Interim Results

Seeing Machines Limited 15 March 2006 15th March 2006 SEEING MACHINES LIMITED ('Seeing Machines' or 'the Company') REVIEWED INTERIM RESULTS FOR SIX MONTHS TO 31 DECEMBER 2005 Seeing Machines Limited (AIM: SEE) announces its reviewed interim results for the six months to 31 December 2005. Financial Highlights • Admission to AIM, raising £1.65m on 1 December 2005 • Revenue increased 14% to A$1.345m (31 December 2004: A$1.182m) • Sales of faceLABTM grew by 55% to A$1.152m (31 December 2004: A$0.744m) Operational Highlights • faceLABTM 4.2 released • Completion of a number of scientific trials and the first clinical trial for the glaucoma diagnostic device, including validation of underlying methodology • Significant progress on prototype driver monitoring system for the automotive Orignial Equipment Manufacturer (OEM) market with Hella AG • Agreement with Schlumberger to conduct field trial of Fatigue Detections System • First sales of the Noah Basketball System in the USA • US Patent Office allows Seeing Machines' core patent on Facial Image Processing Fulton Muir, Chairman stated, 'The success of the Company's IPO in December 2005 means that we have secured the capital that will enable us to significantly progress the Company's research and development and commercialisation activities fundamental to the strategy to deploy our computer vision technology into new markets and generate diversified revenue streams.' Copies of this announcement will be available from the Company's registered office, Innovations Building, Level 3, Corner Eggleston & Garran Roads, Acton ACT 2601, Australia. Enquiries: Seeing Machines Limited Insinger de Beaufort Parkgreen Communications Nick Cerneaz, CEO Simon Fox Justine Howarth/Victoria Thomas +61 (0) 2 6125 6501 +44 (0) 20 7190 7018 +44 (0) 20 7493 3713 www.seeingmachines.com Director's Report Your directors submit their report for the half-year ended 31 December 2005. DIRECTORS The names of the company's directors in office during the half-year and until the date of this report are as below. Directors were in office for this entire period unless otherwise stated. James Fulton Muir, AO Non Executive Chairman David Gaul Non Executive Director Rob Sale Non Executive Director Trent Victor Non Executive Director Alex Zelinsky Non Executive Director Anthony Kinnear Non Executive Director Nicholas Cerneaz Executive Director (appointed 6 October 2005) REVIEW AND RESULTS OF OPERATIONS Review of 1st Half of Our Sixth Year of Operations The first half of the 2006 financial year was one of achieving many of the goals that will provide the foundation for the ongoing development and growth of Seeing Machines. The success of the Company's IPO in December 2005 means that we have secured the capital that will enable us to significantly progress the Company's research and development and commercialisation activities fundamental to the strategy to deploy our computer vision technology into new markets and generate diversified revenue streams. Operational highlights for the half-year included: • Obtained £1.65 million / A$3.8m in IPO funds through the AIM listing; • faceLABTM 4.2 released and sales of over A$1.1 million for the half-year; • Completion of a number of scientific trials for the Glaucoma diagnostic device including T5 which validated the scientific method underpinning the device; • Completion of the 1st clinical trial at the Canberra Eye Hospital for the Glaucoma diagnostic device which demonstrated that the technology successfully detects the loss of the visual field associated with glaucoma and successfully differentiates between those patients with visual field loss and those without, thus providing the basis for a reliable and accurate diagnostic instrument; • Significant progress on the prototype driver monitoring system for the automotive Original Equipment Manufacturer (OEM) market with Hella AG; • Agreement with Schlumberger to conduct a field trial of the Fatigue Detection System; • First sales of the Noah Basketball System; and, • Notice from the US Patent Office that Seeing Machines core patent on Facial Image Processing was allowed; Financial Results Total revenue for the half year to December 31 2005 was A$1.345 million, A$162,452 higher than the period to 31 December 2004 (A$1.182 million). The increase in revenue is due to increased sales of faceLABTM to A$1.152 million up by A$408,809 on the prior year (A$0.744 million). This increase in faceLABTM sales follows three releases of the product (versions 4, 4.1 and 4.2) since August 2004. A reduction in other income of A$248,551 is due to the accounting treatment of government grants for capitalized R&D. Net expenditure for the half year was A$1.432 million down by A$129,000 on the prior year (A$1.561 million), reflecting management's tight control of expenditure during the period. The cost of goods sold has increased in line with the increase in faceLABTM sales. Research and development continued to be a significant area of investment, particularly the glaucoma and automotive projects which have both made significant progress during the half year. A significant amount of the investment in R&D has been capitalized and is therefore not identified in expenditure. The costs of the IPO in December 2005 have been offset against equity and are therefore not reflected in expenditure. As a result of the introduction of the A-IFRS (International Financial Reporting Standards) the company has had to recognize an expense for share based payments in relation to employee share options. The loss for the half year to 31 December 2005 was a loss of A$.087 million compared to a loss of A$0.379 million for the half year to 31 December 2004. The company expects losses to continue for the year to 30 June 2006. No interim dividend had been declared on the ordinary shares (2004 - nil). The Company had A$3.126 million in cash at 31 December 2005 compared to A$299,462 at 31 December 2004. Net assets increased to A$3,851,615 at 31 December 2005 compared to A$425,721 as at 31 December 2004. Operational Highlights faceLAB In August 2005 we released faceLABTM 4.2 which includes: • New, small form factor digital camera support; • Improved laptop support; • Improved gaze accuracy and quality; and • Improved Graphical User Interface (GUI) support. During the first half of 2006 we will release a version which adds 'Scene camera' functionality to the product - an ability to embed a live video-feed of the subject's actual view into the data feed from the device. We have also commenced development of a major new feature that will greatly expand the field of view of the device by allowing any configuration and space to be monitored no matter how spatially complex. Medical Devices Significant progress has been made on our project to develop the world's first non-contact objective device for detecting and managing glaucoma. This project was commenced in FY2005 and during the first half of FY2006 we have completed a number of scientific trials which demonstrated that the fundamental technology could detect glaucoma in patients with known disease. A clinical trial completed at the end of 2005 showed that the device could discriminate between those patients with and those without glaucoma. We have a busy 2nd half of the year with the start of a much larger clinical trial, industrial design work for the production device, further software development and the preparation work required for regulatory approvals. We remain on track for the product to be launched in 2007. Automotive Our project with German Tier -1 supplier Hella to develop a commercial grade fatigue detection device has made very good progress and the results of the project are being evaluated by a major automotive manufacturer who is currently examining the feasibility from a marketing and production perspective of including the fatigue device in its cars. We reached agreement with oil field services company Schlumberger to trial the driver state sensing technology in their transport fleet to allow them to evaluate the technology prior to potentially rolling-out the technology across their fleet. We have also progressed projects in Australia with National ICT Australia (NICTA) to develop a new measure to detect fatigue and also with the Co-operative Research Centre for Advanced Automotive Technology (AutoCRC) on vision based collision avoidance. Sports In FY2005 we signed a licensing agreement with Pillar Vision in the US for the use of our technology in their basketball training device Noah Select. During the first half of FY2006 the first shipments of the Noah product were made to customers and Pillar expects to ship significant numbers of the product in the coming years which will result in an ongoing revenue stream for Seeing Machines. New Markets The business model pursued with Pillar Vision (licensed access to our technology as an enabler in OEM products) is being developed further in other industries and applications. To facilitate this we have commenced work on a project to enable us to make the core technology available through an easy to use interface so that it can be used by application developers. We have had strong interest from a large player in the games industry and a company in the computer industry renowned for its innovation. We will continue to pursue both of these opportunities through the 2nd half of the year. Patents In August 2005 the company was advised by the US Patents and Administration that its application to patent its core facial image processing technology was to be allowed. In November 2005 the company filed a new patent application relating to the robust tracking of subjects wearing eye glasses. This will be a key patent for the company and robust tracking of subjects wearing eye glasses is fundamental to having an acceptable solution for many applications of the core Seeing Machines technology particularly those in the automotive industry. Staff Dr Nick Cerneaz took over from Tony Kinnear as Chief Executive in September 2005. Paul Day joined the company in October 2005 as Development Manager and Technical Architect for the glaucoma project. Funding The company achieved a significant milestone in December 2005 when it completed a listing on the Alternative Investment Market (AIM) of the London Stock Exchange. The company raised £1.65 million /A$3.8 million in funds that will be primarily used to progress key projects. We have obtained an independence declaration from our auditors, Ernst & Young. The signed declaration is included after this report. Non-Audit Services The following non-audit services were provided by the company's auditor, Ernst & Young. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. Ernst & Young received or are due to receive the following amounts for the provision of non-audit services: Tax compliance services A$8,000 Accounting advice A$15,000 Signed at Canberra this 14th day of March 2006 in accordance with a resolution of the directors made pursuant to section 306(3) of the Corporations Act 2001. Fulton Muir Nick Cerneaz Chairman Chief Executive Officer and Director Auditor's Independence Declaration to the Directors of Seeing Machines Limited In relation to our review of the financial report of Seeing Machines Limited for the half-year ended 31 December 2005, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. Ernst & Young James Palmer Partner Canberra 14 March 2006 Condensed Income Statement HALF-YEAR ENDED 31 DECEMBER 2005 Notes 31 DECEMBER 31 DECEMBER 2005 2004 A$ A$ Revenue 2 1,166,578 755,485 Cost of sales (353,674) (284,401) Gross Profit 812,904 471,084 Other income 2 178,434 426,985 Other expenses (1,016,521) (1,241,372) LOSS BEFORE FINANCE AND INCOME TAX COSTS (25,183) (343,303) Finance costs (61,895) (35,355) LOSS BEFORE INCOME TAX (87,078) (378,658) Income tax expense - - NET LOSS AFTER TAX (87,078) (378,658) NET LOSS AFTER TAX ATTRIBUTABLE TO THE MEMBERS OF SEEING MACHINES (87,078) (378,658) LIMITED Earnings per share (cents per share) - Basic for loss for the half year (0.0017) (50.05) - Diluted for loss for the half year (0.0017) (50.05) Condensed Balance Sheet AS AT 31 DECEMBER 2005 Notes AS AT AS AT 31 DECEMBER 30 JUNE 2005 2005 A$ A$ CURRENT ASSETS Cash and cash equivalents 3,126,142 663,213 Trade and other receivables 550,857 292,396 Inventories 97,878 99,099 Other 7,045 485,718 TOTAL CURRENT ASSETS 3,781,922 1,540,426 NON-CURRENT ASSETS Property, plant and equipment 144,671 174,335 Intangible assets 556,194 225,107 Other 2,635 2,454 TOTAL NON-CURRENT ASSETS 703,500 401,896 TOTAL ASSETS 4,485,422 1,942,322 CURRENT LIABILITIES Trade and other payables 537,563 935,048 Deferred revenue - 10,454 Provisions 72,989 96,242 TOTAL CURRENT LIABILITIES 610,552 1,041,744 NON-CURRENT LIABILITIES Interest bearing loans and borrowings - 471,526 Provisions 23,255 3,331 TOTAL NON-CURRENT LIABILITIES 23,255 474,857 TOTAL LIABILITIES 633,807 1,516,601 NET ASSETS 3,851,615 425,721 EQUITY Contributed equity 3 6,550,345 3,394,946 Accumulated losses (3,107,369) (3,020,291) Other reserves 408,639 51,066 TOTAL EQUITY 3,851,615 425,721 Condensed Cash Flow Statement HALF-YEAR ENDED 31 DECEMBER 2005 Notes 31 DECEMBER 31 DECEMBER 2005 2004 A$ A$ CASH FLOWS FROM /(USED IN) OPERATING ACTIVITIES Receipts from customers 974,864 521,743 Grants received 175,776 426,985 Payments to suppliers and employees (953,795) (1,322,877) Interest received 13,916 11,632 Finance costs paid (83,421) (84,645) NET CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES 127,340 (447,162) CASH FLOWS USED IN INVESTING ACTIVITIES Purchases of plant and equipment (15,802) (51,186) Payments for intangible assets (19,859) (83,978) Payments for research and development costs (334,149) - NET CASH FLOWS (USED IN) INVESTING ACTIVITIES (369,810) (135,164) CASH FLOWS FROM FINANCING ACTIVITIES Exercise of options 16,373 - Issue of shares 3,848,550 - Costs of listings on AIM (1,159,524) - NET CASH FLOWS FROM FINANCING ACTIVITIES 2,705,399 - NET INCREASE IN CASH AND CASH EQUIVALENTS 2,462,929 (582,326) Cash and cash equivalents at beginning of period 663,213 881,788 CASH AND CASH EQUIVALENTS AT END OF PERIOD 5 3,126,142 299,462 Condensed Statement of Changes in Equity HALF-YEAR ENDED 31 DECEMBER 2005 Attributable to equity holders of the company Issued Accumulated Employee Equity Capital Losses Benefits Reserve Total Equity A$ A$ A$ A$ At 1 July 2004 2,295,146 (1,796,383) 37,960 536,723 Loss for the period - (378,658) 7,279 (371,379) At 31 December 2004 2,295,146 (2,175,041) 45,239 165,344 Issued Accumulated Employee Equity Total Equity Capital Losses Benefits Reserve A$ A$ A$ A$ At 1 July 2005 3,394,946 (3,020,291) 51,066 425,721 Profit for the period - (87,078) - (87,078) Exercise of options 16,373 - - 16,373 Issues of ordinary shares during the half-year: Issue of share capital 3,848,550 - - 3,848,550 Transaction costs (1,159,524) - - (1,159,524) Conversion of Convertible Notes 450,000 - - 450,000 Cost of share-based payment - - 357,573 357,573 At 31 December 2005 6,550,345 (3,107,369) 408,639 3,851,615 Notes to the Half-Year Financial Statements FOR THE HALF-YEAR ENDED 31 DECEMBER 2005 1. BASIS OF PREPARATION OF THE HALF-YEAR FINANCIAL REPORT The half-year financial report does not include all notes of the type normally included within the annual financial report and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the company as the full financial report. The half-year financial report should be read in conjunction with the Annual Financial Report of Seeing Machines Limited as at 30 June 2005, which was prepared based on Australian Accounting Standards applicable before 1 January 2005 ('AGAAP'). (a) Basis of accounting The half-year financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, applicable Accounting Standards including AASB 134 'Interim Financial Reporting' and other mandatory professional reporting requirements. The half-year financial report has been prepared on a historical cost basis. For the purpose of preparing the half-year financial report, the half-year has been treated as a discrete reporting period. (b) Statement of compliance The half-year financial report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards ('AIFRS'). Compliance with AIFRS ensures that the half-year financial report, comprising the financial statements and notes thereto, complies with International Financial Reporting Standards ('IFRS'). This is the first half-year financial report prepared based on AIFRS and comparatives for the half-year ended 31 December 2004 and full-year ended 30 June 2005 have been restated accordingly. A summary of the significant accounting policies of the Company under AIFRS are disclosed in Note 1(c) below. Reconciliations of: - AIFRS equity as at 1 July 2004, 31 December 2004 and 30 June 2005; - AIFRS profit for the half-year 31 December 2004 and full year 30 June 2005, to the balances reported in the 30 June 2005 full-year financial report prepared under AGAAP are detailed in Note 1(e) below. (c) Summary of significant accounting policies (i) Property, plant and equipment Plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Plant and equipment, computer software, furniture & fittings, and plant and equipment used exclusively for research & development, are depreciated so as to write off the cost of each asset over its expected useful life. The diminishing value method or the straight line method of depreciation is used for each asset class as deemed appropriate by the directors. Management have determined that the depreciation and amortisation rates to be applied against plant and equipment during the period are as follows: 2005 2004 Leased computers N/A 37.5% Computer software 40% 40% Furniture and fittings 7.5% - 37.5% 7.5% - 37.5% Plant and equipment 7.5% - 50% 7.5% - 50% Low Value Pool 37.5% 37.5% R & D Equipment 33.3% 33.3% Impairment The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (ii) Borrowing Costs Borrowing costs are recognised as an expense when incurred. (c) Summary of significant accounting policies (iii) Intangible assets Patent, trademarks and licences Patents, trademarks and licences acquired separately are capitalised at cost. The useful lives of patents, trademarks and licences are assessed to be finite. Where amortisation is charged on assets with finite lives, the expense is taken to the income statement. Research and development costs Research costs are expensed as incurred. Development expenditure incurred on an individual project is carried forward when its future recoverability can reasonably be regarded as assured. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure carried forward is amortised over the period of expected future sales from the related project. The carrying value of development costs is reviewed for impairment annually when the asset is not yet in use, or more frequently when an indicator of impairment arises during the reporting year indicating that the carrying value may not be recoverable. Where recognition criteria are not met development costs are recognised in the income statement as incurred. A summary of the policies applied to the company's intangible assets is as follows: Patents and Trademarks Licences Development Costs Useful lives Finite Finite Finite Method used 15-20 years - Straight line 4 - 20 years - Straight 20 years - Straight line line Internally Acquired Acquired Internally generated generated/acquired Impairment test / Annually and where an Annually and where an Amortisation method Recoverable amount indicator of impairment indicator of impairment reviewed at each financial testing exists exists year-end; Reviewed annually for indicator of impairment Gains or losses arising from derecognition of intangible assets are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised. (iv) Recoverable amount of assets At each reporting date, the company assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the company makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset's value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or company of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (v) Inventories Inventories are valued at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows; Raw materials - purchase cost on a first-in, first-out basis; Finished goods and work in progress - cost of direct materials and labour and a proportion of manufacturing overheads based on normal operating capacity but excluding borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. (vi) Trade and other receivables Trade receivables are carried at original invoice amount less an allowance for any uncollectible debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. (vii) Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. (viii) Interest-bearing loans and borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised in the income statement when the liabilities are de-recognised as well as through the amortisation process. (c) Summary of significant accounting policies (continued) (ix) Provisions Provisions are recognised when the company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. (x) Share-based payment transactions The company provides benefits to employees (including directors) of the company in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (' equity-settled transactions'). The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by using a Trinomial model. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Seeing Machines Limited ('market conditions'). The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled ending on the date on which the relevant employees become fully-entitled to the award ('vesting date'). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired; and (ii) the number of awards that, in the opinion of the directors of the Company, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the affect of these conditions is included in the determination of fair value at grant date. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share. (xi) Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the company and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Sale of Goods Control of the goods has passed to the buyer. Interest Revenue is recognised as the interest accrues using the effective interest method to the net carrying amount of the financial asset. (xii) Government Grants Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual instalments. (xiii) Income tax Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: • except where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, except where the timing of the reversal on the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of the unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: • except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement. (xiv) Other taxes Revenues, expenses and assets are recognised net of the amount of GST except: • where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and • receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cash flows are included in the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. (xiv) Other taxes (continued) Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (d) AASB 1 Transitional exemptions The company has made its election in relation to the transitional exemptions allowed by AASB 1 'First-time Adoption of Australian Equivalents to International Financial Reporting Standards' as follows: Exemption from the requirements to restate comparative information for AASB 132 and AASB 139 The company has elected to adopt this exemption and has not applied AASB 132 'Financial Instruments: Presentation and Disclosure' and AASB 139 'Financial Instruments: Recognition and Measurement' to its comparative information. In the period to December 2005, the convertible notes were recognised at face value and interest was accrued as incurred. At 1 July 2005, the accounting policies relating to the convertible note was to recognise as fair value on the effective interest rate method. The difference between these two accounting policies has resulted in no material impact. (e) Impacts of adoption of AIFRS The impacts of adopting AIFRS on the total equity and profit after tax as reported under Australian Accounting Standards applicable before 1 January 2005 (AGAAP) are illustrated below. (i) Reconciliation of total equity as presented under AGAAP to that under AIFRS NOTES 30 June 2005 31 Dec 2004 1 July 2004 (**) (**) (*) A$ A$ A$ Total equity under AGAAP 822,412 412,539 805,568 Adjustments to equity Derecognition of deferred research costs (A) (396,691) (247,195) (268,845) Recognition of option reserve (B) 51,066 45,239 37,960 Share based payments expense (51,066) (45,239) (37,960) Total equity under AIFRS 425,721 165,344 536,723 * This column represents the adjustments as at the date of transition to AIFRS. ** This column represents the cumulative adjustments as at the date of transition to AIFRS and those for the periods ended 31 December 2004 and 30 June 2005. (i) Reconciliation of total equity as presented under AGAAP to that under AIFRS (continued) A Intangible Assets - deferred research and development cost Under AASB 138 Intangible Assets, costs incurred in the research phase of an internally generated intangible asset would be expensed. The company has reversed all previous research costs capitalised to retained earnings. B SHARE BASED PAYMENTS Under AASB 2 Share Based Payments, the company would recognize the fair value of options granted to employees as remuneration as an expense on a pro-rata basis over the vesting period in the income statement with a corresponding adjustment to equity. (e) Impacts of adoption of AIFRS (continued) (ii) Reconciliation of loss after tax under AGAAP to that under AIFRS NOTES 30 June 2005 31 Dec 2004 A$ A$ Loss after Tax previously under AGAAP (1,082,956) (393,029) Derecognition of deferred research costs A (127,846) 21,650 Fair value of share options issued to employees B (13,106) (7,279) Loss after Tax under AIFRS (1,223,908) (378,658) A Intangible Assets - deferred research and development cost Under AASB 138 Intangible Assets, costs incurred in the research phase of an internally generated intangible asset would be expensed. The company has reversed all previous R&D capitalization to retained earnings. B SHARE BASED PAYMENTS Under AASB 2 Share Based Payments, the company would recognize the fair value of options granted to employees as remuneration as an expense on a pro-rata basis over the vesting period in the income statement with a corresponding adjustment to equity. (iii) Explanation of material adjustments to the cash flow statements There were no material differences between the condensed cash flow statement presented under AIFRS and those presented under AGAAP. FOR THE HALF-YEAR ENDED 31 DECEMBER 2005 31 December 31 December 2005 2004 A$ A$ 2. REVENUE AND EXPENSES Specific Items Profit from continuing activities before income tax expense includes the following revenues and expenses whose disclosure is relevant in explaining the financial performance of the company: (i) Revenues Sale of goods 1,152,662 743,853 Interest received 13,916 11,632 1,166,578 755,485 (ii) Other income Proceeds from grants 175,777 426,985 Foreign exchange gain 2,657 - 178,434 426,985 (iii) Expenses Depreciation of non-current assets 45,464 81,400 Amortisation of intangible assets 24,600 11,600 70,064 93,000 Employee benefits 425,158 747,815 Finance costs 61,895 35,355 Marketing 9,710 13,409 Professional fees 60,643 164,624 Minimum lease payment - operating leases 61,527 58,905 Foreign exchange loss - 11,553 Share based payments 357,573 - FOR THE HALF-YEAR ENDED 31 DECEMBER 2005 31 December 30 June 2005 2005 A$ A$ 3. CONTRIBUTED EQUITY Ordinary shares Issued and fully paid 6,550,345 3,394,946 Movements in ordinary shares in issue At July 1 2005 3,394,946 3,394,946 Issue of share capital 3,848,550 - Transaction costs (1,159,524) - Exercise of options 16,373 - Conversion of Convertible Notes 450,000 - 6,550,345 3,394,946 4. SEGMENT INFORMATION The company operates in one business segment being research, development and production of computer vision technology in Australia. The company's primary product is faceLAB which is marketed internationally. 5. RECONCILIATION OF CASH For the purposes of the Condensed Cash Flow Statement, cash and cash equivalents comprise the following at 31 December 2005: 31 December 31 December 2005 2004 A$ A$ Cash at bank and in hand 3,111,588 285,404 Short term deposits 14,554 14,058 3,126,142 299,462 6. EVENTS SUBSEQUENT TO BALANCE SHEET DATE There have been no significant events that have occurred since the balance sheet date. 7. NO INTERIM DIVIDEND HAD BEEN DECLARED ON THE ORDINARY SHARES (2004 - nil). 8. COPIES OF THIS ANNOUNCEMENT WILL BE AVAILABLE FROM THE COMPANY'S REGISTERED OFFICE, INNOVATIONS BUILDING, LEVEL 3, CORNER EGGLESTON & GARREN ROADS, ACTON ACT 2601, AUSTRALIA. In accordance with a resolution of the directors of Seeing Machines Limited, I state that: In the opinion of the directors: (a) the financial statements and notes of the company: (i) give a true and fair view of the financial position as at 31 December 2005 and the performance for the half-year ended on that date of the company; and (ii) comply with Accounting Standard AASB 134 'Interim Financial Reporting' and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. On behalf of the Board Director Canberra, 14 March 2006 Independent Review Report To the members of Seeing Machines Limited Scope The financial report and directors' responsibility The financial report comprises the balance sheet, income statement, cash flow statement, statement of changes in equity and accompanying notes to the financial statements for Seeing Machines Limited (the company), and the directors' declaration for the company, for the period ended 31 December 2005. The directors of the company are responsible for preparing a financial report that gives a true and fair view of the financial position and performance of the company, and that complies with Accounting Standard AASB 134 'Interim Financial Reporting', in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. Review approach We conducted an independent review of the financial report in order to make a statement about it to the members of the company, and in order for the company to lodge the financial report with the AIM London Stock Exchange and the Australian Securities and Investments Commission. Our review was conducted in accordance with Australian Auditing Standards applicable to review engagements, in order to state whether, on the basis of the procedures described, anything has come to our attention that would indicate that the financial report is not presented fairly in accordance with the Corporations Act 2001, Accounting Standard AASB 134 'Interim Financial Reporting ' and other mandatory financial reporting requirements in Australia, so as to present a view which is consistent with our understanding of the company's financial position, and of its performance as represented by the results of its operations and cash flows. A review is limited primarily to inquiries of company personnel and analytical procedures applied to the financial data. These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance is less than given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. Independence We are independent of the company, and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. We have given to the directors of the company a written Auditor's Independence Declaration, a copy of which is included in the Directors' Report. Statement Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the financial report of Seeing Machines Limited is not in accordance with: (a) the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of the company at 31 December 2005 and of its performance for the half-year ended on that date; and (ii) complying with Accounting Standard AASB 134 'Interim Financial Reporting' and the Corporations Regulations 2001; and (b) other mandatory financial reporting requirements in Australia. Ernst & Young James Palmer Partner Canberra Date: 14 March 2006 This information is provided by RNS The company news service from the London Stock Exchange

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