FST.L Regulatory News (FST)

Frontier Smart Technologies Group Limited

('Frontier', the 'Group' or the 'Company')

Half-Year Results

Frontier Smart Technologies Group Limited (AIM: FST), a pioneer in technologies for Digital Radio and Smart IoT devices, announces its half-year results for the six months ended 30 June 2019 ('H1-2019' or the 'period').

Summary

Notes:

1 Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation, and before share-based payments and restructuring charges.

2 Trading EBITDA means Adjusted EBITDA less R&D costs capitalised in compliance with IAS 38 'Intangible Assets'.

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About Frontier Smart Technologies Group Limited

Frontier Smart Technologies is a pioneer in technologies for Digital Radio and Smart IoT devices. The Group's customers include many leading consumer audio brands: Bose, Denon, harman/kardon, JBL, Onkyo, Panasonic, Sony, Yamaha, Altec Lansing, Blaupunkt, Grundig, Hama, Klipsch, Marshall, Pioneer, Pure, Roberts, TechniSat, Teufel and many more. Established in 2001, the Group is headquartered in London, with engineering, sales and operations teams in Cambridge, Timisoara (Romania), Hong Kong and Shenzhen. For more information, see frontiersmart.com.

Forward-looking statements

The information in this release is based on management information. This announcement includes statements that are forward looking in nature. Forward looking statements involve known and unknown risks, assumptions, uncertainties and other factors which may cause the actual results, performance or achievements of the Group to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Except as required by the AIM Rules and applicable law, the Group undertakes no obligation to update, revise or change any forward-looking statements to reflect events or developments occurring after the date of this announcement.

MAR

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.

Overview of H1-2019 performance

Group H1-2019 revenues were US$14.2 million (H1-2018: US$17.0 million) and Trading EBITDA loss, after the capitalisation of R&D costs, was US$1.8 million (H1-2018: Trading EBITDA loss of US$2.1 million). Adjusted EBITDA loss was US$1.3 million (H1-2018: Adjusted EBITDA loss of US$2.1 million).

Digital Radio (DAB and Smart Radio) revenues were US$13.1 million (H1-2018: US$14.9 million) reflecting increased competition for low cost DAB solutions, partly offset by a stronger performance in Smart Radio.

Digital Radio Adjusted EBITDA was US$1.6 million (H1-2018: US$3.0 million).

R&D expenditure for Digital Radio in the period was US$1.0 million. The major development programme over the last 12 months has been the Group's new Smart Radio solution, Venice X, which entered mass production at the end of Q2-2019.

Smart IoT revenues in H1-2019 were US$1.1 million (H1-2018: US$2.2 million). This business line is switching its focus from smart audio hardware modules to licensing.

A significant reduction in Research & Development costs resulted in the Adjusted EBITDA loss for Smart IoT reducing to a loss of $2.7 million (H1-2018: loss of US$4.7 million).

The Group achieved gross margin of US$5.3 million (H1-2018: US$7.1 million). In percentage terms, gross margin fell from 42% to 38% of revenues, with both business lines seeing a narrowing of margins partly due to price pressure and partly due to product mix.

R&D expenditure was reduced by 39% to US$2.8 million (H1-2018: US$4.6 million) due largely to a US$1.8 million reduction in Smart IoT R&D expenditure. Group sales and administrative expenses fell 15% to US$4.0 million (H1-2018: US$4.7 million).

Central group Adjusted EBITDA loss was US$0.2 million (H1-2018: US$0.5 million) an improvement of US$0.3 million due to a reduction in professional fees.

From 1 January 2019, the Group has adopted IFRS 16 "Leases". This has primarily affected the accounting for leasehold properties occupied by the Group and has resulted in overheads reducing by US$0.42 million and depreciation and interest costs increasing by US$0.4 million and US$0.02 million, respectively.

EBITDA can be calculated as:

Below Adjusted EBITDA, the Group reports non-recurring costs, interest, tax, depreciation and amortisation.

At 30 June 2019, the Group's gross cash balance was US$3.6 million (31 December 2018: US$3.8 million; 30 June 2018: US$3.4 million). This equates to a net cash position of US$(2.7) million (31 December 2018: net cash US$(2.5) million; 30 June 2018: US$(3.2) million).

Group pre-tax loss was US$3.5 million (H1-2018: loss US$4.5 million) with a loss per share of 8.23 cents (H1-2018: loss 10.86 cents).

The Board

Following the emergence of Science Group plc ('Science Group') as the Group's largest shareholder, the following changes were made to the composition of Frontier's Board. In July 2019 Martin Harriman, Non-Executive Director, stepped down from the Board and in August, Sir Hossein Yassaie, Chairman, and the Group's other Non-Executive Director, Paul Taylor, stepped down from the Board. In September, Science Group's Martyn Ratcliffe and Sarah Cole are expected to take positions on the Board following the publication of the Company's Interim Results - with Martyn becoming Chairman of the Board and Sarah becoming a Non-Executive Director.

Anthony Sethill

Chief Executive Officer

30 August 2019

Consolidated Condensed Statement of Comprehensive Income

1Research & development expensed is net of the capitalised Venice X development costs of $560k (HY2018: Nil) (FY2018: $619k).

2Adjusted EBITDA is earnings before interest, tax, depreciation, amortisation, share option charge and non-recurring costs but includes the capitalised development cost credit 

Consolidated Condensed Statement of Financial Position at 30 June 2019

Consolidated Condensed Statement of Changes in Equity

 for the period ended 30 June 2019

Consolidated Condensed Statement of Changes in Equity

for the period ended 30 June 2018

Consolidated Condensed Statement of Changes in Equity

for the period ended 31 December 2018

Consolidated Condensed Cash Flow Statement

for the period ended 30 June 2019

Condensed Notes to the Interim Report

for the period ended 30 June 2019

1. Nature of operations and general information

Frontier Smart Technologies Group Limited and subsidiaries' (the 'Group') principal activity is that of commercial exploitation of wireless infrastructure technologies with commercial propositions for the consumer electronic sector.

Frontier Smart Technologies Group Limited is the Group's ultimate parent company. It is incorporated in the Cayman Islands. The address of Frontier Smart Technologies Group Limited's registered office is Elgin House, 119 Elgin Avenue, George Town, Grand Cayman, Cayman Islands. Frontier Smart Technologies Group Limited's shares are listed on the Alternative Investment Market of the London Stock Exchange. Frontier Smart Technologies Group Limited's consolidated condensed interim financial statements are presented in US Dollars ($).

The financial information set out in this interim report does not constitute statutory accounts. The interim financial statements have not been audited or reviewed by the Group's auditor. The Group's statutory financial statements for the year ended 31 December 2018 are available from the Group's website. The auditor's report on those financial statements was unqualified.

2. Accounting Policies

Basis of Preparation

These interim condensed consolidated financial statements are for the six months ended 30 June 2019. They have been prepared following the recognition and measurement principles of IFRS as adopted by the European Union. The condensed set of financial statements included in this interim report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting", as adopted by the European Union. They do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2018.

These financial statements have been prepared on the going concern basis and under the historical cost convention.

These condensed consolidated interim financial statements have been prepared in accordance with the accounting policies adopted in the last annual financial statements for the year to 31 December 2018.

3. IFRS 16 'Leases' 

IFRS 16: Leases came into effect on 1 January 2019, this is the first set of accounts which incorporates the adoption of the new standard.

The main impact of the standard is to capitalise the Group's rental leases as "right-of-use assets" within Property, Plant and Equipment on the Statement of Financial Position with corresponding liabilities representing the commitment to fulfil those lease obligations. The assets are then depreciated over the life of the lease and a notional interest charge is made against the liability.

The standard allows for different transition options and the Group has adopted the Modified Retrospective: Asset equals liability approach, resulting in the Group adopting the standard from 1 January 2019 with no adjustment to reserves or comparative numbers. On adoption, the Group's assets increased by US$2.3m with liabilities increasing by the same value. The group has elected not to recognise a lease liability for short term leases (leases of expected term of 12 months or less) or for leases of low value. Payments made under such leases are expensed on a straight-line basis. In addition, certain variable lease payments are not permitted to be recognised as lease liabilities and are expensed as incurred.

For the six months to 30 June 2019 reported EBITDA has increased by US$0.42m as a result of rental costs no longer being charged to overhead expenses. Additional depreciation and interest costs of US$0.4m and US$0.02m respectively have been incurred.

The adoption of this new Standard has resulted in the Group recognising a right-of-use asset and related lease liability in connection with all former operating leases except for those identified as low-value or having a remaining lease term of less than 12 months from the date of initial application.

The following is a reconciliation from IAS17 to IFRS 16 at 1 January 2019:

The following is a reconciliation of total operating lease commitments as 31 December 2018 to the lease liabilities recognized at 1 January 2019:

4. Revenue by sector

In accordance with IFRS 15, the Group's revenue disaggregated by pattern of revenue recognition is as follows:

For the year ended 30 June 2019 (unaudited)

For the year ended 30 June 2018 (unaudited)

For the year ended 31 December 2018 (audited)

Segmental information

Management currently identifies three divisions as operating segments.

5. Loss per share

The calculation of the basic loss per share is based on the loss attributable to ordinary shareholders divided by the weighted average number of shares in issue during the period. The impact of the share options on the loss per share is anti-dilutive.

6. Goodwill

7. Other intangible assets

Intellectual property

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

Licence & development fees

Intellectual property

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

Licence & development expenditure

The Group capitalises certain licence, third-party development fees and internally generated development 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 costs are amortised in accordance with the Group accounting policy and are subject to a regular impairment reviews.

During the year all licences that no longer provide any benefit to the Group have been disposed of from the Financial Statements, the carrying value of these licences was nil.

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 considered impairment indicators for all intangible assets and tested for impairment in conjunction with their testing for goodwill, in accordance with the Group's accounting policy. 

8. Property, Plant and Equipment

9. Trade and other receivables

Trade and other receivables are usually due within 30 - 60 days and do not bear any effective interest rate.

The fair value of these short term financial assets is not individually determined as the carrying amount is a reasonable approximation of fair value.

10. Trade and other payables

Loan

Frontier Smart Technologies Group Limited entered into a loan facility agreement in October 2015 for a maximum of £5,000,000. The loan accrued interest monthly at 6.25% above three-month LIBOR with interest repayable in 12 quarterly instalments commencing 29 December 2015. Capital repayments were payable quarterly in ten instalments commencing March 2016, made up of nine instalments of £300,000 and a final instalment of £2,300,000. The loan carried a fixed and floating charge over all the property, assets and undertakings of the Group.

This loan was repaid on 23 May 2018 and replaced by a new revolving credit facility with Clydesdale of £5,000,000 over three years. The facility accrues interest monthly at 4.75% above three-month LIBOR with interest repayable quarterly, interest on any amount not drawn down is 1.9%. The loan carries a fixed and floating charge over all the property, assets and undertakings of the Group. At the 30 June 2019 the amount drawn down was £5,000,000. The loan carries certain covenants on the business which are monitored at a historic and forecast level on a monthly and quarterly basis by the Board. 

11. Leases

The Group has leases for all office buildings. With the exception of short-term leases and leases of low-value underlying assets, each lease is reflected on the balance sheet as a right-of-use asset and a lease liability.

Each lease generally imposes a restriction that, unless there is a contractual right for the Group to sublet the asset to another party, the right-of-use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by incurring a substantive termination fee. The Group is prohibited from selling or pledging the underlying leased assets as security. For leases over office buildings the Group must keep those properties in a good state of repair and return the properties in their original condition at the end of the lease.

The table below describes the nature of the Group's leasing activities by type of right-of-use asset recognised on the balance sheet:

Lease liabilities

Lease liabilities are presented in the statement of financial position as follows:

12. Share capital

All shares are equally eligible to receive dividends and the repayment of capital and represent equal votes at meetings of shareholders with the exception of 2,119,841 shares held jointly by the Employee Benefit Trust and participants for the purpose of the Company's joint share ownership plan in relation to which all voting rights have been waived.

Allotments

13 June 2019, 469 ordinary shares of 10p were issued in relation to the exercise of share options by employees.

13. Financial Instruments

The Group uses financial instruments comprising cash and cash equivalents, other loans and various other short-term instruments such as trade receivables and trade payables which arise from its operations. The main purpose of these financial instruments is to fund the Group's business strategy and the short-term working capital requirements of the business.

Financial assets by category

The categories of financial asset included in the balance sheet and the headings in which they are included are as follows: