CAP-XX Regulatory News (CPX)

30 Oct 2008 07:00



30 October 2008

CAP-XX Limited

Audited Results for the year ended 30 June 2008

Manufacturing and Licensing Agreement with Murata Manufacturing Corporation finalized in May 2008. Under the terms of the Agreement, CAP-XX will receive "up-front" Technology Transfer payments and a royalty based on Murata's future sales

1.43 million units sold, 2.9% up on 2007 levels

Net loss was A$11.6m, 29% more than last year. This includes one off expenses totaling A$2.6m, comprising Impairment and Obsolescent Inventory provisions, due to the Murata Manufacturing Agreement, of A$1.6m and A$0.9m respectively.

Cash balance at end of period was A$3.5 million

Relationships with major mobile handset manufacturers have progressed and new key markets for supercapacitors have been identified

Main focus on 2009 will be assisting Murata with the completion of their manufacturing timetable and securing mobile handset design wins

Additional agreements signed with Murata and additional commitments of support made by Murata to CAP-XX

Anthony Kongats, CEO of CAP-XX said

"The signing of the agreement with Murata provides CAP-XX with the credibility and production scale to give the mobile handset manufacturers a degree of confidence that CAP-XX can deliver. Murata remains on track to start mass production of our supercapacitor product by October 2009. While mobile handsets remains our key focus a number of new and exciting markets have emerged, which have a real need for the CAP-XX technology. They are currently being investigated further and the early signs are extremely encouraging."

For further information contact:

More information is available at www.cap-xx.com

Notes to Editors:

CAP-XX is a world leader in the design and manufacture of thin form supercapacitors and energy management systems, predominantly for portable electronic devices.

The unique feature of CAP-XX's supercapacitors is their ability to store high volumes of energy and output high power levels within a thin form design. These attributes will be critical for the next generation of high volume, power-hungry portable electronic devices, including mobile phones. 

Portable devices are one of the fastest growing segments of the electronics market and provide the greatest opportunities for CAP-XX's products. CAP-XX's products are already an established enabling technology for the current generation of wireless devices, such as PDAs and PCMCIA cards.

Chairman's statement 

For some time, we have remarked that CAP-XX's major objectives were to achieve a large scale design commission from a major mobile handset manufacturer and a manufacturing agreement with a world scale electronic component manufacturer. 

I am therefore pleased to report that on 25 May 2008, CAP-XX entered into a formal contract with Murata Manufacturing Corporation (Murata) of Japan to jointly develop and supply high performance supercapacitors for mobile handsets and other portable applications.

Under the terms of the agreement, CAP-XX will receive "up-front" licence fees associated with the technology transfer and will be entitled to a royalty based on the volume of supercapacitor sales. Both parties also agreed to work together to develop next generation products. Progress since the agreement was signed is in line with management's expectations. The technology transfer has been completed with two of the scheduled "up- front" payments being received and both Murata and CAP-XX are forecasting that manufactured product and associated sales from this agreement will commence in the second half of the next calendar year. Subsequent to the main agreement, both companies signed a Re-sale Agreement on 9 October 2008 which will allow CAP-XX a proportion of Murata's manufactured product to be sold under the CAP-XX name. Joint development programs are also currently being negotiated. 

The agreement with Murata provides CAP-XX with a world-class manufacturer which is one of the largest suppliers to all of the major mobile handset manufacturers and coupled with the CAP-XX technology, provides the necessary manufacturing quality and scale to meet the requirements for volume and integrity of supply of the major mobile handset manufacturers.

The relationships with all of the major mobile handset manufacturers, as well as the integrated circuit design houses, have continued to progress at a very satisfactory rate. The CAP-XX value proposition is well known and understood.

I am pleased to report that we have been able to achieve volume growth across our markets. This is despite tough economic conditions, especially in the key United States retail market, coupled with the loss of significant wireless card volumes due to a market shift towards USB modems. Product shipments for 2008 of 1.43 million units were up compared with 1.39 million units in 2007. Revenues of A$5.12 million for the 12 months to 30 June 2008 were negatively impacted by a strengthening Australian dollar, but were still higher than the previous year (2007:$4.98m). Despite the competitive market, Average Selling Prices were maintained primarily due to improved product mix. 

Our operating result for the year to 30 June 2008, before accounting for one-off expenses, was a loss of A$9.0 million (2007: loss of A$9.1 million). The reported net loss was A$11.6 million (2007: loss A$9.0 million) with the major differences between the reported and operating loss being the need for provisioning on inventory and plant and machinery in the light of the production agreement with Murata . 

Headcount has reduced in the past twelve months with the Lane Cove manufacturing plant reducing from two shifts to a single shift. This was due to the slowdown in sales orders in the second half of the year, especially orders to the United States customer base. However, key people areas such as Research and Development and Sales and Marketing have not been decreased and in fact additional resources have been added in Research and Development to ensure that key product development initiatives that have been commenced can be completed as soon as practicable. 

The Company has commenced the new financial year in a solid fashion with sales in line with expectations. Orders from existing customers are healthy, with the key markets to be serviced continuing to be wireless, consumer and commercial applications. However, it is the enquiries from new customers which are proving to be most exciting. New markets have been identified, especially the Solid State Drive market with early investigations highlighting additional opportunities and applications for supercapacitors. While these additional opportunities will be actively pursued, they will not distract us from gaining a foothold in the mobile phone market where good progress has been made towards obtaining a mobile handset design win.

The obvious highlight for CAP-XX over the past twelve months was securing a long term manufacturing agreement with Murata. This agreement will not only "de-risk" CAP-XX but will also provide a springboard for the organisation to obtain a mobile handset design win. We firmly believe that with Murata on board, the outlook for CAP-XX has been significantly strengthened. The next twelve months will be focussed on assisting Murata with their manufacturing timetable and securing mobile handset design wins.

Michael Quinn

Chairman

Business review

About CAP-XX Limited

CAP-XX Limited is a world leader in the design and manufacture of revolutionary thin-form supercapacitors predominately for use in small portable electronic devices. Supercapacitors can considerably extend battery run-times and provide power-hungry functions that are not possible with current battery technology.

CAP-XX supercapacitors have a compact, thin-form design and they can store higher volumes of energy and output higher power levels than competing supercapacitor products. These attributes are critical for current and future generation electronic devices, such as mobile phone cameras with a quality flash photography capability and high quality audio capabilities. Other potential applications include mobile phone and solid state disk power management, mobile phone accessories markets, digital still cameras, MP3 players, portable drug delivery systems, wireless sensors, uninterrupted power supplies, plant condition monitors, toll tags and location tracking devices. The Company believes fuel cells will play a part in the solution to battery limitations and believes that this offers a potential significant opportunity to CAP-XX.

Portable devices have been, and continue to be, a fast-growing segment of the electronics market. Last year, well over 1.5 billion portable electronic devices were sold, including over 1 billion mobile phones, approximately 120 million laptops, 300 million desktop and industrial computers,  toys, digital cameras and MP3 players. Increasingly, the majority of mobile handsets being manufactured and sold have in-built cameras and flash technology. Many of these devices could benefit from supercapacitors. 

In 2007-2008, CAP-XX supplied supercapacitors to a number of blue chip consumer electronics companies for use in current generation wireless devices such as ruggedised PDAs (personal digital assistants) and PCMCIA (personal computer memory card international association) cards. CAP-XX is now particularly focussed on the camera phone market and is in discussions with leading mobile phone manufacturers as well as other manufacturers in exciting emerging markets, such as Solid State Drives (SSD).

CAP-XX is incorporated in Australia and has its headquarters and research and development and manufacturing facilities in Sydney, Australia employing 36 staff. These facilities have ISO 9000 status. A similar but larger manufacturing facility is operated in Malaysia by Polar Twin Advance Sdn Bhd under a manufacturing agreement with CAP-XX.

Historical Milestones

In 1994, a company associated with Anthony Kongats, now Chief Executive Officer of CAP-XX Limited, entered into an agreement with CSIRO (the Australian Commonwealth Scientific and Industrial Research Organisation) to research and commercialise supercapacitor technology that had resulted from CSIRO research. 

CAP-XX Limited (formerly known as Energy Storage Systems Pty Limited) was established in 1997 by Anthony Kongats as the vehicle to hold the intellectual property resulting from the partnership with CSIRO. CAP-XX received research and development grants from the Australian Government and was backed by some of the world's leading technology investors, including Intel, Acer, ABN Amro and Walden and well supported by Australian based venture capitalists Innovation Capital and Technology Venture Partners. 

In 1999, the Company built a pilot production plant in Lane Cove, Sydney, Australia, and progressively improved production capacity. It began shipping supercapacitor products to customers in 2003. Customers supplied to date include Sony, Sony Ericsson, IP Wireless, Option, Sierra Wireless, Flextronics, and product shipped to Motorola, Intermec and Hand Held Products has been incorporated in field-critical devices such as those used by leading parcel delivery companies such as FedEx and UPS.

In late 2004, the Company entered into a manufacturing agreement with Polar Twin Advance Sdn Bhd ("PTA") of Malaysia to provide high volume manufacturing services. The production flow process developed in Sydney has been successfully replicated in Malaysia and PTA has consistently improved their operational efficiencies and volume of production.

CAP-XX was named a 2005 Technology Pioneer by the World Economic Forum in developing and applying innovative and transformational technology.

In February 2006, the CAP-XX technology was recognised by Frost & Sullivan's 2005 Technology Innovation of the Year Award as a 'breakthrough nanotechnology process for producing supercapacitors to meet the pulse-power requirements of portable devices'. This Award recognises research expected to make significant contributions to the electronics industry. 

Since then, CAP-XX has received numerous other International awards for its products and electronic circuit designs including EDN's Top Overall Power Product for 2008 and being voted 3rd overall in Electronic Design's Top 101 Components for 2008.

Business review (continued)

On 20 April 2006, CAP-XX Limited was listed on the AIM market of the London Stock Exchange in conjunction with a placement of 18,433,333 shares at 93 pence per share, which raised gross proceeds of A$41million (£17.1 million) and increased the total shareholding to 48,565,893 shares and market capitalisation (at 93p per share) to about A$108 million (£45.2 million). Shareholding has risen to 49,112,791 by 30 June 2008 as various Employee Shareholder Option Plan participants exercised their options

In May 2008, CAP-XX entered into a formal agreement with Murata Manufacturing Corporation (Murata) of Japan to jointly develop and supply high performance supercapacitors for mobile handsets and other peak power hungry, space constrained portable applications. Murata is recognised as one of the world's leading manufacturing companies of electronic components and is an existing supplier to all of the top mobile handset market companies. CAP-XX and Murata will work together to scale supercapacitor production to meet the anticipated demand of the global handset market. Both organisations are anticipating that volume mass production and sales from this partnership will commence in the second half of 2009. In early October 2008, the companies signed a Re-sale Agreement which provides CAP-XX with a proportion of the Murata manufactured product. This product will be sold to CAP-XX's existing and new customers under the CAP-XX name.

Review of Operations and Activities 

The Company has continued to grow its revenue year on year with more than 5 million units sold since 2003. Revenue for the 12 months to 30 June 2008, increased by A$137,000 to A$5.1 million compared to A$5.0 million in 2007. Unit sales of 1.4 million were in line with the previous year. The total revenue for 2007/08 does include a proportion of the Murata Technology Transfer payments which will be spread over 24 months for revenue recognition purposes. The first payment was received in June 2008. The operating result for the year to 30 June 2008, before accounting for one-off expenses, was a loss of A$9.0 million (2007: loss of A$9.1 million). The one-off expenses relate to an increase in the inventory obsolescence provision due to an excess of specific products in a market which has significantly declined and the write down of plant and machinery which is deemed to be surplus to CAP-XX's requirements in light of the Murata manufacturing agreement. The reported result for the twelve months to 30 June 2008 was a net loss of A$11.6 million (2007: loss of A$9.0 million).

Business Environment

Portable electronic devices are one of the fastest growing segments of the electronics market and provide the greatest opportunities for CAP-XX's products. Driven by customer requests, manufacturers are constantly adding to the functions and applications available on these devices, meaning that power management continues to be an increasingly important consideration. The other important factor is size, with the devices becoming smaller even though their capabilities are increasing.

CAP-XX technology provides a competitive advantage over other supercapacitor manufacturers, which include AVX, Maxwell Technologies and NEC/Tokin Corporation. Other manufacturers are unable to match the CAP-XX technology for thinness, energy density and power density. Many competitors manufacture higher-capacity, large package devices and focus on applications where the combination of thinness, energy density and power density is not an issue.

Opportunities

The growing camera phone market remains the top priority for CAP-XX. Mobile phones with a camera have become the standard offering and manufacturers are increasingly moving towards higher resolution cameras. Mobile handset providers, especially in mid tier and high end mobile phones, are including a quality camera but are not providing an effective camera flash. There is a widening gap between the power these applications require and the power current battery technology can deliver. There is also a strong move towards improving the quality of the music played through the phones and our supercapacitors can provide a vital link in achieving these goals. Good progress has been made with both mobile handset manufacturers and the international integrated circuit (IC) companies. CAP-XX is now well known for its capability and technology.

A further opportunity that materialised during the year is Solid State Drives (SSD). Due to lower prices, higher capacities, improved reliability and faster performance this product is rapidly replacing hard disks. The SSD market to date has been limited to the enterprise market segment, due largely to its high cost. Penetration is growing from a virtual zero base in many consumer segments to substantial quantities by 2009/10. We estimate this will drive SSD growth rates many times more than those of the underlying markets. To ensure system performance is not compromised, SSD will require an Uninterrupted Power Supply (UPS) to assist with the write speed required for the large volumes of meta data that are produced. The attraction of the CAP-XX supercapacitor to the SSD manufacturers is the energy storage capability, delivered power and the physical dimensions (size and weight). CAP-XX has already achieved several design wins and trials of the supercapacitor product are underway with several selected vendors.

Other potential applications include digital still cameras, MP3 players, portable drug delivery systems, wireless sensors, uninterrupted power supplies, toll tags and location tracking devices. The Company believes that fuel cells will also have a part to play in the solution to battery limitations and believes that this also offers another significant opportunity to CAP-XX.

Business review (continued)

An additional benefit of the Murata manufacturing agreement is that it will enable the CAP-XX supercapacitor to be validated as a mainstream consumer electronics technology and will increase CAP-XX's exposure to markets and customers previously not targeted due to limited resources. Association with the Murata name will help gain recognition for, and acceptance of, the capabilities of the CAP-XX supercapacitor product to support hi-power functions, and reduce misconceptions about their price and performance. Murata will not be able to meet the product type or size requirements to all markets. Murata will refer non-core customers to CAP-XX and CAP-XX will supply these markets directly using products made by contract manufacturers.

Strategies for Growth

The Company continues to have discussions aimed at securing business with a number of global original equipment manufacturers active in mobile phone and portable consumer electronics. We hold regular engineering meetings together with their integrated circuit board providers as well as strengthening our relationships across their organisations. Whilst we are unable to comment on specific progress with individual companies we can state that we are pleased with the overall progress and remain confident that the first mobile handset utilising CAP-XX technology will appear in the market in 2009.

CAP-XX opened an office outside London in 2007 which includes our mobile phone business development team. We also have a sales office in the USA whilst Asia is covered from our Sydney offices. Most sales to date have been achieved by direct sales and the Company plans to maintain direct sales contacts with key customers. To gain broader market coverage, the Company has entered into distribution agreements with a number of well-qualified distributors covering Asia (inclusive of Japan, Korea and China)  US and Europe. Sales growth from this distributor network is encouraging and their experience in selling our product is steadily improving.

Research and Development

CAP-XX has a research facility at its headquarters in Lane Cove, Australia where a research and development department comprised of 10 engineers and scientists. They are ably assisted by 14 additional engineers and scientists in other departments. Development work continues to maintain CAP-XX's lead position in the engineering of electrode, separator and electrolyte material in supercapacitor devices. We have a close association with leading personnel across various research institutions. Our Scientific Advisory Board provides clear direction on the commercially relevant technologies our R&D programme should address.

The market in which the Company operates is competitive and is characterised by rapid technological change. The Company believes that it currently has a strong competitive position in all its target markets covering wireless, consumer and commercial applications with its capability to produce supercapacitors with a high energy density and power density in a small conveniently sized flat package. The CAP-XX devices are also lightweight, work over a broad temperature range and have an operating lifetime measured in years.

The Company's success depends on its ability to protect its intellectual property and prevent any infringements of its intellectual property. CAP-XX has sought to protect its intellectual property and has considerable intellectual property embodied in patents covering the design, manufacture and use of its high performance supercapacitors. The CAP-XX patent portfolio currently consists of 21 patent families, 14 granted US patents, 14 US patent applications and corresponding international patents and applications. The patents cover supercapacitive devices, components for supercapacitors, techniques for manufacturing devices and applications of the devices in electronic circuits. 

Outlook

The Company had identified that a reliable large scale manufacturer needed to be located in order to pursue the mobile phone market. With Murata, CAP-XX's long term manufacturing strategy is now in place and both the short and longer term outlooks are positive. Murata is well recognised as a worldwide components manufacturer and already supplies to the large mobile handset manufacturers. Murata's worldwide distribution expertise will also assist the sales and marketing of the 

CAP-XX developed supercapacitor. First sales of the Murata produced supercapacitor remain on schedule and are expected in the second half of 2009.

The Company made good progress during 2008 towards its objective of large scale design commissions from mobile handset manufacturers. We also actively engaged with the various suppliers and integrated circuit design houses that support the major handset manufacturers globally. These customers are expanding the array of solutions on offer using our supercapacitor as a core technology feature. Discussions are continuing with Murata on the most effective use of common resources (business development, sales and marketing) to achieve the desired outcome.

In partnership with Murata, CAP-XX will continue to focus on developing credible long-term relationships with mobile handset manufacturers, with the goals of securing a mobile design win and the successful commencement of the Murata production line. 

CAP-XX Limited

Income statement

For the year ended 30 June 2008

CAP-XX Limited

Balance sheet

As at 30 June 2008

CAP-XX Limited

Statement of changes in equity

For the year ended 30 June 2008

CAP-XX Limited

Cash flow statement

For the year ended 30 June 2008

Notes to the financial statements

Basis of preparation

The financial information included in this announcement does not constitute statutory accounts within the meaning of the Australian Corporations Act 2001. Whilst the financial information has been computed in accordance with Australian equivalents to International Financial Reporting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001, this announcement does not itself contain sufficient information to comply with those requirements.

A copy of the Company's annual report incorporating compliant financial statements for the year ended 30 June 2008 will be posted to shareholders in October 2008.