MD&A in relation to Q3 result
Synchronica plc
('Synchronica', 'the Company' or 'the Group')
Management Discussion and Analysis and Accounts
for the nine months ended 30 September 2010
Synchronica plc, the AIM and TSX-V Toronto listed international provider of next-generation mobile messaging services is making further information available following the announcement of 22 November. The Management Discussion and Analysis and Accounts for the first nine months of 2010 have now been filled on SEDAR, http://www.sedar.com/FindCompanyDocuments.do as required by TSX-V. The new format of documentation is required by TSX-V Toronto. All documents are also available on the Company´s website at www.synchronica.com and are set out below.
Carsten Brinkschulte, CEO of Synchronica, said, "We are pleased with the progress that Synchronica has made over the past nine months, growing both organically and through acquisition."
Enquiries:
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Synchronica plc
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Carsten Brinkschulte, CEO Angus Dent, CFO, Nicole Meissner, COO, |
+44 (0) 7977 256 406 +44 (0) 7977 256 347 +44 (0) 7977 256 412 |
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finnCap |
Clive Carver, Nomad |
+44 (0) 20 7600 1658 |
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Charlotte Stranner, Corporate Finance |
+44 (0) 20 7600 1658 |
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Stephen Norcross, Corporate Broker |
+44 (0) 20 3207 3211 |
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Walbrook PR Ltd
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Paul McManus (media relations) |
+44 (0) 20 7933 8780 |
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Paul Cornelius (investor relations) |
MANAGEMENT'S DISCUSSION & ANALYSIS
SEPTEMBER 30, 2010
This Management's Discussion and Analysis ("MD&A") of Synchronica Plc ("Synchronica" or "the Group") is dated November 22, 2010 and provides an analysis of the Group's performance and financial condition for the nine month period ended September 30, 2010, as well as an analysis of future prospects. The Board of Directors carries out its responsibility for review of this disclosure principally through its audit committee, comprised of a majority of independent directors. The audit committee reviews this disclosure and recommends its approval by the Board of Directors.
This MD&A should be read in conjunction with the Group's unaudited interim financial statements for the period ended September 30, 2010, including the related note disclosure, both of which are prepared in accordance with EU endorsed International Financial Reporting Standards (IFRS), International Financial Reporting Interpretations Committee (IFRIC) interpretations. All dollar figures included therein and in the following discussion and analysis are quoted in U.S. dollars unless otherwise specified. Additional information relevant to the Group's activities can be found on the Group's website at www.synchronica.com.
This MD&A may contain forward-looking statements that are based on the Group's expectations, estimates and projections regarding its business and the economic environment in which it operates. These statements speak only as of the date on which they are made, are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict. Examples of some of the specific risks associated with the operations of the Group are set out below under "Risk Factors". Actual outcomes and results may differ materially from those expressed in these forward-looking statements and readers should not place undue reliance on such statements.
OVERALL PERFORMANCE
Synchronica's portfolio includes the award-winning Mobile Gateway, which provides push email, synchronization, instant messaging, backup & restore, and mobile connectivity to social networks. With an addressable market of nearly one billion end users through its 60 carrier contracts, Synchronica can now be perceived as the de facto leader in mobile messaging solutions for emerging markets.
Synchronica has made significant progress during the first nine months of 2010, with a robust operational performance that has allowed the Group to generate substantially improved results. This increased traction is a result of the Group's consistent strategy to focus on opportunities in high-growth emerging markets and to license Mobile Gateway to both mobile operators as well as device manufacturers targeting these regions.
Synchronica's principal challenges and goals in 2010 are to increase its customer base, integrate new mobile messaging services to its product portfolio and progress the transition of its revenue model towards recurring revenue streams. In the nine months to 30 September 2010, Synchronica has successfully delivered on these key targets.
Synchronica has been trading on AIM since December 14, 2004 and on the TSX Venture Exchange since September 22, 2010.
Financial Highlights:
· Revenues in the first nine months increased 2.2 times to US $ 5.75m (Q1-Q3 '09: US $ 2.64m), 97% of previous full year revenues (FY '09: US $ 5.93m);
· Growing recurring revenue from licensing and support US $ 518k for Q3´10, increased by 186% from US $ 181k in Q3 ´09;
· Closed 11 new deals including a pan-African operator group with 15 subsidiaries in the first nine months of this year;
· Significantly increased the high-end deal size, with four $1m+ deals signed to date in 2010;
· Recurring revenue, from monthly user licenses as well as support and maintenance, are showing accelerated growth rates of 54% between Q1 ´10 and Q" ´10 and 81% between Q2 ´10 and Q3 ´10;
· Costs, net of non-cash items, increased to US $ 8.76m for nine months ´10 (nine months ´09: US $ 7.22m) with acquisition of Instant Messaging (IMPS) business;
· Gross profits increased significantly in both absolute and percentage terms to US $5.44m, 94.69% (Q3 '09: US $ 2.27m, 85.55%);
· Loss at EBITDA decreased by 25%, US $ 3.23m in the nine months of ´10, (nine months '09: US $ 4.31m);
· Significantly stronger balance sheet at September 30, 2010, total assets US $ 34.30m (Sept 09: US $ 14.97m), net assets US $ 25.92m at September 30, 2010 (Sept '09: US $ 9.49m);
· Liquidity ratio increased by 93.7% to 2.27 times (Q3 '09: 1.43 times).
Operational Highlights:
· Expanded the total customer base to 60 operator contracts, up from 21 at end of 2009;
· Live installations with 33 operators with many showing quickly increasing adoption rates;
· User base of Synchronica messaging services exceeded three million subscribers at the end of Q3 '10;
· Acquisition of iseemedia Inc., provided additional contracts with Indian operators, as well as complementary document streaming technology, which will be integrated into Mobile Gateway in 2011;
· Expanded Mobile Gateway product portfolio with key enhancements, including support for instant messaging and mobile social networking;
· Initial traction with MessagePhone launch provided a springboard for subsequent deals with three additional device manufacturers, now scheduled to introduce devices bundled with Mobile Gateway;
· Began to up-sell Mobile Gateway to Colibria Instant Messaging ("IM") customers gained with the acquisition of Colibria's IMPS business.
Increasing Customer and User Base, and Value Proposition
Synchronica has increased its customer base through a mix of organic growth and acquisitions. In the first nine months, the Group secured 11 new deals, including group-wide agreements with two large operator groups and their 40 subsidiaries across Africa and Latin America, bringing the number of operator customers to 60 with a total addressable market of almost a billion subscribers. In order to accelerate customer deployment timescales and to ensure a successful launch, Synchronica has created a specialised customer delivery team that works closely with operators in the run up to deployment and launch. This is now paying dividends, with 33 carriers launched and sometimes dramatically increasing adoption rates. By the end of September 2010, three million subscribers had signed up for Synchronica messaging services.
Synchronica's products are designed to act as a churn inhibitor, especially important for operators with a high ratio of prepaid customers, which is the norm for most operators in emerging markets. Mobile Gateway is a 'sticky' service, which means that subscribers become dependent on the service to stay in touch with their personal and business contacts. If they were to defect to a rival carrier, they would lose their IM and/or email identity and their access to push email. Most operators see the strategic value in Synchronica products and often support the launch with high-budget marketing campaigns, which typically include both electronic and print media and sometimes TV. Telcel Mexico, for example, launched its Telcel Messenger service at the beginning of April, and recorded several thousand new user subscriptions to the service each day.
Improved Product Portfolio
During the period, Synchronica has substantially enhanced its product portfolio and positioned itself well for the future by adding Instant Messaging and Social Networking functionality. The acquisition of Colibria's IMPS business has provided Synchronica with a solid Instant Messaging solution that is currently being rolled out across two major carrier groups in the high-growth regions of Latin America. Mobile IM is positioned as a churn inhibitor in emerging markets and Synchronica's ability to deliver on the contracts acquired with Colibria's IMPS puts the Group in a strong position for the future. Synchronica is also gaining traction in mobile social networking, and is among the first to support Facebook Chat on mobile phones. Additionally, Synchronica's new transcoding engine, which is patented and is being integrated into Mobile Gateway, will further enhance the product offering from a commercial and competitive perspective.
Acquisition of Colibria's IMPS Business
Synchronica's decision to acquire Colibria's IMPS business earlier in the year is starting to pay dividends. The acquisition added 13 carrier contracts to Synchronica's business, including two large carrier groups with an addressable market of more than 320 million subscribers.
The acquisition of Colibria's IMPS business has also provided Synchronica with the opportunity for the up-selling of Mobile Gateway to its IM customer base. Carriers see push email and contact/calendar synchronisation, which is built into Mobile Gateway, as highly complementary to their IM service. By offering Mobile Gateway in addition to Synchronica's IM solution to subscribers, carriers can accelerate the adoption rate across their customer base.
Over the last few months, Synchronica has worked closely with America Movil to honour the group-wide framework agreement with Colibria for its IM service and had already helped four subsidiaries to launch the service successfully. Subscriber adoption rates are looking very promising and all remaining subsidiaries are scheduled to launch the Synchronica-based mobile IM service by 31 March 2011.
The group-wide framework agreement with America Movil has also provided Synchronica with growing recurring revenue streams. The Group now has a good balance of recurring revenue streams and perpetual licence fees.
Acquisition of iseemedia
Through a tender offer which closed in September 2010, Synchronica acquired competitor iseemedia. Synchronica's acquisition of iseemedia added contracts with two major Indian mobile operators to the Synchronica portfolio and extended the contracted addressable market to 853 million subscribers at the time of the acquisition.
All iseemedia contracts are based on monthly active user fees, which are expected to accelerate the transition of Synchronica's revenue profile towards recurring revenue streams. Synchronica will also benefit from an improved competitive position by the integration of iseemedia's patented document transcoding technology .One of the acquired patent applications has now been granted by the US patent office, improving Synchronica's IPR position.
The acquisition was well supported by new and existing institutional investors of both Synchronica and iseemedia, and the Group received positive feedback from customers and partners, which it regards as further validation of its expansion strategy.
Recent Contract Wins and Q4 Outlook
2009 was a record-breaking year for Synchronica, with 13 new customers announced. In the first nine months of 2010, the Group signed contracts with an additional 11 customers, including two multi-national operator groups covering 30 subsidiaries combined.
In the third quarter, traditionally one of the weaker quarters, Synchronica signed a group-wide framework agreement with a large multi-national African operator, scheduled to launch Mobile Gateway in 15 countries. Synchronica expects to accelerate sales in Q4, which has traditionally been its strongest quarter. The Group is in the process of negotiating and completing several large license deals with high profile customers which, if closed before the end of the year, will result in a significantly improved financial performance compared to the previous year. Funding for 2011 is dependent on the successful outcome of at least some of these negotiations. Management is confident the outcome of these discussions will be positive.
Recurring Revenue Streams and Expanded Reseller Network
Synchronica has progressed in the transition to a business model that combines perpetual-licence and revenue-share agreements, resulting in a stronger cash flow. While mobile email deals are focussed on perpetual license models, most Instant Messaging deployments provide monthly revenues to the Group. One example is the group-wide framework agreement with a large multi-national operator group in Latin America, which now provides Synchronica with a growing, monthly recurring revenue stream. The operator expects to launch the Synchronica IM service across all subsidiaries before 31 March 2011; four subsidiaries have so far been successfully launched.
Recurring revenue, from both licensing of software and support and maintenance are showing accelerating growth rates of 45% between Q1'10 and Q2'10 and 81% between Q2'10 and Q3'10. It is expected that this trend will continue. Synchronica is also seeing a major uplift in the size of deals it is winning in high-growth emerging markets. The Group has already secured four $1m+ deals this year and expects this trend to continue.
To further accelerate sales, Synchronica has successfully established a global reseller network, a strategy that now is bearing fruit. The Group has reseller agreements with Brightstar, Nokia Siemens Networks, an Asian-based network equipment provider and a European mobile data solutions provider with a strong customer base in the CIS. With the help of its distribution partners, Synchronica has closed six significant deals in 2010 so far.
Device Manufacturers As Open New Sales Channel
During 2009, device manufacturers became a significant sales channel for Synchronica. In the first three quarters of 2010, the Group recorded revenues of US $2.6m from manufacturer deals. The experience, which Synchronica gained from the collaboration of the MessagePhone, the first device to be bundled with Mobile Gateway, has been instrumental to the success of the new sales channel. MessagePhone has been launched by a 20 million-subscriber subsidiary of a major carrier group in Latin America and a second operator in Africa.
Synchronica has successfully closed three additional deals in the first three quarters with device manufacturers which sell their products in high-growth emerging markets. One of these manufacturers anticipates launching their new family of products in the fourth quarter of 2010, concentrating on the rapidly growing mobile market of India. The manufacturer, which already supplies devices to several of the top Indian operators, will sell the devices via operator-branded shops and ecommerce. A second manufacturer will launch a new Mobile Gateway supported device family in the first quarter of 2011 targeting Russia and India.
Strategy and Emerging Market Focus
Synchronica continues to see the largest market potential for its products in emerging markets and remains focused on these high-growth regions in its sales and marketing strategy. Synchronica Mobile Gateway provides strong unique selling points especially in these markets as it supports the entire device landscape, from high-end Smartphones to low-cost basic phones. This enables mobile operators in emerging markets to launch next-generation mobile messaging services to their entire subscriber base and reach successful penetration rates.
Share Consolidation
In August 2010, Synchronica made a 1 for 15 share consolidation.
RESULTS OF OPERATIONS
Nine months ended September 30, 2010
Financial Results
Revenue has more than doubled to US $ 5.75m, when compared with the US $ 2.64m for the same period last year. The revenue for the first nine months of 2010 is 97% of the revenue reported for the whole of 2009. Historically, Synchronica's revenue has been heavily weighted towards Q4.
Recurring revenue from licensing software on a rental basis and from support and maintenance increased by 186% when comparing Q3 '10 to Q3 '09. With contracts in place and a growing user base, we expect this channel to continue increasing and form an ever growing part of our overall revenue. This will make our revenue and resulting cash flow smoother and more predictable, and help remove the peaks and troughs from our income and expenditure account.
The Group's cost base has, as expected, particularly given the acquisition of the IMPS business in April 2010, seen an increase between 2009 and 2010. If the costs are adjusted to remove non-cash costs, book entries associated with the acquisitions and derivative financial instruments, the increase in costs is modest, US $ 1.54m, only 21%. The Group owns all of its software outright, the majority having been developed in-house, and delivers the vast majority of professional services using its own staff; this means that, while costs will rise as we deliver more revenue, the Group expects that they will continue to rise far more slowly than the increase in revenue.
The loss, at EBITDA, for the period to end Q3 2010, of US $ 3.23m is 25% less than the loss for the same period in 2009, US $4.31m. With increasing revenue and cost control we expect this trend of reducing losses to continue.
Synchronica's liquidity has improved markedly between 2009 and 2010, a 93.7% improvement in the liquidity ratio from 1.43 times at end September 2009 to 2.27 times at the end of September 2010.
With revenue heavily biased towards the end of Q4 2010, losses in the period to end September 2010 and long payment terms demanded by customers, the Group's cash generation from operations, while improved, needs to improve further. The Group continues to monitor its cash position on a daily basis and continues to believe that the Group has sufficient cash to allow it to meet its present requirements, realise its assets and discharge its liabilities in the normal course of business.
Operational Review
The Group's focus on product development in tandem with a global reseller network is significantly improved. Over the past six months, the Group has moved closer to its goal of being the leading provider of mobile messaging services for mobile operators and device manufacturers in emerging markets.
While the initial period of the first half began with a slower than expected conversion rate, during the end of the period the Group saw strong demand for its products, an accelerated conversion rate and an increased deal size. The Group signed its three largest deals ever, totalling more than US $1m each, in June 2010. Two of these deals came from emerging market-focused device manufacturers intending to bundle Mobile Gateway with their devices. The third came from a Tier-1 multinational operator group that provides services in Latin America.
PRINCIPAL RISKS AND UNCERTAINTY
Competition
There is a competitive market for the Group's products; on occasion this places pressure on sales price and sales margin. The Group monitors the products offered by competitors, functionality and price and if necessary adjusts price accordingly.
Employees
The Group's performance depends largely on key staff. The resignation of key individuals and the inability to recruit people with the right skills could adversely impact the Group's results. To mitigate these issues the Group provides a share option scheme and remuneration packages designed to retain key individuals.
Technological change
The pace of technological change is rapid and the Group seeks to be part of this. The Group is a member of key industry standard setting bodies, is seen as a thought leader, regularly monitors the activities of its competitors and continuously invests in product development. It is therefore considered unlikely that markets will develop without the Group responding in such a way as to make the Group's products less attractive than those of its competitors.
Foreign currency risk
The main financial risk arising from the Group's operations is foreign currency risk as the Group receives a significant proportion of its revenues in US Dollars and Euros and has significant expenses in Pounds Sterling and Canadian Dollars. There were no forward contracts outstanding at the period end.
Liquidity
A Consolidated Statement of Cash Flow is included in the Q3 '10 Interim Accounts on Page 13. The group has semi-variable costs of approximately US $1,000,000 per month and generally receives payment from its customers between 90 and 120 days from invoice. All receivables are collectible in the opinion of the directors. SWAPs are settled on the due dates. The directors therefore believe, given an even pattern to revenue generation, that the Group has a working capital requirement of approximately US $ 3.0m.
The Group has no significant plans for capital expenditure. The business is not capital intensive, premises are leased, personal and laptop computers are purchased, servers are rented, office furniture is purchased.
The Directors believe that the Group has sufficient funds, US $ 4.92m plus debtors of US $5.92m (2009: Cash US $ 4.25m, debtors US $ 2.66m) at September 30 2010, to meet its present needs. Cash is freely transferable between the parent company and its subsidiaries both in the UK and other territories.
The Group finances its operations through a combination of shareholders' funding and cash generated from revenues. The Group's treasury policy aims to ensure that there are sufficient funds available to meet the projected cash flow requirements in the business plan. Management monitors the Group's liquidity on the basis of expected cash flow. Cash position is monitored on a daily basis and a detailed rolling weekly cash flow forecast for three months ahead is maintained. Cash reports are produced and reviewed by senior management. Monthly cash flow statements are reviewed by management and annual cash flow budgets are produced and reviewed by the Board of Directors.
To date the Company's principal source of funding is from its shareholders. The Group has no borrowings.
Financial Risk Management
Price and credit control risk
The Group has set prices for its products, which only senior management can adjust. The majority of the Group's customers are national mobile phone operators and offer it low credit risk.
Liquidity and cash flow risk
The Group monitors its cash position on a daily basis and maintains a detailed rolling weekly cash flow forecast for three months ahead. The Group's annual budgets include a cash flow forecast. All of these documents are regularly reviewed by the Directors. The Group does not have any borrowings and the Group's assets are principally funded by equity and cash in bank.
Treasury management
The Group invests its cash balances, which are mainly held in sterling for appropriate periods with institutions with high credit ratings. The release of funds from deposit has been timed to reflect the Group's ongoing cash needs. The Group monitors interest rates, switching cash balances to bank accounts that provide competitive rates of return.
Environmental risk
The Group's policy is to ensure that it fully understands and manages the actual and potential environmental impact of its activities. Our operations are conducted in such a way that we comply with the legal requirements relating to the environment in all areas of our business.
Liquidity risk
The following table analyses the group's financial liabilities which will be settled on a net basis into the relevant maturity groupings based on the remaining period on the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounts is not significant.
You may wish to refer to the disclosure on page 17 under "Liquidity and Cash Flow Risk", page 39 under "Financial Risk Management - Liquidity Risk" and page 50 under "Liquidity Risk" of the Group's Annual Report and Accounts 2009.
Capital Resources
Through working capital and the additional share capital raised the Group has met the obligations as disclosed below:
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The Group |
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Less than |
Between |
More than |
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3 months |
3 and 6 months |
6 months |
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US $'000 |
US $'000 |
US $'000 |
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At 30 September 2010 |
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Financial liabilities measured at amortised cost |
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3,060 |
- |
- |
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At 30 September 2009 |
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|
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Financial liabilities measured at amortised cost |
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3,033 |
- |
- |
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At September 30 2010, the Group had cash reserves of US $ 4.92m, approximately US $ 2m above its immediate working capital need.
At the period end, the Group had made no commitments for capital expenditure.
The Group has no borrowing or loan agreements; it is financed from revenue and by its shareholders.
Financial instruments and other instruments
Financial assets measured at fair value
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Fair Value Measurements |
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Level 1 |
Level 2 |
Level 3 |
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US $'000 |
US $'000 |
US $'000 |
|
1 January 2010 |
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880 |
- |
- |
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New derivative agreement |
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1,980 |
- |
- |
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Net gains and losses recognised in comprehensive income |
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(1,391) |
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|
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Amounts settled |
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(387) |
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30 September 2010 |
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1,082 |
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The Company has previously entered into two derivative agreements and entered a third derivative agreement on March 31 2010. The Company issued shares in exchange for the right to receive the proceeds of monthly swap settlements. Each settlement amount is determined by the Company's share price and by interest on the notional balance outstanding during that settlement period. Until the settlement of each swap the company holds the risk and reward of market changes.
On January 15 2008, the Company completed a placing of 30,000,000 ordinary 1p shares at a price of 6.25p. The Company also entered into its first derivative agreement, consisting of equity and interest rate swaps with a notional principal value of £1.875m. At the request of the Company the settlement of swaps was delayed in November 2009, resuming in February 2010. 12 of 24 swaps remain to be settled at September 30 2010.
On September 11 2008, the Company completed a placing of 21,666,666 ordinary 1p shares at a price of 3p. The Company also entered into the second derivative agreement, consisting of equity and interest rate swaps with a notional principal value of £0.65m. The final swaps of this agreement settled in September 2009.
On March 31 2010, the Company completed a placing of 80,000,000 ordinary 1p shares at a price of 2.5p. The Company also entered into the third derivative agreement, consisting of equity and interest rate swaps with a notional principal value of £2.0m. 21 of 24 swaps remain to be settled at September 30 2010.
SWAP commencing January 15 2008
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30 September 2010 |
31 December 2009 |
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Company share price |
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18.000p |
50.625p |
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Interest rate receivable |
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(2.01)% |
(2.01)% |
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Discount rate |
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12.5% |
12.5% |
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Fair value (US $'000) |
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214 |
880 |
The notional principal of this derivative agreement is divided into 24 equal swaps. The value of the swap settled in each period is determined by reference to the Company's share price, the equity swap, and to LIBOR (1 month GBP London Interbank Borrowing Rate), the interest rate swap. The amount received in respect of each equity swap is based on the Company's share price divided by the base price of 8.3333p multiplied by the principal being settled of £78,125. A change in share price of 0.1p from the base price will lead to a change in receipts of £938 per month. The settlement value of the interest rate swap to be deducted from the equity swap is arrived at by multiplying the outstanding notional principal amount over the period since the last settlement date by LIBOR minus 2.5% p.a.
Fair value of the swaps is calculated by discounting the forecast cash flows by reference to the current share price and LIBOR on the reference date.
SWAP commencing March 31 2010
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30 September 2010 |
31 December 2009 |
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Company share price |
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18.000p |
50.625p |
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Interest rate payable |
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0.85% |
N/A |
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Discount rate |
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12.5% |
N/A |
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Fair value (£'000) |
|
868 |
- |
Independent Review Report to Synchronica plc for the nine month period ended 30 September 2010
Introduction
We have been engaged by the Group to review the interim unaudited financial statements for the nine month period ended 30 September 2010 which comprises of a Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position, Consolidated Statement of Cash Flows, Consolidated Statement of Changes in Equity and related notes.
We have read the other information contained in the interim unaudited financial statements and considered whether it contains any apparent misstatements or material inconsistencies with the information in the unaudited financial statements.
Directors' responsibilities
The interim unaudited financial statements, including the financial information contained therein, are the responsibility of and have been approved by the directors. The directors are responsible for preparing the interim report in accordance with the rules of the TSX for companies trading securities on the TSX Venture Exchange which require that the interim unaudited financial statements be presented and prepared in a form consistent with that which will be adopted in the Group's annual accounts having regard to the accounting standards applicable to such annual accounts.
Our responsibility
Our responsibility is to express to the Group a conclusion on the interim unaudited set of financial statements in the quarterly financial report based on our review.
Our report has been prepared in accordance with the terms of our engagement to assist the Group in meeting the requirements of the rules of the London Stock Exchange and the TSX for companies trading securities on the Alternative Investment Market, TSX Venture Exchange and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity", issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the interim unaudited financial statements in the quarterly financial report for the nine months ended 30 September 2010 is not prepared, in all material respects, in accordance with the rules of the TSX for companies trading securities on the TSX Venture Exchange and with IAS 34 "Interim Reporting".
Emphasis of matter - going concern
We have considered the adequacy of the disclosure made in note 1 of the financial statements concerning the Group's ability to continue as a going concern. The Group is reliant on signing new deals with customers which are expected but not guaranteed in order to continue as a going concern. These conditions, along with other matters discussed in note 1 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern. The financial statements do not include any adjustments that would result if the Group was unable to continue as a going concern.
BDO LLP
Chartered Accountants and Registered Auditors
Gatwick
United Kingdom
22 November 2010
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
Consolidated Statement of Comprehensive Income for the three and the nine month periods ended 30 September 2010
|
|
|
3 months to |
3 months to |
9 months to |
9 months to |
|
|
|
30 September |
30 September |
30 September |
30 September |
|
|
|
2010 |
2009 |
2010 |
2009 |
|
|
|
(unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
|
|
Note |
US $'000 |
US $'000 |
US $'000 |
US $'000 |
|
Revenue |
|
746 |
661 |
5,747 |
2,637 |
|
Cost of sales |
|
(72) |
(155) |
(305) |
(381) |
|
Gross profit |
|
674 |
506 |
5,442 |
2,256 |
|
Administrative costs |
|
|
|
|
|
|
Amortisation and depreciation |
|
(921) |
(412) |
(1,875) |
(739) |
|
Other administrative expenses |
|
(3,415) |
(1,736) |
(8,826) |
(6,656) |
|
Finance (losses)/gains on operating activities |
|
(258) |
35 |
(343) |
(16) |
|
Total administrative costs |
|
(4,594) |
(2,113) |
(11,044) |
(7,411) |
|
Operating loss |
|
(3,920) |
(1,607) |
(5,602) |
(5,155) |
|
Finance income |
|
- |
201 |
3 |
83 |
|
Finance costs |
|
(701) |
(10) |
(1,450) |
(58) |
|
Loss before taxation |
|
(4,621) |
(1,416) |
(7,049) |
(5,130) |
|
Taxation |
2 |
498 |
77 |
565 |
406 |
|
Loss after tax and total comprehensive income for the period |
|
(4,123) |
(1,339) |
(6,484) |
(4,724) |
|
Attributable to: |
|
|
|
|
|
|
- Equity holders of the parent company |
|
(4,100) |
(1,339) |
(6,461) |
(4,724) |
|
- Non-controlling interest |
|
(23) |
- |
(23) |
- |
|
|
|
(4,123) |
(1,339) |
(6,484) |
(4,724) |
|
Loss per ordinary share from continuing operations |
|
|
|
|
|
|
Basic and diluted loss per ordinary share (US$) |
3 |
0.06 |
0.04 |
0.13 |
0.16 |
Consolidated Statement of Financial Position as at 30 September 2010
|
|
|
As at |
As at |
|
|
|
30 September |
31 December |
|
|
|
2010 |
2009 |
|
|
|
(unaudited) |
(unaudited) |
|
|
|
US $'000 |
US $'000 |
|
Assets |
|
|
|
|
Non-current assets |
|
|
|
|
Intangible assets |
|
22,637 |
7,464 |
|
Property, plant and equipment |
|
466 |
267 |
|
Derivative financial instruments |
|
356 |
313 |
|
Total non-current assets |
|
23,459 |
8,044 |
|
Current assets |
|
|
|
|
Trade and other receivables |
|
5,919 |
2,656 |
|
Corporation tax |
|
- |
22 |
|
Cash and cash equivalents |
|
4,924 |
4,252 |
|
Total current assets |
|
10,843 |
6,930 |
|
TOTAL ASSETS |
|
34,302 |
14,974 |
|
Current liabilities |
|
|
|
|
Trade and other payables |
|
3,060 |
3,033 |
|
Corporation tax |
|
40 |
143 |
|
Provisions |
|
1,683 |
1,659 |
|
Total current liabilities |
|
4,783 |
4,835 |
|
Non-current liabilities |
|
|
|
|
Provisions |
|
506 |
543 |
|
Deferred tax liability |
|
3,717 |
109 |
|
Total non-current liabilities |
|
4,223 |
652 |
|
Total liabilities |
|
9,006 |
5,487 |
|
Equity and reserves |
|
|
|
|
Ordinary shares |
|
21,239 |
8,644 |
|
Share premium account |
|
34,421 |
30,033 |
|
Merger reserve |
|
4,821 |
2,269 |
|
Warrant reserve |
|
1,358 |
- |
|
Accumulated losses |
|
(37,793) |
(31,459) |
|
Equity attributable to shareholders of the parent company |
|
23,946 |
9,487 |
|
Non-controlling interest |
|
1,350 |
- |
|
Total Equity |
|
25,296 |
9,487 |
|
TOTAL EQUITY AND LIABILITIES |
|
34,302 |
14,974 |
Consolidated Statement of Cash Flow for the three month and the nine month periods ended 30 September 2010
|
|
3 months to |
3 months to |
9 months to |
9 months to |
|
|
30 September |
30 September |
30 September |
30 September |
|
|
2010 |
2009 |
2010 |
2009 |
|
|
(unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
|
|
US $'000 |
US $'000 |
US $'000 |
US $'000 |
|
Cash flow from operating activities |
|
|
|
|
|
Loss before taxation |
(4,621) |
(1,416) |
(7,049) |
(5,130) |
|
Adjusted for: |
|
|
|
|
|
Depreciation |
53 |
86 |
144 |
165 |
|
Amortisation of intangibles |
868 |
267 |
1,731 |
508 |
|
Impairment of intangibles |
- |
43 |
- |
43 |
|
Loss on disposal of property, plant and equipment |
- |
16 |
- |
23 |
|
Finance losses/(gains) on operating activities |
258 |
(35) |
343 |
16 |
|
Finance income |
- |
(201) |
(3) |
(83) |
|
Finance costs |
701 |
10 |
1,450 |
58 |
|
Equity-settled share-based payment |
57 |
(9) |
156 |
91 |
|
Cash flows from operating activities before changes in working capital and provisions |
(2,684) |
(1,239) |
(3,228) |
(4,309) |
|
Decrease/(increase) in receivables |
1,447 |
78 |
(2,272) |
166 |
|
(Decrease)/increase in provisions |
(51) |
13 |
(170) |
57 |
|
(Decrease)/increase in payables |
(124) |
(601) |
131 |
(2,161) |
|
Cash utilised in operating activities |
(1,412) |
(1,749) |
(5,539) |
(6,247) |
|
Tax received |
306 |
364 |
265 |
514 |
|
Net cash used in operating activities |
(1,106) |
(1,385) |
(5,274) |
(5,733) |
|
Cash flow from investing activities |
|
|
|
|
|
Acquisition of subsidiaries net of cash acquired |
3,421 |
- |
2,453 |
- |
|
Purchase of intangible assets |
(87) |
(623) |
(2,579) |
(1,504) |
|
Purchase of property, plant and equipment |
(96) |
(150) |
(146) |
(204) |
|
Net cash used in investing activities |
3,238 |
(773) |
(272) |
(1,708) |
|
Cash flow from financing activities |
|
|
|
|
|
Net proceeds from issue of ordinary share capital |
1,742 |
7,163 |
6,181 |
7,669 |
|
Proceeds from derivative financial instruments |
64 |
228 |
387 |
654 |
|
Finance costs paid |
(1) |
(10) |
(5) |
(10) |
|
Interest received |
- |
7 |
3 |
27 |
|
Net cash generated from financing activities |
1,805 |
7,388 |
6,566 |
8,340 |
|
Net increase in cash and cash equivalents |
3,937 |
5,230 |
1,020 |
899 |
|
Cash and cash equivalents at 1 July / 1 January |
1,168 |
420 |
4,252 |
5,023 |
|
Effects of exchange rate changes on cash equivalents |
(181) |
185 |
(348) |
(87) |
|
Cash and cash equivalents at period end |
4,924 |
5,835 |
4,924 |
5,835 |
Consolidated Statement of Changes in Equity for the nine month period ended 30 September 2010
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
attributable |
|
|
|
|
|
|
|
|
|
to equity |
Non- |
|
|
|
Share |
Share |
Merger |
Warrant |
Accumulated |
shareholders |
controlling |
Total |
|
|
capital |
premium |
reserve |
reserve |
losses |
of the parent |
interest |
equity |
|
|
(unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
|
|
US $'000 |
US $'000 |
US $'000 |
US $'000 |
US $'000 |
US $'000 |
US $'000 |
US $'000 |
|
At 1 January 2009 |
5,442 |
25,566 |
2,269 |
- |
(26,630) |
6,647 |
- |
6,647 |
|
Adjustment for share based payments |
- |
- |
- |
- |
91 |
91 |
- |
91 |
|
Proceeds from placing |
3,202 |
4,467 |
- |
- |
- |
7,669 |
- |
7,669 |
|
Total comprehensive income |
- |
- |
- |
- |
(4,724) |
(4,724) |
- |
(4,724) |
|
At 30 September 2009 |
8,644 |
30,033 |
2,269 |
- |
(31,263) |
9,683 |
- |
9,683 |
|
Adjustment for share-based payments |
- |
- |
- |
- |
32 |
32 |
- |
32 |
|
Total comprehensive income |
- |
- |
- |
- |
(228) |
(228) |
- |
(228) |
|
At 1 January 2010 |
8,644 |
30,033 |
2,269 |
- |
(31,459) |
9,487 |
- |
9,487 |
|
Adjustment for share-based payments |
- |
- |
- |
- |
156 |
156 |
- |
156 |
|
Proceeds from placing |
3,534 |
2,148 |
- |
499 |
- |
6,181 |
- |
6,181 |
|
Shares issued in exchange for derivative financial assets |
1,337 |
631 |
- |
- |
- |
1,968 |
- |
1,968 |
|
Shares issued as consideration for acquisitions |
7,724 |
1,509 |
2,552 |
859 |
- |
12,644 |
- |
12,644 |
|
Non-controlling interest arising on business combination [Note 4] |
- |
- |
- |
- |
- |
- |
1,558 |
1,558 |
|
Acquisition of non-controlling interest |
- |
- |
- |
- |
(29) |
(29) |
(185) |
(214) |
|
Total comprehensive income |
- |
- |
- |
- |
(6,461) |
(6,461) |
(23) |
(6,484) |
|
At 30 September 2010 |
21,239 |
34,321 |
4,821 |
1,358 |
(37,793) |
23,946 |
1,350 |
25,296 |
Notes to the Interim Financial Information for the nine month period ended 30 September 2010
1. Basis of preparation
These interim unaudited financial statements have been prepared in accordance with IAS 34, "Interim Financial Reporting", as adopted by the European Union. They do not include all disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the 2009 Annual Report. The financial information for the period ended 30 September 2010 and 30 September 2009 does not constitute statutory accounts and is unaudited.
The principal accounting policies used in preparing the interim results are those the Group expects to apply in its financial statements for the year ended 31 December 2010 and are unchanged from those disclosed in the Group's Report and Financial Statements for the year ended 31 December 2009, with the following exception.
With effect from 1 July 2010 the presentational currency has been changed to US dollars. The Group presentational currency had remained in sterling, following the change in functional currency to US dollars from 1 January 2009, to provide consistency for the shareholders. Following the acquisition of iseemedia Inc. and listing on the TSX Venture Exchange the shareholder base is split between the London and Toronto markets. The board decided to provide a presentation currency that shareholders in both jurisdictions are familiar with, the US dollar. The change of the Group's presentation currency and that of the Company's functional currency were accounted for in accordance with IAS 21 "The Effects of Changes in Foreign Exchange Rates". On the change of the Group's presentation currency, comparative figures previously reported in sterling are translated into US dollars using the underlying functional currency amounts.
The annual financial statements of Synchronica plc are prepared in accordance with IFRS's as adopted by the European Union. The comparative financial information for the year ended 31 December 2009 included within this report does not constitute the full statutory accounts for that period. A copy of those statutory financial statements has been delivered to the Registrar of Companies and is included in the Listing Application filed September 17, 2010 on the System for Electronic Document Analysis and Retrieval (SEDAR). The auditors' report on those accounts was unqualified, but did contain references to going concern to which the auditors drew attention by way of an emphasis of matter paragraph without qualifying their report.
These Group financial statements have been prepared on the going concern basis which is supported by forecasts and projections covering the period to 31st December 2011.
The forecasts and projections, which include monthly cash flows, suggest that provided the Group trades in line with expectations it has sufficient funds to meet its liabilities as they fall due. There is however a risk that the Group may not meet its revenue expectations and / or that while it may meet these revenue expectations it might meet them more slowly than anticipated; either or both of these could test the Group's cash flow. The forecasts are reliant on signing new deals with new customers which is expected but not guaranteed, negotiations are ongoing.
Given the above, the directors acknowledge that there is a material uncertainty related to these events, that may cast significant doubt on the Group's ability to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business.
The Group has faced the uncertainties noted above throughout its life. To date, when required, management has been successful in raising additional funding from existing and new investors. Based on forecasts and projections, management expect the company to continue as a going concern.
The Board of Directors approved this Interim Report on 22 November 2010.
2. Taxation
The taxation charges for the three and nine month periods to 30 September 2010 are based on the effective taxation rate, which is estimated will apply to earnings for the year ending 31 December 2010.
Notes to the Interim Financial Information for the nine month period ended 30 September 2010
3. Loss per share
|
|
3 months to |
3 months to |
9 months to |
9 months to |
|
|
30 September |
30 September |
30 September |
30 September |
|
|
2010 |
2009 |
2010 |
2009 |
|
|
(unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
|
Numerator |
|
|
|
|
|
Losses used for calculation of basic and diluted EPS (US$'000) |
(4,100) |
(1,339) |
(6,461) |
(4,724) |
|
Denominator |
|
|
|
|
|
Weighted average number of ordinary shares used in basic EPS |
65,047,810 |
37,666,434 |
50,396,767 |
29,743,620 |
|
Basic and diluted loss per ordinary share (US$) |
0.06 |
0.04 |
0.13 |
0.16 |
|
|
|
|
|
|
|
Weighted average dilutive securities |
9,049,312 |
4,723,088 |
8,223,516 |
3,171,876 |
|
|
|
|
|
|
The weighted average number of dilutive securities (options, warrants and deferred shares) have been excluded from the calculation of diluted loss per share because they would reduce loss per share.
4. Acquisition of iseemedia Inc.
On September 21, 2010 the Group acquired 82.34% of the share capital of iseemedia Inc.. The following provisional fair value table is at that date. On September 28, 2010 the Group acquired a further 2.13% of share capital of iseemedia Inc.
|
|
Carrying values |
Provisional |
|
|
pre-acquisition |
fair values |
|
|
US$'000 |
US$'000 |
|
|
|
|
|
Customer relationships |
- |
2,999 |
|
Intellectual property rights |
- |
2,471 |
|
Patent rights |
- |
1,172 |
|
Property, plant and equipment |
138 |
138 |
|
Receivables |
547 |
547 |
|
Cash and cash equivalents |
3,421 |
3,421 |
|
Payables |
(70) |
(70) |
|
Deferred tax |
- |
(1,860) |
|
Fair value of net assets |
4,036 |
8,818 |
|
Minority interest (17.66%) |
|
(1,558) |
|
Goodwill |
|
553 |
|
Consideration paid |
|
7,813 |
|
Satisfied by: |
|
|
|
Ordinary 15p shares (19p/ USD$0.295) |
|
6,954 |
|
Warrants |
|
859 |
|
Consideration paid |
|
7,813 |
The fair value of the shares issued was determined by reference to their quoted market bid price of 19p at the date of acquisition.
The fair value of the warrants issued was determined using the Black-Scholes-Merton pricing model.
This information is provided by RNS
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