to service a distribution deal signed in December 2006 with major European contract furniture reseller, Adolf Wurth GmbH, which operates through a network of 368 companies and will distribute the Be-Code product across its European catalogue furniture business. Servocell has committed orders scheduled for delivery through to October 2007 which underpin the existing forecast of £400,000 to £500,000 of sales to Beloxx for the current year. • Jin Kun, a major supplier to the motor industry in Taiwan, has developed a keyless motorcycle steering lock under an exclusive agreement with Yamaha Taiwan, using the AL1. The steering lock has now completed field trials, and is in pre production within Yamaha where, subject to final quality approval, it will be rolled out onto 125cc motorbikes in Taiwan during 2007. This is the first time Jin Kun has taken on a technology outside Taiwan, reinforcing Servocell's market potential; and • Codelocks Limited continues to sell a range of AL1 based door locks in the UK and USA. To speed lock manufacturers' internal development cycle for integrating theActive Latch technology into their products, the Group introduced a fixed pricedesign service that delivers a proof of principle prototype (POPP) for arelatively low cost. The POPP demonstrates how Active Latch technology can beapplied to the customer's specific application, and has been successfully usedduring the period to attract a number of major customers into productdevelopment. These include: • Master Lock, the world's largest padlock manufacturer based in the United States. The project was to develop for test marketing an innovative range of electronic locks based on the Active Latch 2 ("AL2") for Master Lock's core business. These demonstrator units were delivered in March 2007 and are now being actively marketed; • Lips Nederland BV, a Dutch subsidiary of the Assa Abloy Group (one of the leading international lock manufacturers) announced that it had developed for test marketing and field trials a new lock application based on the AL2. This was in addition to an AL1 based product developed for the door entry market; • Kaba Mas, a major USA based lock manufacturer, for high security networked locks for container shipping. The POPP for a retrofit of an AL2 into an existing Cargo Lock was delivered in Q4 2006 and is now undergoing customer evaluation and testing; • Fix AB, a Swedish subsidiary of the Assa Abloy group, to develop a multipoint lock for the European and UK replacement door and window market. The POPP was delivered in February 2007 for and detailed development is now under way prior to customer demonstrations; • Flo Healthcare, a US based supplier into the medical market, to develop an AL1 based lock for electronic drug dispensing carts. This was delivered in Q4 2006 and is now in customer evaluation and testing; and • ODI Security Inc, for the development of a fingerprint controlled device. This is still work in progress and is expected to be delivered in Q2 2007. The above is augmented by a number of AL2 based product developments beingundertaken by customers, which are moving forward from product evaluation andtesting through to field trials and pre production. These include: • Immucor, a Spanish subsidiary of a US based medical company, for electronic locks on containers for the transportation of blood and transplant organs; • An access control business who have deployed AL2 based locks in major field trials in a European postal application; and • A German furniture lock manufacturer, for a keyless electronic lock. In March 2007 Servocell will launch into the market its first "Ready to Go"product, with a limited number of AL1 Cabinet Lock customer samples available.Advance orders for samples have been taken from a wide range of 21 customersworldwide, including some of the major lock manufacturers, as well asdistributors and value added resellers. Advance marketing of Cabinet Latch product has also generated interest in theretail "front of house" security market (i.e. display cabinets) where, subjectto Servocell meeting a technical specification, a major UK retailer has agreedto a test site field trial. Servocell also set up the Pro-Active Partnership programme during the year, withthe objective of making it easier for lock manufacturers to move fromtraditional mechanical lock designs to electro-mechanical solutions. Byintroducing lock companies to access control developers, the partnership helpsto create tomorrow's leading edge security products. The new range of CabinetLocks makes the Pro-Active Partnership more attractive to end users, because theGroup can bundle access control and the lock into a single device, greatlysimplifying procurement and installation. Product Development The "Ready to Go" sub-assembly products utilise the AL1 and AL2 modulesdeveloped to date and offer a wide range of locking modes and mountingpositions. Typical applications include cabinet and drawer locks for vendingmachines, medical dispensing, key control and retail display security.Particular interest has been shown by the burgeoning health care market, whichis seeking more efficient solutions for control of drug dispensing. The first ofthese products, the Cabinet Latch 1, will be available in Q1 2007 in samplequantities and is scheduled for volume production in Q3 2007. Development of the AL2 module has taken longer than anticipated following sometechnical issues identified during validation. These have been resolved and theprocess to bring these into volume production is moving ahead rapidly. Thechallenges encountered in this project centred on the device's resistance tomanipulation and the environmental sealing. The AL2 module offers customers thebenefits of extremely high resistance to environmental damage in conjunctionwith slimmer size. Whilst there are many further innovative products in the pipeline, the Group isfocusing its resources on all the necessary development actions to sell involume AL1 and AL2 modules, sub-assembly Cabinet Latch and Active Escutcheonproducts, that serve to convert existing door locks to electro-mechanicaloperation without the need for a locksmith. Risks • As a business promoting a disruptive technology into a mature industry, there is a risk of time delay caused by the inertia of large customers in decision making and adopting new technology not developed by themselves. Customer projects have already affected the business in its first year, but the Company is confident that the sales will be achieved in due course. This risk is being addressed both by the POPP strategy to speed development and by augmenting the product offering with Ready to Go products. • The general failure of a new technology to make the transition from the innovators in a market to the main adopters is a risk that will materialise as failure to meet sales targets. Both the modules and sub-assembly products are vulnerable to this risk. The risk will be managed through strongly focused marketing into segments that are known to require the benefits of the technology. • Recruitment and retention of key individuals is a considerable risk at this stage of accelerating growth, but the Company has taken steps to retain the current high calibre staff, and has recently been successful in recruiting both a sales and marketing director and a senior engineering manager. • Risk of technical failure will remain with the Company for the foreseeable future. Such risks are managed through the maintenance of an excellent laboratory and our well informed engineering team. Extensive testing in our own facility and via third parties helps minimise the likelihood of any product failure in the field. • At present the business is trading at a loss and consuming cash, as it continues to invest in sales, marketing and production, in addition to the development costs of the Active Latch and "Ready to Go" products. Therefore, any significant delays in sales orders or technical delays may affect future cash flow. The Directors believe that the Company has appropriately tight financial management procedures in place in order to manage this risk. • Servocell is not aware of any competitor products that offer the benefits of Active Latch technology, but there is a persistent risk that one will arise. The Company is aware that many of its potential lock manufacturer customers already have electro-mechanical offerings which, whilst not as good as the Servocell proposition, are in production and avoid them having to invest in new product development with Servocell solutions. Strong promotion of the Group's technology benefits and a constant review of its patents are used to defend against this risk. Regular reviews of customer/competitor websites are made to search for risks. Position at end of the year Turnover of £204,000, a loss of £1,684,000 during the period and cash in bank at31 December 2006 of £2,237,000 was largely in line with market expectations. The Group started the process of upgrading its manufacturing equipment duringthe period, with approval for £184,000 of investment in the semi automation ofthe actuator manufacturing line and, in November, approval was given for thefirst phase of a semi automated plant for the AL2 production line to be set upin Malaysia. Other significant achievements during 2006 include the successful continuationof ISO 9001:2000 quality audit, an essential customer measurement. In addition,new patents have been filed on applications for portable and fixed locks usingboth AL1 and AL2 based products. This move allows these patents to be licensedto customers, providing them with a competitive advantage and an incentive toinvest in tooling and marketing. Outlook In common with other companies in the new technology sector, translatingcustomer interest into physical orders is taking longer than anticipated.However, the projected sales pipeline presents encouraging signs from a varietyof end users and manufacturers, expressed progress to orders by establishedcontacts and a satisfactory growth rate for new prospects. The Board isconfident that, following the appointment of our new sales and marketingdirector and the move into more finished products, conversion rates from ourmarketing initiatives will deliver success within an acceptable timescale. With its revised business model designed to speed up the sales process and rollout our products to a broader market, Servocell's sales strategy in 2007 willincreasingly place less emphasis on component manufacturing and developing fixedprice prototypes for large customers and more on complete systems for downstreamcustomers such as furniture makers, loss prevention operations and systemsintegrators. This should result in shorter lead times to market and open up apotentially bigger marketplace. At the same time, focus will continue on thedevelopment of a global network of distribution and value added reselling. Simon PowellChief Executive Officer GROUP INCOME STATEMENTFOR THE PERIOD ENDED 31 DECEMBER 2006 Notes £'000 Revenue 2 204 Cost of sales (139) ------------ Gross profit 65 ------------ Other operating income 11 Research and development costs (639) Administrative expenses (1,224) ------------ Operating loss (1,787) Finance costs 103 ------------ Loss on ordinary activities before tax (1,684) Income tax credit - ------------ Loss attributable to equity holders (1,684) ============ Loss per share (pence) Basic 5 (4.5)p Diluted (4.5)p GROUP BALANCE SHEETAS AT 31 DECEMBER 2006 Assets £'000 Goodwill 4,673Other intangible assets 766Property, plant and equipment 436 ---------- 5,875 ---------- Cash and cash equivalents 2,237Inventories 93Trade and other receivables 260 ---------- 2,590 ---------- Total assets 8,465 ========== Equity and liabilities Trade and other payables 491 ---------- 491 ---------- Capital and reserves Share capital 379 Share premium 9,276 Equity reserve 3 Retained earnings (1,684) ---------- Total equity attributable to equity holders 7,974 ---------- Total equity and liabilities 8,465 ========== GROUP STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITYFOR THE PERIOD ENDED 31 DECEMBER 2006 Share Share Equity Retained capital Premium Reserve earnings Total £'000 £'000 £'000 £'000 £'000 9 November 2005 - - - - - Loss for the period - - - (1,684) (1,684) -------------------------------------------------- Total recognisedincome and expensesfor the period - - - (1,684) (1,684) -------------------------------------------------- Issue of shares:- on acquisition of PBT(IP) Limited 277 4,723 - - 5,000- on placement of shares 102 5,398 - - 5,500Costs associated with placement - (845) - - (845) Issue of share options - - 3 - 3 -------------------------------------------------- 31 December 2006 379 9,276 3 (1,684) 7,974 -------------------------------------------------- GROUP CASH FLOW STATEMENTFOR THE PERIOD ENDED 31 DECEMBER 2006 Note £'000 Cash flows from operating activities Loss for the period (1,684) Adjustments for:Loss on disposal 3Depreciation 63Amortisation 379Share options issued 3 ---------- Operating cash flows before movements in working capital (1,236) ---------- Decrease inventories 8Decrease in receivables 91Increase in payables 279 ---------- Net cash from operating activities (858) ---------- Cash flows from investing activities Acquisition of property, plant and equipment (384)Development costs capitalised (561) ---------- Net cash used in investing activities (945) ---------- Cash flows from financing activities Net proceeds from issue of new shares after costs 4,655Net debt acquired on acquisition 7 (615) ---------- Net cash from financing activities 4,040 ---------- Net decrease in cash and cash equivalents 2,237 Cash and cash equivalents at the beginning of the year - ---------- Cash and cash equivalents at the end of the year 2,237 ========== Cash and cash equivalents comprise: Current assets - Cash and cash equivalents 2,237 ---------- 2,237 ========== NOTES TO THE PRELIMINARY ANNOUNCEMENTFOR THE PERIOD ENDED 31 DECEMBER 2006 1. Accounting Policies General Information The company was incorporated in England and Wales on 9 November 2005 andcommenced trading on 14 February 2006, when the company acquired the entireshare capital of PBT (IP) Limited for £5,000,000, with consideration beingsettled by way of issuing 27,745,758 new ordinary shares of 1p each to theshareholders of PBT (IP) Limited on an 18:1 share exchange. On the same day thecompany acquired 100% shareholding in Servocell Limited for a consideration of£3,000,000 from PBT (IP) Limited. On 9 March 2006 the company placed a further 10,185,186 new ordinary shares of1p each at a price of 54p per ordinary share raising, £5,500,000 before expensesand made an application to be admitted to trade on AIM. Basis of preparation The financial information set out in this announcement does not constitute theCompany's statutory accounts for the period ended 31 December 2006. The auditorshave reported on the 2006 accounts; their report was unqualified and did notcontain a statement under section 237 (2) or (3) of the Companies Act 1985. Thefinancial information contained in this Preliminary Announcement has beenprepared using accounting policies and practices consistent with those used inpreparing the statutory accounts and in the admission document issued inrelation to the admission of Servocell Group plc to the AIM Market of the LondonStock Exchange on 9th March 2006. The directors approved this preliminaryannouncement for issue on 23rd March 2007. Basis of consolidation The accompanying consolidated financial statements include the accounts of theCompany and its subsidiaries for the period from 9 November 2005 to 31 December2006. The financial statements are consolidated on an acquisition basis, wherebythe results of subsidiaries are included in the consolidated income statementfrom the date of acquisition. Inter-company balances and transactions have beeneliminated. Comparative figures No comparative figures have been presented for the period as this was thecompany's first period of trading. Use of estimates The preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions thataffect reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the identifiable assets and liabilities acquired and are included inintangible assets. Goodwill is tested annually for impairment and carried atcost less accumulated impairment losses. (b) Research and development Research and development costs are expensed as incurred, except for developmentcosts which are deferred as intangible assets when the Group can demonstrate allof the following: • the technical feasibility of completing the intangible asset so that it will be available for use or sale; • its intention and ability to use or sell the intangible asset; • the existence of a market for the output of the intangible asset or the intangible asset itself; • the availability of adequate technical resources to complete the development; • the availability of adequate financial and other resources to complete the development and to use or sell the intangible asset, subject to the ability of the Group to continue as a going concern; and • its ability to measure the expenditure attributable to the intangible asset during its development reliably. Deferred development costs are originally recorded at cost, which includes: • expenditure on materials and services used or consumed in generating the intangible asset; and • the salaries, wages and other employment related costs of personnel directly engaged in generating the asset. Capitalised development costs have a finite useful life of an estimated threeyears from the date the product is launched to market and as such, are amortisedon a straight-line basis over this period. Amortisation charges appear in thefollowing lines within the consolidated income statement: 2006 £'000 Research and development costs 639 The research and development costs charged to the profit and loss account relateto research and development associated with projects which have not met thecriteria above and the amortisation charge of capitalised development costs. 2. Revenue The Group's revenue for the period is from the sale of Active Latch basedproducts. 3. Business and geographical segments Business segments The group at present reports on only one business segment being the sales ofActive Latch products, and therefore all the assets, liabilities and trading forthe period are allocated to one business segment. Geographical segments The following table provides an analysis of the Group's sales by geographicmarket, irrespective of the origin of the goods. UK Europe Asia North Total America2006 £'000 £'000 £'000 £'000 £'000 Revenue 20 117 30 37 204 The following is an analysis of the carrying amount of segmented assets,liabilities and additions to plant and equipment and other intangible assets,analysed by the geographical area in which the assets and liabilities arelocated. UK Asia Total 2006 £'000 £'000 £'000 Segmented assets (1) 3,502 290 3,792Segmented liabilities 491 - 491Additions to plant and equipment 35 288 323Additions to intangible assets 561 - 561 (1) Segmented assets exclude goodwill 4. Dividends The Directors do not recommend the payment of a dividend. 5. Earnings per share (a) Basic Basic earnings per share is calculated by dividing the loss attributable toequity holders of the company by the weighted average number of ordinary sharesin issue during the period. Loss attributable to equity holders of the company (£'000) 1,684 Weighted average number of ordinary shares in issue ('000) 37,199 Basic loss per share (4.5)p (b) Diluted Diluted earnings per share is calculated by adjusting the weighted number ofordinary shares in issue to assume conversion of all potential dilutive ordinaryshares. However, no potential ordinary shares are considered dilutive, as lossper share would decrease had the options in issue been exercised. 6. Subsidiaries The Group has two 100% owned subsidiary undertakings. The details are asfollows: Company Name Country Nature of business Servocell Limited UK Development and manufacture of piezo ceramic actuators and related productsPBT (IP) Limited UK Owning and licensing intellectual property 7. Analysis of Assets Acquired at the Acquisition On the 14 February 2006 the Group purchased the entire share capital of PBT (IP)Limited for consideration of £5,000,000, with consideration being settled by wayof issuing 27,745,758 new ordinary shares of 1p each to the shareholders of PBT(IP) Limited on an 18:1 share exchange Acquiree's Carrying Amount Before Fair Value Combination Adjustments Restated £'000 £'000 £'000 Inventories 153 (52) 101Trade and other receivables 255 - 255Tax Credit - 96 96Trade and other payables, (212) - (212)including accruals and taxesProperty, plant and equipment 123 (5) 118Intangible fixed assets 601 (17) 584 ----------------------------------------- Net assets acquired by the Company 920 22 942 Debt acquired on acquisition (615) - (615) ----------------------------------------- 305 22 327 ========================================= Consideration:Shares issued in the Company 5,000Less Net assets acquired (327) ---------- Goodwill arising on acquisition 4,673 ========== The goodwill arising on acquisition of PBT(IP) Limited is attributable to theanticipated profitability through the future exploitation of the Group'stechnology and products. PBT(IP) Limited and Servocell Limited contributed £204,000 revenue and£1,687,000 to the Group's loss before tax for the period between the date ofacquisition and the balance sheet date. If the acquisition had been completed on 1 January 2006, total Group revenue forthe year would have been £220,000 and loss for the year would have been£1,874,000. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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