ARTA.L Regulatory News (ARTA)

30 Sep 2008 07:00



30 September 2008

Artilium plc

Preliminary Results for the Financial Year Ended 30 June 2008

Management's key milestones for the year achieved and clear strategy for growth

Artilium plc ("Artilium" or the "Company") announces preliminary results for the financial year ended 30 June 2008.

Artilium's ARTA software opens mobile telecommunications networks to Internet commerce, new media content and social network communities. 

Financial Highlights

Operational Highlights

Commenting on the results Robert Marcus, Chief Executive of Artilium said: 

"Artilium has been transformed into a disciplined, professional software development organisation, focused on making the commercial, transactional, new media, and social networking revolution of the Internet, mobile. 

We relentlessly focused on fundamentals, intensified our strategic partnership with Microsoft, and drove the business forward with KPN, signing the largest licensing deal in the Company's history and achieved 20% year-on-year revenue growth. 

We launched an ambitious drive towards development of a significantly enhanced next version of ARTA, optimised for channel partner distribution and deployment to enable significant acceleration and expansion of the Company's worldwide business. 

While the Company remains in an investment phase currently and will continue to market and sell the existing version of the Company's software, it has secured the funding necessary to deliver the next version of ARTA, which will enable significant growth and expansion of the business in the financial year to June 2010. 

The current financial year concludes an important consolidation phase for the business, which is now positioned for consistent long-term expansion. The Company anticipates solid revenue growth in the current financial year."

For further information please contact:

Artilium plc via Financial Dynamics

Robert Marcus, Chief Executive

Financial Dynamics T. +44 20 7831 3113 

Harriet Keen/Matt Dixon/Hazel Stevenson

Deloitte Corporate Finance (Nomad) T. +44 20 7936 3000

Jonathan Hinton/David Smith

About Artilium

Artilium's ARTA software opens mobile telecommunications networks to Internet commerce, new media content and social network communities. 

Artilium activates mobile networks for the coming wave of third-party development and innovation, enabling infinite possibilities for intelligent services which combine network capabilities of presence, mobility, location and telephony; with web services including advertising, social networking and search. 

Founded in 1995 and recognised for advanced and innovative engineering, Artilium has completed more than 40 installations serving tens of millions of end-users in 11 countries.

* * * * *

Chairman's Statement

This has been a profoundly challenging but ultimately successful year for the Company, highlighted by the agreement signed with leading mobile network operator, KPN Mobile; an important proof point for the quality of the ARTA software development team and the ARTA software itself. This is the largest deal in the Company's history and we are in active deployment at KPN Mobile at this time.

Earlier in the year we announced the acquisition of Trisent Communications to deliver highly accurate non-GPS geospatial location-based technology to mobile network operators. We are pleased to report that acquisition integration has progressed well.

In order to consolidate management control and cut costs, the corporate function of Artilium was relocated from London to Belgium in 2008. We are now planning to change the domicile of the Company and move the centre of management and control to Belgium, a process expected to be completed before the end of 2008. It is intended that the Company will, going forward, report in Euros and we also plan to consider a listing on a European exchange in addition to the Company's shares trading on AIM. To coincide with the full relocation of the business, and to reflect the Company's status as a European software developer, the current British-based Board will, with the exception of the CEO Robert Marcus, stand down in two phases. At the AGM, Chris Ogle the Finance Director, Philip Kendall, Paul Gratton and Michael Hulme will resign. Following the AGM, Wim de Pauw, currently General Manager of Artilium's Belgian operation, will become Finance Director and join the Board.

Wim joined Artilium in April 2006 as Finance Manager for the Belgian subsidiary and was promoted to General Manager in May 2007. Prior to joining Artilium he was a partner in Acckta Grasveld, an accounting firm, and Finance and Administration manager for a ZA Verzekeringen, a subsidiary of NYSE-listed Hartford Insurance. Wim is certified as a Chartered Accountant by the Belgian Institute of Accountants and Tax Consultants and holds bachelor's degrees in Accounting from the Stedelijk Instituut voor Economisch Hoger Onderwijs (SIVEHO), and Tax Science from the European University College, Brussels in addition to a post-graduate degree in Corporate Finance also from the European University College, Brussels.

The Board is in the process of identifying a new non-executive Chairman and non-executive Director. These two new non-executive Directors will most likely be based in Europe or the USA so that the new Board has greater international experience. Non-executive Director, Paul Thornton, and I will remain on the Board until appropriate replacement candidates have been identified. Five non-executive Directors are expected to be replaced by two. Keeping costs under control continues to be an important part of our strategy.

As Chairman I would like to thank all of our exiting Board members for their contribution to the birth of a new software company and their role in concluding the consolidation phase in the Company's development. In the current financial year, further sales are planned to new mobile network operators beyond KPN and our relationship with Microsoft significantly helps our chances of achieving those sales. We will, however, need to continue to invest in this financial year in the next version of the ARTA software due for completion in 2009, with revenues expected to be generated from the summer of 2009. We operate in a fast moving and entrepreneurial part of the mobile communications market and it is crucial that we leverage the competitive advantage that the ARTA software gives us through continued investment now to generate future growth.

* * * * *

Chief Executive's Statement

Results

Revenue for the year ended 30 June 2008 was £5.4 million, representing an increase of over 20% over the financial year to 30 June 2007 (£4.5 million.)

The loss before tax was £4.5 million compared with a loss in 2007 of £2.9 million. This loss included a charge for share-based payments (for the grant of share options) of £932,000 (2007: £707,000); an exceptional item for the non-payment of £1.0 million on the exercise of share warrants; an exceptional restructuring charge related to the closure of the London office of £211,000 as part of a continuing cost reduction initiative; and the loss on the sale of an associate of £280,000.

Operations

The highlight of the year was the licensing agreement announced with KPN Mobile on 20 March 2008, estimated to generate €15.0 million of revenue over the 3-year term of the agreement. The licence fee component of the agreement of €5.0 million has been recognised as revenue in the year ended 30 June 2008. It is expected that KPN will order significant hardware, custom software and professional services over the term of the license in order to deploy ARTA across the KPN group. Deployment has now moved out of planning and into execution and shortly after the end of the financial year, the Company signed a new €2.9 million purchase order with KPN for additional hardware, software and professional services.

Earlier in the year we announced the acquisition of Scotland-based Trisent Communications for £1.7 million comprising £460,000 cash and 1.24 million shares of which 301,875 shares were deferred and dependent on the delivery of certain development milestones. Acquisition integration and general progress has been good and it is expected that the performance conditions for the deferred shares will be satisfied and the shares issued. The acquisition is being supported by a jobs creation scheme led by Scottish Enterprise with a general research and development grant of £750,000 in conjunction with investment from Artilium.

In the interim results for the six months ended 31 December 2007, we reported the divestment of our holding in Chinook Hosting Corporation to the majority shareholder Implement.com. In return, Implement.com has agreed to develop a hosted unified communications service for ARTA targeting small and midsize businesses. Despite the future earnings potential of this transaction, the Board recognises that there is uncertainty regarding future cashflows and has therefore elected not to recognise any value on its balance sheet in respect of these services. A loss on disposal of £280,000 has been reported in the accounts for the year.

Fund Raising

In order to maximise the first-mover advantage the Company possesses with its technology as well as its go-to-market relationship with Microsoft, Artilium has accelerated research and development of the next major version upgrade to ARTA which will require additional finance in order to be completed. On 25 September 2008 we received shareholder approval for the placing of 28,852,942 shares with a number of institutional and private investors in two tranches. 9,498,104 shares were placed at 23.25 pence raising £2.2 million and a further 19,354,838 shares were placed with the proceeds receivable over 24 months, with the exact amount receivable being dependent on the Company's share price performance over the period.

Going Concern

The results have been prepared on a going concern basis. However, it is acknowledged that there are some material uncertainties in the assumptions used to prepare the Company's cash flow forecasts. These assumptions and uncertainties are described in Note 1 to the accompanying financial statements.

Business update

Artilium develops and sells highly sophisticated interoperability software that connects complex distributed applications to an addressable market that comprises the 2,869 Mobile Network Operators (MNOs) worldwide.

The essence of communications is breaking down barriers; the mobile phone and Internet break distance and time barriers so that people can communicate in real-time when they are apart in order to develop their social networks, interface with the world of commerce, and accelerate decision-making and thus increase productivity and in their business networks. 

The focus of IT innovation has moved from desktop to mobile computing, however mobile networks remain inflexible and proprietary, with access tightly controlled to ensure the security and reliability of the network. Unlocking the value of the networks has proved challenging for operators.

ARTA is designed to activate the coming wave of third-party and user-generated mobile Internet application development and innovation, enabling rapid creation of a virtually infinite ecosystem of autonomous software processes and mashups (applications combining data from more than one source) as services, all interoperating in an open yet structured and secure architecture.

ARTA functions as an onramp for new mobile services, defining and provisioning the network to allow different applications to safely exchange data and participate in inter-dependent processes. These functions are loosely coupled with the network operating systems and programming languages underlying the applications. ARTA separates functions into distinct units (services), which can be distributed over a network and can be combined and reused to create new services, communicating with each other by passing data from one service to another, or by coordinating an activity between two or more services. 

The Apple iPhone and Google's Android mobile operating system both make great headlines, but ultimately, they are just front-end interfaces. The real innovation is occurring at the network level, where operators like KPN, are opening networks to allow third parties to create personalised mash-up services which feature mobile and Internet elements. ARTA enables this transformation, allowing operators to create new business models and a new value chain in which developers can launch and profit from innovative new services. ARTA services are applications that may be developed by mobile operators or any certified third-party including users, may run on the PC and the mobile phone, are highly customisable, engagingly interactive and rely on vast data held in the cloud. 

In summary, ARTA opens mobile networks to the Internet and incorporates third-party generated applications packaged as services. ARTA delivers continuous real-time communications as well as location and state (mobile presence) data to open a very wide variety of possibilities for intelligent services combining the 'three Cs': Content (new media including advertising), Commerce (micro-payments, money transfer and other transactions), and Community (social and business networks). 

The Company is the leading developer of Microsoft-based mobile telecoms software, the first to have applied Microsoft innovation and popular development tools to a real-time mobile network at a time when the Artilium Board believes that Microsoft is moving aggressively into the telecoms sector. ARTA runs on the Windows Server operating system using Microsoft SQL Server database technology and uses the industry's most widely-used development system, Microsoft Visual Studio, as a rapid service creation environment to activate the more than 4 million .NET developers in the world. The Company enjoys an exceptional level of direct Microsoft engagement and support in an expansive strategic and go-to-market relationship that includes direct sales engagement, joint pipeline and opportunity management, presence on Microsoft booths at industry and internal events, Web presence, PR support, and funding towards joint-marketing marketing activities.

Outlook

Over the last year the Company has consolidated its technical roadmap and business strategy, focusing on growth opportunities where it is both an innovator and leader. The development workforce has been stabilised and capacity is growing steadily. Operationally, the business is now streamlined and more efficient. Microsoft is closely engaged and the KPN agreement functions as an important validation of the Company's strategy and technology. While the Company remains in an investment phase currently and will continue to market and sell the existing version of the Company's software, it has secured additional funding to deliver the next version of ARTA, which will enable significant growth and expansion of the business in the financial year to June 2010. The Company anticipates solid revenue growth in the current financial year.

* * * * *

Artilium plc

Consolidated income statement

Year ended 30 June 2008

Artilium plc

Consolidated statement of recognised income and expense

Year ended 30 June 2008

Artilium plc

Consolidated balance sheet 

Year ended 30 June 2008

Artilium plc

Consolidated balance sheet 

Year ended 30 June 2008

Artilium plc

Consolidated cashflow statement

Year ended 30 June 2008

Artilium plc

Notes to the Company financial statements

Year ended 30 June 2008

1. Preparation of results

Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs.

The financial information set out in the announcement does not constitute the company's statutory accounts for the years ended 30 June 2008 or 2007. The financial information for the year ended 30 June 2007 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under s237(2) or (3) Companies Act 1985. The audit of the statutory accounts for the year ended 30 June 2008 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the company's annual general meeting.

The directors approved this preliminary announcement on 29 September 2008. This announcement is prepared on the basis of the accounting policies to be adopted for the full set of financial statements for the year ended 30 June 2008. The financial statements have been prepared on the historical cost basis. 

The consolidated financial statements incorporate the financial statements of the Company and the entities controlled by the Company (its subsidiaries) made up to 30 June each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

The result of the subsidiary acquired during the year is included in the consolidated income statement from the effective date of acquisition.

Where necessary, adjustments are made to the financial statements of the subsidiary to bring the accounting policies used into line with those used by the Group.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Going Concern

The Directors have adopted the going concern basis in preparing the accounts, having carried out a going concern review. The Group has recently placed 28,852,942 shares for consideration of £2.2 million. In addition the Company has entered into an equity swap agreement in respect of 19,354,838 shares for which consideration will be received on a monthly basis over a 24 month period. The amount to be received each month is dependent on the Company's share price at the end of each month. The Directors have made assumptions in their financial forecasts about the quantum of the funds to be received each month however there is material uncertainty underlying these assumptions due to the unpredictable nature of share prices.

In carrying out the review the Directors have made assumptions about the revenue that will be generated in the financial years ending 30 June 2009 and 2010. There will be an increased focus on sales and the directors have forecast that the launch of the new version of the ARTA software will considerably increase revenue relative to the year ended 30 June 2008. Given that this future revenue is not supported by sales contracts there is material uncertainty as to the amount of revenue that the Group will generate.

As highlighted above, there is a material uncertainty related to events or conditions which may cast significant doubt on the entity's ability to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business.

Carrying value of long-term assets

The Directors have carried out impairment tests on the carrying value of the Group's intangible assets and goodwill and concluded that these assets are not impaired. In arriving at this conclusion the Directors have made assumptions about revenue in the near and longer term, which, due to the nature of our sales and the time-scales involved are not supported by sales contracts. There is thus material uncertainty as to the amount of revenue that will be generated, which may cast significant doubt as to the carrying value of these assets.

The impairment tests were carried on the following balances:

Intangible asset pertaining to the current version of the ARTA software: £0.8 million.

Intangible asset pertaining to capitalised development work on the new version of the ARTA software: £1.7 million.

Goodwill: £7.3 million.

Impairment of these assets has been tested by estimating the value in use of these assets.

The current version and new version of the Company's ARTA software have been treated as separate cash generating units and tested for impairment accordingly. The impairment of the goodwill has been tested by comparing the cash flows generated by the Artilium N.V. business after subtracting the cash flows that support the carrying value of the intangible assets. 

For the existing version of the ARTA software, future cash flows were estimated for the two years ending 30 June 2010, the expected period of time over which the software will be marketable. A large percentage of the revenues in the first year are under contract. A rate of 15% was used to discount these cash flows.

For the new version of the ARTA software, revenue of £7.0 million was assumed for the year ending 30 June 2010, the year in which the software is due to be released, with an annual growth rate of 30% thereafter for the three years ending 30 June 2013, the estimated useful economic life of the software. This revenue assumption is based on an expectation that there will be significant revenue growth as a result of the Company's strategic partnership with Microsoft and the Company's focus in the future on the sale of software licences to large mobile operators. Management believe this is achievable as the current development of the software will make it more scalable and thus make the software more accessible to a wider customer base of bigger customers. The Company is at an early stage of development and therefore it is expected that growth for the first few years will outpace the industry average. A rate of 15% was used to discount these cash flows.

For the goodwill impairment test cash flows have been forecast for five years and a terminal value has been calculated for the years beyond that. The terminal value is based on the year five net cash flows forecast to perpetuity using a discount rate of 15%, which is appropriate for the industry, and a long term growth rate of 3%. Based on these assumptions the recoverable amount exceeds the carrying amount by £29.0 million. If the annual growth rate for the three years ended 30 June 2013 drops below 22% then the recoverable amount will be less than the carrying amount.

As a consequence of the material uncertainties highlighted above relating to going concern and the carrying value of long-term assets, at the date of issuing this statement the auditors have indicated to the directors that their audit report will be unqualified but modified to include emphasis of matter paragraphs on these uncertainties which may cast significant doubt on the group's ability to continue as a going concern and the carrying value of the long-term assets.

Business combinations

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for resale in accordance with IFRS 5 Non Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell.

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.

The interest of minority shareholders in the acquiree is initially measured at the minority's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales-related taxes.

Revenue from platform contracts is recognised in accordance with the group's accounting policy on completion of contracts. Revenue comes from the sale of proprietary software, professional services, and the re-sale of third party hardware and software and after sale maintenance contracts.

Where the outcome of a contract can be estimated reliably, revenue and costs related to the sale of proprietary software and professional services are recognised by reference to the stage of completion on the contract activity at the balance sheet date. This is normally measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

Sale of third party hardware and software is recognised when the goods are delivered and title has passed.

Revenue from the sale of software licences is recognised when the following criteria are met:

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount.

2. Loss for the year

Loss for the year has been arrived at after charging/(crediting):

3. Exceptional restructuring costs

4. Exceptional Cost - Provision for non-payment of shares on exercise of warrants 

On 7 November 2007, 3,250,000 warrants were exercised by Cold Investments Limited ('Cold Investments') for consideration of £2.4 million. The shares were issued as fully paid for admission to AIM, satisfied by cash of £1.4 million and an undertaking to satisfy a debt of £1.0 million. However, the £1.0 million remained unpaid, despite assurances given by solicitors acting for Cold Investments. In order to recover the monies due, 1.9 million shares were forfeited and control taken by the Company. However, the Directors were subsequently satisfied that the shares were owned by individuals not connected with Cold Investments and were therefore returned. The Directors have decided to make full provision for the debt.

5. Taxation

The total taxation expense in the income statement relates to continuing operations. 

The charge for the year can be reconciled to the loss per the income statement as follows:

6. Losses per share

The warrants and share options in issue do not have a dilutive effect as the market price of ordinary

shares exceeded the exercise price of the warrants and share options during the financial year. As a

result, diluted loss per share is the same as basic earnings per share.

7. Share capital

Fully paid ordinary shares carry one vote per share and carry the rights to dividends.

8. Share-based payments

The Company has the following share plans in place. These plans were approved by shareholders on 5 January 2007:

Unapproved Share Option Plan: Awards are made to employees with the exercise price based on the market price of the Company's shares at the date of the award. These awards have a three year vesting period and a five year exercise period. The performance criteria are at the discretion of the remuneration committee. Under this plan 331,000 options were granted on 19 September 2007 at an exercise price of £1.972 and 70,000 options were granted on 17 October 2007 with an exercise price of £2.746.

Long Term Incentive Plan: Awards are made as nil cost options or as performance shares. Awards are subject to stretching performance criteria, at the discretion of the remuneration committee. The vesting period is 3 years. Under this plan 75,000 nil cost options were granted on 21 April 2008.

Founders Awards: Awards have been made to a limited number of executives under this scheme, with an exercise price of 73.5p, based on the share price of the Company in the 5 days following the Company's readmission to AIM. The options vest in equal tranches over a 3 year period and have an exercise period of one year. There were no awards made under this scheme during the year.

Details of the share options outstanding during the year are as follows:

There were no share options exercised during the period.

There are currently a maximum of 970,000 share awards outstanding under the LTIP.

The aggregate of the estimated fair values of the options and LTIP shares granted during the year was £312,000 (2007: £3.5 million) and the amount recognised as an expense during the year ended 30 June 2008 was £932,000 (2007: £707,000). The valuations were carried out in accordance with independent advice from Price Waterhouse Coopers and a Binomial and Monte-Carlo model deployed to arrive at the fair value of these share awards.

The inputs into the Binomial and Monte-Carlo models were as follows:

In the case of the share option grants and the absence of a credible amount of past share price data for the Company, expected volatility was calculated using the historical volatility of similar listed companies. For the LTIP award that was made in the year the Company's share price volatility was calculated for the period since the most recent AIM admission up to the grant date, a relatively short period of 16 months. This gave a result of 123.0%. Comparator companies over the same period had volatility of 34.0%. The management consider the Company's share price volatility to be unusually high as a result of unusual trading patterns and have therefore decided to use a rate of 75.0% for the purpose of this calculation. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

9. Notes to the cash flow statement

Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.

10. Share warrants

As at 30 June 2007, 5.4 million of the Series 2 warrants remained exercisable at a price of 75p per ordinary share at any time up to 31 December 2007. Before the expiry date 5.35 million share warrants were exercised and the remaining unexercised warrants expired on 31 December 2007.

Details of the warrants outstanding during the year are as follows:

The weighted average share price at the date of exercise for warrants exercised during the period was 75 pence.

11. Events after the balance sheet date

On 25 September 2008 at a general meeting the shareholders approved the placing of 28,852,942 shares in two tranches. 9,498,104 shares were placed at 23.25 pence raising £2.2 million and a further 19,354,838 shares were placed with the proceeds receivable over 24 months, with the exact amount receivable being dependent on the Company's share price performance over the period.

12. AGM

The Company's AGM will be held in early November, 2008 and shareholders should expect to receive copies of the Annual Report in due course.