FST.L Regulatory News (FST)

Frontier Smart Technologies Group Ltd

('Frontier' or the 'Group')

Final Results

EBITDA ahead of market expectations

Frontier (AIM: FST), a pioneer in technologies for Digital Radio and Smart Audio devices, has published its final results for the full year ended 31 December 2016.

Financial Highlights

· EBITDA ahead of market expectations, turning positive at £0.7 million (FY 2015: loss1 £0.8 million)

· Steady revenues of £32.1 million (FY 2015: £31.7 million)

o Digital Radio revenues up 8% to £22.3 million (2015: £20.6 million)

o Smart Audio revenues down 11% to £9.8 million (2015: £11.1 million), pending release of Minuet, the Group's new solution incorporating Google's Chromecast platform

· R&D expenditure reduced 11% to £6.6 million (FY 2015: £7.4 million)

· Loss-making Healthcare division sold in July 2016 for gross proceeds of £1.3 million plus ten-year royalty agreement

· As of 31 December 2016, the Group's cash balance was £3.4 million

Operational Highlights

· Group renamed Frontier Smart Technologies Group Limited in November 2016 to reflect sole focus on consumer audio technologies

· 40 for one share consolidation completed in November 2016

· Design wins secured for Minuet, with several Smart Audio brands, including Harman JBL, the world's largest manufacturer of speakers; first products from Brookstone already on sale

Commenting on the Final Results, Anthony Sethill, CEO of Frontier, said: 

"2016 was a pivotal year for the Group. We sold our loss-making Healthcare business, delivered our first positive EBITDA figure and are now fully focused on our Consumer Audio technology business.

"In Digital Radio we have maintained our market leadership position as international markets for DAB radio continue to develop. With Norway becoming the first country in the world to switch- off its FM signals, the prospects for this business are encouraging.

"2016 was an important year for our Smart Audio business, as we completed the development of our new Minuet solution incorporating Google's Chromecast platform. The first consumer products using this solution are now available in-store, with more to follow in the coming months. This will help drive Group revenue and EBITDA growth in 2017."

Notes:

1 EBITDA means earnings before interest, tax, depreciation, amortisation, and before non-recurring and certain non-cash items. In 2015 EBITDA was adjusted in respect of an exceptional non-cash provision.

Certain statements made in this release are forward-looking statements. Such statements have been made by the Directors in good faith using information available up until the date that they approved this update. Forward-looking statements should be regarded with caution because of the inherent uncertainties in economic trends and business risks.

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation. Upon the publication of this announcement via a regulatory information service, this inside information is now considered to be in the public domain.

For further enquiries:

About Frontier Smart Technologies

Frontier is a pioneer in software and hardware technologies for Digital Audio devices. The Group has one operating division, Frontier Silicon, which provides solutions for Digital Radio and Smart Audio devices.

Frontier was founded in 2002. Customers include many leading consumer audio brands: Bose, Bowers & Wilkins, Denon, Grundig, harman/kardon (JBL), Onkyo, Panasonic, Philips, Pioneer, Pure, Roberts, Sony, TechniSat, Yamaha, and many more.

The Group is headquartered in London, with engineering, sales and operations teams in Cambridge, Timisoara (Romania), Hong Kong, and Shenzhen. Please visit http://www.frontiersmart.com/

Chairman's Statement

In last year's report, I described how our highest priority was to optimise shareholder value from our loss-making Healthcare business. Working with advisors, we completed the sale of the business in July 2016, for gross proceeds of £1.3 million. In addition, the Group will receive royalties on net revenues over ten years and, if the business is sold within four years, we will receive 19% of net proceeds.

Following this disposal, the Group is now fully focused on its consumer audio technology business, Digital Radio and Smart Audio, an area where Management has extensive, deep-rooted expertise. To reflect this shift in focus, in November 2016, we changed our name to Frontier Smart Technologies Group Limited. At the same time we undertook a 40 for 1 share consolidation.

I am pleased to report that in 2016, the continuing consumer audio business became EBITDA positive for the first time, moving from an EBITDA loss of £0.8 million to a positive figure of £0.7 million. Revenues were relatively flat at £32.1 million; but close control of overheads, in particular R&D costs, contributed to this significant improvement in financial performance.

At year end, the Group had a cash balance of £3.4 million. Given the continuing business's improved financial performance, the Board is confident that no further funds from shareholders will be required to support the existing business.

Frontier has two business lines, Digital Radio and Smart Audio, each in different stages of development. The Digital Radio business is well-established and performing well. The prospects for DAB radio appear positive, not least, as Norway has recently become the first country in the world to start switching off its FM transmission. The cashflows from this business line provide a foundation for our investment in Smart Audio.

Our Smart Audio business, where we are working closely with Google, offers potentially exciting opportunities, but is in a much earlier stage of development. Initial indications in terms of design wins for this business are promising, however it is too early to predict with great certainty how quickly revenues will grow. Nevertheless, for the Group as a whole, our financial goals for 2017 and 2018 are to increase revenues and improve our profitability and cash generation.

In the last 12 months, we have seen some changes to the Board. In July 2016, Professor Chris Toumazou stepped down from his position as Non-Executive Director. As many of you will know, Chris was the founder of and long-time driving force behind the Group. I would like to thank him for his contribution over the years. In November 2016, we appointed a new NED, Martin Harriman. Martin brings a wealth of international, digital experience - most recently from his time at Telefonica. I would like to welcome Martin to the Board.

Finally, I would like to thank the Group's staff. The success of our established business is down to them, and their efforts will play a crucial role in determining our fortunes as we address the exciting, opportunities in Smart Audio.

Martin Knight

Chairman

23 March 2017

Chief Executive's Statement

Overview

2016 was a pivotal year for the Group. In July, we sold our loss-making Healthcare business, leaving the Group to focus solely on its consumer audio business, Frontier Silicon, which provides technology solutions for DAB digital radios and Wi-Fi enabled smart audio devices.

In November 2016, the Group was renamed Frontier Smart Technologies Group Limited which more accurately reflects the refocused business. At the same time, a 40 for one share consolidation was undertaken, which the Board believes may help to make New Ordinary Shares more attractive to potential new investors.

In FY 2016, the continuing business returned its first positive EBITDA of £0.7 million (against an adjusted loss of £0.8 million in 2015). Reported revenues were slightly ahead at £32.1 million (2015: £31.7 million), benefiting from being largely denominated in US dollars.

As at 31 December 2016, the Group had cash of £3.4 million, with the outstanding balance of its bank loan being reduced by £0.9 million to £4.1 million.

The improvement in EBITDA reflected improved revenues from Digital Radio and an 11% reduction in the Group's R&D expenditure to £6.6 million (2015: £7.4 million); this follows completion of the Group's fourth generation digital radio chip in 2015. Smart Audio revenues were lower than 2015, pending the release of the Group's next generation solution incorporating Google Chromecast.

Smart Audio is expected to be the driver of growth for the business in the medium term. Global volumes for Smart Audio devices are expected to grow from 14 million units in 2016 to 50 million units in 2020 (Source: Strategy Analytics). Frontier's focus is on third party brands which are incorporating ecosystem platforms, such as Google's Chromecast, into their Smart Audio devices.

Operational Review

Digital Radio

Digital Radio revenues were up 8% to £22.3 million (2015: £20.6 million), supported by sales volume growth of 4% to 4.5 million units (2015: 4.4 million units).

EBITDA for Digital Radio was £8.7 million, a significant improvement on the prior year (2015: £2.7 million), largely reflecting the completion of major R&D expenditure. The Group's fourth generation chip is shipping in significant volumes and is generating improved margins for the business.

Frontier continues to retain its strong market leadership position and has benefited from growth in Germany, the UK, Norway and the Netherlands. Continued growth is expected following the start of Norway's switch-off of FM transmissions in January 2017, a process which completes at the end of this year. Sustained medium term growth in volumes should be driven by continued expansion in continental Europe, including Switzerland switching off FM in 2020-24.

Smart Audio

Smart Audio revenues were 11% lower at £9.8 million (2015: £11.1 million), reflecting a 20% fall in volumes, pending the release of Minuet, Frontier's new solution incorporating Google Chromecast.

Working software for Minuet was released in December 2016, four months later than originally anticipated, but the Group has now secured a number of design wins for its new platform. The first, Brookstone's Big Blue Studio Wireless Speaker, has already gone on sale in the US. Several other Minuet design wins have also been secured, including for Harman JBL, the world's largest manufacturer of speakers. The Board believes these design wins will deliver growth in Smart Audio revenues in 2017.

Frontier's competitive position in this sector is based on its significant experience in developing technologies in emerging areas of the consumer audio market, its well-established supply chain operations and its relationships with leading audio brands and industry innovators, such as Google.

Prospects for this business, whilst not without risk, are promising, driven in particular by the advent of Voice Personal Assistants ('VPAs') such as the Amazon Echo and Google Home. Frontier's focus will be on third party brands which aim to include these technologies in their own devices.

Disposal of Healthcare

The Group disposed of its healthcare business, Sensium Healthcare, in July 2016 as the business had been heavily loss-making with significant uncertainty regarding when revenue generation would commence. The loss, comprising of £4.7 million in respect of trading losses and £9.5 million loss on disposal for the discontinued business in 2016, was £14.2 million (£6.8 million in 2015).

The business was sold for gross proceeds of £1.3 million (£1.0 million on completion and a further £0.3 million on 31 December 2016) to its European distributor, The Surgical Company ('TSC'). This followed a strategic review, initiated by the Board, which concluded that significant investment would be required to see the business through to revenue generation.

Proceeds from the sale will be used to fund working capital requirements. In addition, the Group will benefit from a ten year royalty stream (3% of net revenues for five years, followed by 2% of net revenues for the following five years). If TSC sells the business within the next four years, Frontier will receive 19% of net proceeds.

Financial review

Revenue

As noted, the Healthcare Division was sold on 22 July 2016 and the trading results and loss on disposal is treated as a discontinued business throughout these accounts. As a result, certain comparative numbers for 2015 have been restated so as to show changes against the continuing business.

Group revenue for the year increased from £31.7 million to £32.1 million, this follows growth of 22.1% in 2015 and 19.6% in 2014. 2016 was broadly flat despite the benefit to revenue of foreign exchange movements between sterling and the US dollar. The exchange gain was offset by a shift in product mix in Digital Radio where fourth generation modules sell for c$5-6 and third generation for c$7-9, and an overall reduction in Smart Radio sales. Total volumes shipped across the business were 5.2 million units (2015: 5.2 million units).

Gross profit margin increased slightly over the year from 43.2% to 43.9%. Overall gross margins are expected to decline in the mid-term as Smart Audio, which has lower margins than Digital Radio, grows as a proportion of total revenues.

R&D

As noted last year, the Group largely completed its investment phase in 2015, with R&D expenditure having peaked at £7.4 million. For 2016 as a whole, R&D spend was £6.6 million and is expected to decline further during 2017.

EBITDA

For the first time in its history the Group is able to report a positive EBITDA of £0.7 million compared to a loss in 2015 on a like for like basis of £0.8 million. As noted earlier, revenue has benefited from the movement in the sterling/dollar exchange rate, however as you move further down the Consolidated Statement of Comprehensive Income this effect is reduced as all the Group's cost of sales is dollar denominated as is a large proportion of its overheads where staff are located outside the UK. The Group expects EBITDA performance to improve further in the coming years as Smart Audio matures.

Discontinued operations

During the year, the Group disposed of its Healthcare Division and both the trading losses and loss on disposal have been included in "Loss for the year from discontinued operations" of £14.2 million. As has been noted in public market announcements previously, the Board undertook a rigorous sales process with external advisers and disposed of the division for gross proceeds of £1.3 million, plus a future royalty stream and a share of any profits on a subsequent disposal.

The table below reconciles the Group's EBITDA to its loss for the year.

Pre-tax loss

The Group reported a pre-tax loss of £3.0 million (Restated 2015: loss £9.1 million).

Taxation

The Group has historically applied for and received tax credits in respect of its R&D expenditure. In 2016 the tax credits amounted to £1.6 million (2015: £1.7 million). It is expected that similar claims will be made in 2016.

As at 31 December 2016, the Group has unutilised tax losses of £37.9 million which may be utilised against taxable future profits. These losses are still to be agreed with the UK tax authorities. In the Board's opinion there is uncertainty over the timing and quantum of their use in the foreseeable future and therefore a deferred tax asset has not been recognised.

Cash flow

At the year-end, the Group recorded £3.4 million of cash and cash equivalents on the balance sheet. The Board believes that with the Group trading at a positive EBITDA level and generating positive cash flows in 2017 and beyond that this is sufficient for the immediate needs of the business.

Current Trading and Outlook

The outlook for 2017 is healthy and the Board expects revenues and EBITDA to improve this year.

Digital Radio revenues are benefitting from the continued international uptake of DAB radio. In January 2017, Norway became the first country to start the switch-off of its FM broadcasts, which has contributed to increased demand in the opening months of this year. Smart Audio revenues should return to growth in 2017 following the release of the Group's new solution at the end of 2016.

Anthony Sethill

Chief Executive Officer

23 March 2017

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

The accompanying principal accounting policies and notes form an integral part of these financial statements.

consolidated Cashflow Statement

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year to 31 December 2016

BASIS OF PREPARATION

The Company was incorporated in the Cayman Islands which do not prescribe the adoption of any particular accounting framework. The Board has therefore adopted and complied with International Financial Reporting Standards as adopted by the European Union (IFRS). The Company's shares are listed on the AIM market of the London Stock Exchange. The principal accounting policies of the Group are set out below.

The financial information set out in the announcement does not constitute statutory accounts for the years ended 31 December 2016 and 31 December 2015. The financial information for the year ended 31 December 2016 is derived from the statutory accounts for that year, which will be delivered to shareholders shortly and were approved by the Directors on 23 March 2017. The auditors' report on those accounts was unqualified.

1 revenue and LOSS before taxation

Revenue and loss before taxation

Revenue and loss before taxation are attributable to the principal activities of the Group.

The loss before taxation is stated after charging:

Revenue by geographic location

Assets and liabilities by geographic location

2 Segmental information

As described under Segmental Reporting in the Principal Accounting Policies, Management currently identifies three divisions as operating segments.

Included in revenues for the year ended 31 December 2016 are revenues of £10.7 million from the largest customer, £5.4 million from its second largest customer and £1.8 million from its third largest customer. Together these represent 55.8% of the total Group revenue for the year.

Included in revenues for the year ended 31 December 2015 are revenues of £5.5 million from the largest customer, £4.3 million from its second largest customer and £2.1 million from its third largest customer. Together these represent 37% of the total Group revenue for the year.

3 Disposal of Sensium Healthcare Limited

On 22 July 2016, the Group disposed of its 100% shareholding in its subsidiary Sensium Healthcare.

The consideration was settled £1 million on 22 July 2016 and £316k on 31 December 2016. At the date of disposal, the carrying amounts of Sensium Healthcare net assets were as follows:

Included within other consideration is amounts relating to a 10 year royalty stream (3% of net revenues for five years, followed by 2% of net revenues for the following five years).

4 Loss Per Share

The calculation of the basic loss per share of 36.46 pence, 3.36 pence from continuing operations and 33.1 pence from discontinued operations (2015 restated: 34.6 pence) is based on the loss after tax of £15.6 million (2015: £14.7 million) divided by the weighted average number of ordinary shares in issue during the year of 42,832,269 (2015 restated: 42,543,169). Due to the losses incurred the impact of the share options and other deferred shares is anti-dilutive. As such the diluted earnings per share equals the ordinary earnings per share.

5 GOODWILL

Goodwill relating to Sensium Healthcare results from the acquisition of Sensium Healthcare Limited on 3 November 2005. Goodwill relating to Frontier Silicon results from the acquisition of the Frontier Silicon Group on 20 August 2012.

All principal operating divisions incurred losses in the year ended 31 December 2016, which is an indicator of impairment. The Directors have tested the aggregate recoverable value of goodwill, specific intellectual property, and licence & development fees for impairment in accordance with the Group's accounting policy of testing annually for impairment. Recoverable value is assessed by value in use. The Directors, in assessing the recoverability of the remaining amount have considered the technical feasibility of the technology and the opportunities for commercial exploitation, including the position with the current commercial relationships.

To determine the value in use, the Directors have produced detailed monthly profit and loss and cash flow forecasts for the four years up to December 2020. A four-year forecast period is considered reasonable for the markets that the Company addresses, particularly given the stage of development of the Group's products and the expected life of new technologies as explained further below.

The Chief Executive's Statement provides a summary of the Group's expectations for each division, together with an overview of the relevant markets. Below we have summarised the key judgements in relation to the individual impairment reviews.

Consumer Audio - Frontier Silicon

The intangible assets of Frontier Silicon were independently valued in 2012 as part of the acquisition accounting. The difference between the fair value of the net assets and the fair value of the consideration has been treated as goodwill.

Whilst Frontier has continued to make losses post-acquisition, primarily as a result of R&D spend, this is in line with the forecasts at the time of the acquisition and therefore the Directors consider the Goodwill arising on consolidation as still valid and no impairment has occurred since acquisition.

The Directors have reviewed the carrying value of these assets in light of their forecasts of revenues and profitability for this business sector. A discount rate of 16% was applied to future cash flows with a rate of 18% used as a stress test. Under both scenarios, the carrying value of the intangible assets could be supported.

In assessing the future cash flows of the division, the Directors have looked at a four-year forward view and then made a terminal value assessment at the end of 2020 assuming no further sales and cost growth. This is based on the life cycle of the smart audio and digital radio products, where certain existing models are reaching end of life, and new models have 12 to 24 months development ahead of them before a useful sales life of 4-5 years depending on future product enhancements. The Directors expect the market for digital radio to keep expanding at its current rate and for the company to maintain its market share. In smart audio the Directors expect the market to expand significantly as Wi-Fi enabled speakers with much enhanced functionality really take hold. The forecast demonstrates that even a relatively small market share could lead to revenue growth rates significantly ahead of more mature markets.

The key judgements applied by the Directors in the forecasts are in relation to sales prices volumes and margins. The forecast model is built on the Directors' best estimates of the addressable market and the Company's resultant share of that market. In determining these estimates the Directors have considered information and trends from existing markets and their expectations for emerging markets in order to develop an assessment of both future sales volumes and prices. The Directors believe the underlying assumptions to be reasonable but are aware that there are significant competitive risks which would be magnified by delays to key programmes and therefore growth rates may not be achieved or margins could be compromised. Should the underlying estimates not be achieved there is a risk these assets will be impaired.

6 OTHER intangible assets

Intellectual property

Intellectual property relates to the valuation of beneficial licence agreements, trade names and customer relationships in Frontier Silicon at the date of their original acquisition.

Licence & development fees

The Group capitalises certain licence and third party development fees where, in the view of management, they have intrinsic value to ongoing software and hardware development programmes. Additions in the year relate to technology on new projects essential to the future development of new generation solutions. The capitalised licence and development fees are amortised in accordance with the Group accounting policy and are subject to an annual impairment review.

Marketing

Marketing-related intangible assets are defined as those assets that are primarily used in the marketing or promotion of products and services. The Frontier solutions are well known and preferred by a majority of the consumer electronic brands who specifically instruct their manufacturers to use Frontier modules and solutions in their audio systems.

Customer relationships

Customer-related intangible assets may consist of customer lists, order or production backlogs, customer contracts and relationships, and non-contractual customer relationships. Frontier has developed relationships with both consumer electronic brands and manufacturers. The customer relationship valuation captures the economic benefits of having these trading relationships.

Impairment reviews

The Directors have tested all intangible assets for impairment in conjunction with their testing for goodwill, in accordance with the Group's accounting policy.

7 Annual reports and accounts

The Annual Report and Accounts for 2016 will be posted to Shareholders on 4 April 2017 and will also be available free of charge on request from the Group's registered office, 4th Floor, 137 Euston Road, London NW1 2AA and on the Group's website at www.frontiersmart.com.

8 Notice of Annual General Meeting

Notice is given that the Annual General Meeting of the members of Frontier Smart Technologies Group Limited will be held at the offices of Buchanan, 107 Cheapside, London EC2V 6DN on Tuesday, 9 May 2017 at 9:00 a.m. 

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