NEXT BIOMETRICS GROUP ASA...

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1 N E X T B I O M E T R I C S NEXT BIOMETRICS GROUP ASA... Q U A R T E R L Y R E P O R T Q

2 Q U A R T E R L Y R E P O R T Q > HIGHLIGHTS... Revenue of NOK 24.7 million vs NOK 25.4 million in Q317 Achieved target of positive gross margin by January 218 Demonstrated first ISO compliant Smart Card with flexible fingerprint sensor with Tactilis Smart Card biometric subassembly project progressing according to plan Launched latest generation of peripheral fingerprint readers, the Oyster II CEO comment In Q4 we continued to develop a range of products featuring our proprietary,large and costefficient rigid and flexible fingerprint sensors with a focus on driving profitable growth within our targeted markets of Smart Cards, Government ID, Access Control and Notebooks. We have developed the first ISO compliant Smart Card with a flexible sensor together with one of our ecosystem partners, we have a roadmap in place to enhance our leading sensor technology and we have proven our mass production capabilities, all of which position us at the forefront of the security, user experience and cost critical emerging, high volume segments of the biometrics market Ritu Favre, the CEO of NEXT Biometrics Group ASA. AMOUNTS IN NOK MILLION (EXCEPT PER SHARE DATA) Q4217 Q3217 Q2217 Q Total revenue Operating profit (loss) Net profit (loss) for the period EBITDA ex options Opening cash balance Cash from operating activities Cash from investment activities Cash from financing activities Closing cash balance Total equity Earnings per share basic & diluted Weighted average number of shares (in thousands)

3 Q U A R T E R L Y R E P O R T Q > STATUS OPERATIONAL REVIEW: NEXT Biometrics (NEXT) maintained focus on product development and marketing through the fourth quarter to expand the business within the targeted markets of Smart Card and Government ID markets. The total number of ongoing Smart Card, Government ID, Access Control design prospects and engagements grew through the period, confirming increased interest in NEXT s unique technology after establishing the first massproduction line for flexible fingerprint sensors earlier in the year and the continued launch of new technological advances. Through 217 NEXT accelerated sales and marketing initiatives backed by the company s proven and scalable massproduction capacity for both flexible and rigid fingerprint sensors. NEXT presented its flexible fingerprint sensor technology at the APSCA Powered and NextGeneration Cards conference in Singapore in early November and later the same month showcased the latest industry technology at the TRUSTECH 217 conference in Cannes, France. At TRUSTECH, NEXT joined with Tactilis to unveil the first smart card using flexible fingerprint sensor technology compliant with international standards. NEXT s large area flexible sensor technology has been integrated into Singaporebased Tactilis biometricsystemoncard (BSoC) to deliver a higher level of security and user experience for the financial, governmental and access control markets. The card, which incorporates the NEXT NB61 flexible fingerprint sensor, is compliant with the ISO standard defining the implementation of biometric systemonacard devices. Tactilis has previously integrated NEXT s nonflexible sensor, the NB 551, into smart cards which are now shipping to customers. Product development, and integration of sensors and surrounding technology in marketready products is key to meeting customer demand in the Smart Card and Government ID segments. In addition, investments will continue to go toward lowering power consumption, which will further strengthen NEXT s position in the Smart Card segment. NEXT has a detailed roadmap for executing these development projects, which are aligned with ongoing sales and marketing activity. This includes further development of ecosystem partnerships. These strategic actions by NEXT come despite customer delays in adopting smart card technology. NEXT continued work with First Biometrics in the fourth quarter. NEXT will use its rigid and flexible fingerprint technology in cards that First Biometrics will be producing. The initial applications that First Biometrics will target are the casino payment and identity cards. 3

4 Q U A R T E R L Y R E P O R T Q In November, NEXT launched the latest generation of peripheral fingerprint readers, the Oyster II. The USBbased device can connect to a variety of mobile and desktop computing gear and leverages the same form factor used in NEXT s Oyster I fingerprint reader that was introduced in 215. It is designed to serve a broad range of market applications requiring both security and convenience. Shipments of the new fingerprint sensor modules using the new ASIC, the NB234S2, to the company s Tier1 U.S. notebook customer continued as planned after the initial volumes were delivered to the client late in the thirdquarter. The shipments had a limited positive impact on fourthquarter margins with more significant enhanced positive margin effects expected in the first quarter of 218. On 1 November, the company announced that Fujitsu has implemented NEXT fingerprint sensors in consumer and commercial notebook and tablet products. NEXT delivered the first volumes in the quarter and expects shipments to increase over the coming months. Within the Government ID market, where sensor size is a key driver for security, NEXT has previously passed a major field test requiring <2% FRR organized by the India STQC Test Institute consisting of 6, fingerprint sensor readings in harsh environmental conditions. The certification process including environmental, technology and specification compliance has continued through the fourth quarter. The Indian government seeks to enroll the entire population in its Aadhaar biometric authentication program. NEXT will continue to place its highest level of focus on Smart Card related plans and activities. The Board maintains that these investments will further strengthen NEXT s position in this segment. The investments and expense levels are expected to peak in the next quarters of 218. The Board has in light of the expected increase in investments, initiated activities to ensure relevant company financing. 4

5 Q U A R T E R L Y R E P O R T Q > INTERIM CONDENSED FINANCIAL STATEMENTS AS OF 31 DECEMBER 217 (UNAUDITED) PROFIT & LOSS STATEMENT Revenues Operating revenue in the fourth quarter of 217 was NOK 24.7 million, compared to NOK 25.4 million in the previous quarter and NOK 31.8 million in the fourth quarter of 216. Revenue for the full year 217 amounted to MNOK 98.2 compared to MNOK 92.1 in 216. Cost of goods sold Until 217, several of the initial cost elements related to production and delivery were of a oneoff or temporary nature, and did not provide a relevant indication of cost of goods sold. Cost of goods sold has been included from the first quarter of 217 as a separate line item in the Company s quarterly financial statement. The contribution margin in the fourth quarter of 217 was negative with NOK.9 million (4%), compared to negative with NOK 1. million (4%) in the third quarter, negative NOK 1.5 million (6%) in the second quarter and negative NOK 2.4 million (1%) in the first quarter of 217. Operating expenses Payroll expenses were NOK 26. million in the fourth quarter of 217, compared to NOK 22.6 million in the previous quarter and NOK 17.7 million in the corresponding quarter of 216. Payroll expenses in 217 amounted to 89.4 million compared to 58.6 million in 216. In the third quarter of 216 stock options cost of NOK 3.7 million was reclassified from salary to operating expenses, based on new best estimates. In addition, social security tax of NOK 5.7 million was reversed. Adjusted for these two effects, the payroll expenses amounted to NOK 68. million for the year 216. Other operating expenses were NOK 14.8 million in the fourth quarter of 217, compared to NOK 15. million in the previous quarter and NOK 6.6 million in the corresponding quarter of 216. For the year 217, other operating expenses were NOK 68. million compared to NOK 16.2 million in 216. The 216 figures are not comparable as cost of goods sold were included in the operating expenses. Total R&D expenses, included in both payroll and other operating expenses, were NOK 87.1 million in 217, compared to NOK 97.6 million in 216. The reduction was mainly related to less external R&D support. Depreciation, amortisation and investments Depreciation and amortisation amounted to NOK 1.7 million in the fourth quarter of 217 compared to NOK 1.5 million in previous quarter and NOK.9 million in the corresponding quarter of 216. In 217, depreciation and amortisation amounted to NOK 4.8 million compared to NOK 3.8 million in 216. At the end of 217, NEXT wrote down the value of its first coating machine from 214 by NOK 11.4 million. The charge reflected changes to industry requirements since development of the initial experimental coatings. Adapting to these changes has required new operating procedures and measures, which have reduced the unit s sensor coating output. NEXT installed a new coating machine in 217 which has been operational for more than six months. It provides significantly improved output, quality and cost for both rigid and flexible sensors. Investments were NOK 9.5 million in the fourth quarter of 217 compared to NOK million in the previous quarter and NOK 13.2 million in the corresponding quarter of 216. The main investments in 217 were the coating machine in the second quarter and the cutting machine for flexible sensor production at the end of the fourth quarter. Net financial items Net financial income was NOK 3.1 million in the fourth quarter of 217 compared to a net financial cost of NOK 1.6 million in the previous quarter and a income of NOK.2 million in corresponding quarter of 216. The increased income from the previous quarter of NOK 4.7 million was mainly related to foreign exchange gains and losses. For the year 217, the net financial cost was NOK.2 million compared to a cost of NOK 1.4 million in 216. The yearoveryear change was mainly related to foreign exchange gains and losses. 5

6 Q U A R T E R L Y R E P O R T Q Net profit (loss) for the period Net loss in the fourth quarter of 217 was NOK 53. million, compared to a loss of NOK 41.6 million in the previous quarter and a loss of NOK 47.2 million in the corresponding quarter of 216. Net loss for 217 amounted to NOK 18.8 million compared to a net loss of NOK million for 216. NEXT incurred payable taxes related to foreign subsidiaries in the fourth quarter, but operated at a loss and did not incur deferred income taxes for the year 217 or in the year 216. CASH FLOW AND BALANCE SHEET Cash and cash equivalents Cash and cash equivalents amounted to NOK 79.7 million by the end of 217, compared to NOK 16.3 million by the end of 216. Cash flow from operating activities was negative with NOK 34.1 million in the fourth quarter of 217 compared a negative amount of NOK 36.8 million in the previous quarter and a negative amount of NOK 37.4 million in the corresponding quarter of 216. For the full year 217, cash flow from operating activities was negative with NOK million compared to negative NOK million in 216. Net cash flow from financing activities was positive with NOK million in 217 following the private placement of 1,167, new shares in the first quarter of 217, compared to NOK million in 216 following the private placement with the repair issue of 1,24, shares in the first half of 216. At the end of 217, the Company s share capital was NOK 16,382,48, divided into 16,382,48 shares with a par value of NOK 1 per share. Equity Equity amounted to NOK million at the end of 217, compared to NOK million by the end of 216. This was mainly related to the net loss of NOK 18.8 million, less net proceeds of NOK million from the private placement of new shares in the first quarter of 217 and an effect on equity of NOK 15.7 million related to share based compensation. Outlook (39 months) Surpass 4 million sensors shipped by end of Q118 Sample new Smart Card module in Q218 Customer progress in smart card and government ID Establish financial runway to break even Oslo, February 28, 218 Board of directors NEXT Biometrics Group ASA 6

7 Q U A R T E R L Y R E P O R T Q NEXT BIOMETRICS GROUP ASA CONDENSED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) 31 DECEMBER 217 AMOUNTS IN NOK 1, PROFIT AND LOSS NOTES Q4217 Q Revenue Operating revenue Total revenue Cost of goods sold Gross margin Operating expenses Payroll expenses Other operating expenses Total operating expenses Profit (loss) before tax, depreciation and amortization Amortization of intangible assets Depreciation of tangible assets Writedowns on tangible assets Operating profit (loss) Net financial items Net profit (loss) before tax Taxes Net profit (loss) for the period Earnings per share basic and diluted Other comprehensive income Items that will be reclassified to profit and loss Exchange rates differences Total other comprehensive income Total comprehensive income for the period Total comprehensive income for the period attributable from: Owners of the parent company Total

8 Q U A R T E R L Y R E P O R T Q NEXT BIOMETRICS GROUP ASA CONDENSED INTERIM STATEMENTS OF FINANCIAL POSITION (UNAUDITED) 31 DECEMBER 217 AMOUNTS IN NOK 1, ASSETS NOTES 31 DEC DEC 216 Noncurrent assets Patens and other intangible assets Machinery and office equipment Total noncurrent assets Current assets Inventory Receivables Accounts receivable Other receivables Prepayments other investments Total receivables Cash and cash equivalents Total current assets Total assets EQUITY AND LIABILITIES Equity Share capital Share premium Other paid in capital Retained earnings Total equity Liabilities Current liabilities Accounts payable Public duties payable Other current liabilities Total current liabilities Total liabilities Total equity and liabilities

9 Q U A R T E R L Y R E P O R T Q NEXT BIOMETRICS GROUP ASA CONDENSED INTERIM STATEMENTS OF CASH FLOW (UNAUDITED) 31 DECEMBER 217 AMOUNTS IN NOK 1, CASH FLOWS FROM OPERATING ACTIVITIES NOTES Q4217 Q Profit (loss) before taxes Taxes payable Share based remuneration (equity part) Amortization of intangible assets Depreciation of tangible assets Writedown on tangible assets Change in prepayments Change in working capital items Net cash flows from operating activities Cash flows from investing activities Purchase of intangible assets Purchase of tangible assets Net cash flows from investing activities Cash flows from financing activities Share issue net of expenses Net cash flows from financing activities Translation differences Net change in cash flows Opening cash balance Closing cash balance

10 Q U A R T E R L Y R E P O R T Q NEXT BIOMETRICS GROUP ASA CONDENSED INTERIM STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) 31 DECEMBER 217 AMOUNTS IN NOK 1, NOTES SHARE CAPITAL SHARE PREMIUM OTHER PAIDIN CAPITAL RETAINED EARNINGS TOTAL EQUITY Balance 1 October Shares issue 7 Share based compensation Translation differences Net profit (loss) Balance 31 December Balance 1 October Shares issue Share based compensation Translation differences Net profit (loss) Balance 31 December Balance 1 January Shares issue Share based compensation Translation differences 7 7 Net profit (loss) Balance 31 December Balance 1 January Shares issue Share based compensation Translation differences Net profit (loss) Balance 31 December

11 Q U A R T E R L Y R E P O R T Q >NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS 31 DECEMBER 217 (UNAUDITED) 1. General information NEXT BIOMETRICS GROUP ASA ( NEXT ) is a public limited liability Company incorporated and domiciled in Norway. NEXT Biometrics Group ASA is the parent Company of the Group whose headquarter is located in Oslo, Norway, with subsidiaries in Shanghai, Seattle, Taipei and Prague. NEXT s shares are listed at Oslo Stock Exchange. From 25 June 216, NEXT s shares were included in the Oslo Stock Exchange main list, OSEBX. The operations of the Group are carried out by the Group s operating subsidiaries. As per the end of 217, the Group has five wholly owned operating subsidiaries: NEXT Biometrics AS (Norway) and its subsidiaries NEXT Biometrics Inc. (Seattle, USA), NEXT Biometrics China Ltd (Shanghai, China), NEXT Biometrics Taiwan Ltd (Taipei, Taiwan) and NEXT Biometrics s.r.o (Prague, Czech Republic). The purpose of the Company as stated in the articles of association is to conduct research, development and commercialization of security products, as well as other related activities that will naturally fall under this. 2. Basis of preparation, accounting policies This condensed interim financial report for fourth quarters of 217 has been prepared in accordance with IAS 34 Interim financial reporting. The condensed interim financial report should be read in conjunction with the annual financial statements for 216. The IFRS accounting policies applied in this condensed interim financial report are consistent with those applied and described in the annual financial statements for 216. The going concern assumption has been applied when preparing this financial report. In February 217, NEXT raised NOK million in net proceeds in a private placement. In March 217, NEXT raised NOK 2.1 million in gross proceeds through exercise of 56,5 incentive stock options. During 217, NEXT earned revenue from commercial volumes, but still at rather modest levels. NEXT is rampingup Smart Card and Government ID related plans and activities. The Board believe that these investments will further improve the companies positions in these market segments. The investments/expense levels are expected to peak during the next quarters. Due to the expected increased investment level, the group cash position cover less than 12 months of operations and the Board accordingly has initiated activities to ensure relevant company financing. This interim financial report has not been subject to audit. The Board of Directors approved the report on 28 February Revenue and segment reporting OPERATING REVENUE PER BUSINESS SEGMENT (AMOUNTS IN NOK) Fingerprint sensor technology Total NEXT targets four markets for the technology; (i) (ii) (iii) (iv) Smart Cards Government ID Access Control Notebooks The available technology is generic into the four market segments. Since NEXT has limited revenues it is operating and reporting only in one business segment; Fingerprint sensor technology. 11

12 Q U A R T E R L Y R E P O R T Q Operating expenses PAYROLL EXPENSES (AMOUNTS IN NOK) R&D related payroll expenses Other payroll expenses Share based remuneration (salary part) Share based remuneration (employer s tax) Total OTHER OPERATING EXPENSES 1 (AMOUNTS IN NOK) R&D related operating expenses 2 Other expenses Share based remuneration (operating part) Total Total Operating expenses In 216, cost of goods sold was included in other operating expenses. 2 In the third quarter of 216, stock options cost of NOK 3.7 million was reclassified from salary to operating expenses, based on new best estimates. In addition, social security tax of NOK 5.7 million was reversed. Adjusted for these two effects the payroll expenses for the year 216 amounted to NOK 68. million. 5. Intangible assets Intangible assets consist of acquisition of right to use the patent and knowhow (IP) described as the Active Thermal Sensing principle. The acquisition was recognized at net present value and included in the opening balance as of 1 January 212. The additions in 216, consists of the work in progress project regarding the new ASIC. The project was finalized with additional investments in 217. INTANGIBLE ASSETS (AMOUNTS IN NOK) Cost Opening balance Additions Disposals at cost Currency adjustments Cost Closing balance Accumulated depreciation Opening balance Depreciation Accumulated depreciation of disposed items Currency adjustments Accumulated depreciation Closing balance Book value Closing balance Depreciation period (straight line) years The patent is amortized over the patent life from the time revenue was recognized

13 Q U A R T E R L Y R E P O R T Q Tangible assets MACHINERY AND EQUIPMENT (AMOUNTS IN NOK) Cost Opening balance Additions Disposals at cost Currency adjustments Cost Closing balance Accumulated depreciation Opening balance Depreciation Accumulated depreciation of disposed items Writedowns Currency adjustments Accumulated depreciation Closing balance Book value Closing balance Depreciation period (straight line) years The additions in 217, consists of the coating machine the second quarter and the new cutting machine for flexible sensors in the end of the fourth quarter. 7. Shares and incentive options NUMBER OF SHARES OUTSTANDING Opening balance Share issue(s) Exercised incentive options Closing balance In February 217, NEXT completed a successful placement of 1,167, new shares at a subscription price of NOK 134 corresponding to a total amount of NOK million. Expenses and commission fee connected with this placement amounted to NOK 5.3 million and net proceeds were NOK million. In March 217, 56.5 incentive stock options were exercised and the share capital was increased accordingly. Net proceeds amounted to NOK 2.1 million. Share options In order to attract talented, experienced and high value networked human resources the Company have entered, and plan to continue to enter, stock option agreements. There are three types of option programs in the Company; unconditional longterm share options, milestone based share options and conditional longterm share options. In the fourth quarter of 217, the Board of Directors resolved to grant a total of 26,5 new share options, of which 16,5 at a strike price of NOK 45.8 and 1. at a strike price of per share. The following primary insiders were granted share options in the fourth quarter of 217: Dan Cronin (EVP, Engineering) was granted 1, options (45, options) The remaining amount under the 217 board authorisation was 25,25 at the end of the third quarter of

14 Q U A R T E R L Y R E P O R T Q OPTIONS Opening balance Grant of incentive options Exercised incentive options Forfeited incentive options Expired incentive options Adjusted quantity 1 Closing balance Adjusted quantity of 259,844 represents the adjustment for the probability of all conditions related to the granted share options being meet. SHARES WEIGHTED AVERAGE EXERCISE PRICE SHARES WEIGHTED AVERAGE EXERCISE PRICE SHARES WEIGHTED AVERAGE EXERCISE PRICE OPTIONS Outstanding at the beginning of period Granted Exercised Cancelled Forfeited Expired Adjusted quantity Modification / Dividends Outstanding at the end of period Vested options Weighted Average Fair Value of Options Granted during the period Intrinsic value outstanding options at the end of the period Intrinsic value vested options at the end of the period Profit (loss) per share When the period result is a loss, the loss per diluted number of shares shall not be reduced by the higher diluted number of shares but equals the result per basic number of shares. The diluted number of shares has been calculated by the treasury stock method. If the exercise price of incentive options exceeds the average price per share in the period, the incentive options are not counted as being dilutive Profit (loss) attributable to the shareholders (NOK) Number of ordinary shares issue at 31 December Weighted average basic number of shares Weighted average diluted number of shares Profit (loss) per share (NOK)

15 Q U A R T E R L Y R E P O R T Q Related party transactions At the Annual General Meeting in May 217, Tore EtholmIdsøe was elected as chairman of the Board and in accordance with the nomination committee recommendation. The Annual General Meeting decided to approve the monthly consideration of NOK 18, to Tore EtholmIdsøe (through his whollyowned company, Eurostores AS) pursuant to the consulting agreement between Eurostores AS and the Company that applies from the Annual General Meeting in 217 to 3 June Risk management A description of risk factors can be found in Note 2 of NEXT Biometrics Group ASA s 216 annual report. 11. Events occurring after the balance sheet date Between 31 December 217 and the resolution of these condensed consolidated interim financial statements, there has not been any other event which have had any noticeable impact on NEXT s result in the year 217 or the value of the Company s assets and liabilities at 31 December 217. Oslo, February Board of directors NEXT Biometrics Group ASA Tore EtholmIdsøe SvennTore Larsen Brita Eilertsen Chairman Board member Board member Emine Lundkvist Emanuel Lang Ritu Favre Board member Board member CEO 15