Page 1 of 13 Precise Biometrics AB (publ), Corporate Identity no 556545-6596 Interim Report for the Period January June 2006 The Group s net sales for the interim period amounted to SEK 28.9 million (28.5) and for the second quarter SEK 7.9 million (13.7). The result for the interim period was SEK 18.7 million ( 14.1) and for the second quarter SEK 16.9 million ( 5.6). Losses per share for the interim period were SEK 0.26 ( 0.19) and for the second quarter 0.23 ( 0.08). Liquid capital at the close of the interim period was SEK 23.0 million (23.8). Interim Report Second quarter The company received a significant order from Scandinavian Airlines (SAS). A biometric security control system and Precise Biometrics fingerprint readers will be used at baggage check in at domestic SAS flights in Sweden. Precise Biometrics became a founding member of the American HSPD 12 Interoperability Consortium, initiated by SafeNet. The Consortium will act to ensure compliant solutions and education on the US Federal Government s HSPD 12 Directive. The company launched a version of Precise Match on Card that complies with the ANSI 378 standard. This US standard provides an important condition when US authorities introduce smart card based ID cards. The company, in cooperation with the partner Worldwide Trust, won a contract for passports with Precise Match on Card fingerprint biometrics for a European country. Significant events since the end of the quarter Precise Biometrics entered into a business agreement with Oki Electric Co, Ltd, a leading Japanese supplier of electronic and computer technology products. The agreement means that Precise Biometrics technology will be incorporated in one of OKI s new lines. The Board has nominated Thomas Marschall to become the new President and CEO of the company after Christer Bergman, effective November 1 (see separate press release). For further information, please contact: Christer Bergman, President & CEO, Precise Biometrics AB. Telephone +1(0) 703 405 8255, or +46 (0) 730 35 67 26 E-mail christer.bergman@precisebiometrics.com Precise Biometrics AB (publ.) is an innovative security company that supplies world-leading systems for fingerprint and smart card-based authentication. The company s solutions replace keys, PIN codes and passwords and enhance the integrity of ID cards and passports. With its proprietary Precise Match-on- Card technology, the company is a market leader within smart ID cards. Through its subsidiary Fyrplus Teknik, Precise Biometrics can deliver complete biometrics solutions on the Scandinavian market based, for example on fingerprint, iris and facial recognition. The product line includes systems for access control to buildings, computers and networks and for integration into ID cards and passports. The group headquarters are in Lund, Sweden. It also has subsidiaries in London and Washington, DC. The subsidiary Fyrplus Teknik is based in Karlstad and the subsidiary Loqware is based in Gothenburg. Precise Biometrics is listed on the O-list of the Stockholm Stock Exchange (symbol: PREC A). For more information, please visit http://www.precisebiometrics.com/
Page 2 of 13 President s comments on the Interim Report The year began with a positive start in the first quarter with the follow on order from the Thai Government, but sales during the second quarter were less than expected. In particular EMEA and ICAO have not reached expected results. Several projects are now in the pipeline, but they have not yet been finalized as we had anticipated. Although sales decreased during the second quarter, there have been several positive developments. Not least, near the end of the second quarter, we were honored to be selected as the total system supplier to SAS, which is the first airline in the world to implement biometric security control at baggage check in and boarding (on domestic flights). This indicates that Precise Biometrics, together with subsidiary Fyrplus Teknik, takes a leading market position, and we view this order as an important breakthrough on a prioritized market segment. In the national ID card segment we have worked a long time with a strategy emphasizing the importance of forming consortia with complementary companies that also have a strong regional base. The implementation of biometric infrastructures necessary for national ID cards, biometric passports and drivers licenses will require cooperation between different companies. The Qatar order is a result from this kind of cooperation, which we won in the first quarter together with several partners. Also, the license order for a passport project, received recently from a European country, worth SEK 20 million, highlight the importance to cooperate with partners. This order is of great significance to us since it is the first passport project we have won. The order was awarded via partner Worldwide Trust and includes licenses with Precise Match on Card technology for more than 5 million passports. Besides the national ID cards market, the American market showed positive sales development and in particular the Precise 200 MC series fingerprint readers. Moreover, there are strong levels of activity within the US Federal Government heavily centered on the implementation of Personal Identity Verification cards (PIV cards). Towards the end of 2006 a large number of US federal agencies must start issuing smart card based ID cards, PIV cards with biometrics, for its employees, contractors and suppliers. This program has great significance for our continued sales growth. In addition, Precise Biometrics launched Precise Match on Card that is compliant with the ANSI 378 standard that is mandated in the PIV card program. A further development on the American market, at the end of the second quarter, was that Precise Biometrics was chosen as a founding member of HSPD 12 Interoperability Consortium formed by SafeNet. The Consortium will act to ensure compliant solutions and provide education on the HSPD 12 Directive for the US Federal agencies. As the implementation of PIV cards approaches, it is significant that the Consortium can show government agencies how our various components work together. Sales and result Interim period, January June 2006 Sales for the interim period were SEK 28.9 million (28.5). The Group s losses for the interim period were SEK 18.7 million ( 14.1). Operating costs for the interim period, excluding the cost of goods sold, were SEK 35.0 million (25.1), including depreciation and write down of SEK 3.4 million (4.1) and capitalization of costs for development work of SEK 2.1 million (2.9). Earnings per share (average number of shares) during the interim period amounted to SEK 0.26 ( 0.19). Gross margin was 56.8% compared with 39.1% during the corresponding period for the previous year.
Page 3 of 13 Second quarter, April June 2006 Sales during the second quarter were SEK 7.9 million (13.7). Gross margin was 40.5% compared with 51.1% during the corresponding period for the previous year. The Group s net loss during the second quarter was SEK 16.9 million ( 5.6). Operating costs, excluding the cost of goods sold, were SEK 20.1 million (12.5), including depreciation of SEK 1.7 million (2.0) and capitalization of expenses for development work of SEK 1.7 million (1.1). Losses per share (average number of shares) over the second quarter were SEK 0.23 ( 0.08). At the close of the second quarter, the company s order book contained current orders in hand valued at about SEK 2.7 million, excluding signed license agreements. Financing and liquidity Equity, as of June 30, 2006, amounted to SEK 93.5 million (59.5), and the equity/share to SEK 1.28 (0.96). Cash flow for the quarter from current operations amounted to SEK 15.6 million ( 8.4). Liquid assets, at the close of the interim period, were SEK 23.0 million (23.8). Market and sales Americas Sales during the second quarter increased by more than 100 percent compared to the first quarter of the year, principally due to a hardware order of Precise 200 MC from the US Department of State and those pilot projects preparing for the introduction of HSPD 12. Sales for the business area during the interim period were SEK 3.3 million (8.1) and operating loss amounted to SEK 3.0 million ( 0.8). Sales for the business area during the second quarter were SEK 2.4 million (1.9) and operating loss amounted to SEK 1.0 million ( 1.3). EMEA Even though the second quarter was a disappointment regarding revenue, the EMEA Sales Team won orders within the bank and finance segments concerning test projects in Europe. These projects can result in more sales during autumn. Sales for the business area during the interim period were SEK 4.6 million (5.0) and operating loss amounted to SEK 3.5 million ( 1.0). Sales for the business area during the second quarter were SEK 1.0 million (1.7) and operating loss amounted to SEK 2.5 million ( 0.9). National ID Card Group Qatar chose Precise Biometrics solution as the emirate is now implementing national ID cards with biometrics. The population, of approximately 1 million, will be provided with national ID cards with Precise Match on Card technology. The order is expected to be worth between SEK 3 to 4 million and may also include additional follow on orders for maintenance services, hardware and software. At the end of the second quarter, the company received a first order concerning passports with Match on Card for a European country. The order is worth about SEK 20 million.
Page 4 of 13 Sales for the business area during the interim period were SEK 6.2 million (6.0) and operating profit amounted to SEK 4.3 million (4.4). Sales for the business area during the second quarter were SEK 1.8 million (5.8) and operating profit amounted to SEK 0.8 million (4.9). ICAO Systems The most encouraging development during the quarter was Scandinavian Airlines (SAS) choosing Precise Biometrics as the total system supplier for the first airline system in the world to implement biometric security control at baggage check in on domestic flights in Sweden. The biometrics system includes functionality for matching fingerprints, integration with other SAS systems, logging and administration. SAS has selected Precise 250 MC fingerprint readers. Sales for the business area during the interim period were SEK 0.9 million (0.0) and operating loss amounted to SEK 0.3 million ( 1.1). Sales for the business area during the second quarter were SEK 0.3 million (0.0) and operating loss amounted to SEK 0.0 million ( 0.5). Fyrplus The second quarter was weaker than expected, principally because a few long term assignments, has come to an end. The Linköping office was closed down during the second quarter. The most encouraging development during the quarter was Precise Biometrics order from SAS. The order is of great significance to Fyrplus since the subsidiary will be responsible for the overall integration work and act as a consultant during the project. The project is a breakthrough for biometrics as setting a security standard in connection with in air travel. It is a prestigious project. Sales for the business area during the interim period were SEK 8.5 million (9.2) and operating profit amounted to SEK 0.1 million (0.3). Sales for the business area during the second quarter were SEK 4.1 million (4.3) and operating profit amounted to SEK 0.0 million (0.3). Loqware In order to further enhance competence regarding Precise Biometrics technology, Smart Unicorn Solutions (SUS) has undergone a staff training program during the quarter. The training was primarily targeted at Precise Match on Card technology. It was decided that the Gothenburg office will be closed and the operations will move to Precise Biometrics headquarters in Lund. This will streamline the Group s operations and enhance its efficiency in a cost efficient manner. The closing costs amounted to SEK 700 thousands and has effected the result during the second quarter. Sales for the business area during the interim period were SEK 7.8 million and operating profit amounted to SEK 4.9 million. Sales for the business area during the second quarter were SEK 0.0 million and operating profit amounted to SEK 1.5 million.
Page 5 of 13 Future prospects and market trends With the breakthrough order from SAS, Precise Biometrics sees new opportunities within the airline industry. The new demands on security controls posed by the EU means that Precise Biometrics can take advantage of the fact that it already has a solution to offer airlines and expect that it lead to further orders from other airlines in the future. On the national ID cards market, future prospects are considered very good, since there is a market trend with increasingly intense project activities in a number of countries. Even though many projects require political support, which can easily cause delays, the company remain convinced that another 3 4 countries will choose Precise Biometrics technology. As a further step in the partner strategy, at the end of the second quarter, Precise Biometrics became member of the American HSPD 12 Interoperability Consortium. From a market perspective, there are large expectations as to the market development in the US. At the same time as the special requirements in large national projects must be satisfied, Precise Biometrics will continue to work actively to satisfy market demand for cost effective and customer focused biometric solutions. Precise Biometrics ambition is to be a leader in both technology and in creating a strong market acceptance for smart card biometric solutions based on Precise Match on Card. This strategy has been in effect for several years and is now showing results in the form of new orders and a growing market interest. On the Chinese market Precise Biometrics view large future potential in its cooperation with Smart Unicorn Solutions. During the first six months of the year, Precise Biometrics noted increased market activity within several prioritized customer and market segments such as ICAO, NID and PIV in America. It is increasingly apparent that Precise Match on Card technology has reached a leading technological and market position, and that technology is not only increasingly in demand, but also is even a requirement in many projects. Organization and staff Precise Biometrics consists of the parent company, Precise Biometrics AB, with headquarters in Lund, Sweden and subsidiaries Precise Biometrics Inc. (in Washington DC, USA), Precise Biometrics UK Ltd. (in London, England), Precise Biometrics Services AB, Fyrplus Teknik AB (with offices in Karlstad, Sweden) and Loqware Sweden AB (with offices in Gothenburg, Sweden). As of June 30, 2006, the Group had 66 (60) employees, 56 in Sweden, 8 in the USA and 2 in the UK. Of these employees, 50 (47) were men and 16 (13) were women. Investments in fixed capital assets During the interim period, the Group made investments of SEK 0.4 million (0.2) in fixed capital assets. During the second quarter, the Group made investments of SEK 0.2 million (0.0) in fixed capital assets.
Page 6 of 13 Capitalized development work During the interim period, expenses for development work have been capitalized in the order of SEK 2.1 million (2.9). Depreciation and write down of capitalized development work was, during the interim period, SEK 2.9 million (3.2). During the second quarter, development work was capitalized in the order of SEK 1.7 million (1.1). Depreciation and write down of capitalized development work was, during the quarter, SEK 1.5 million (1.7). Patents Precise Biometrics has 25 approved patents, of which 14 is in Sweden. The company currently has 33 patent applications based on 15 inventions. Shares The company shares have been listed on the Stockholm Stock Exchange O list since October 3, 2000. The total number of registered shares at end of the quarter was 72,915,450. During the period, average sales per day were SEK 1,944 thousand, and the listed share price ranged between SEK 4.45 and SEK 7.45. The five largest shareholders as of June 30, 2006 Name Proportion of capital and votes Eden Capital Ltd 8.2 % Odin fonder 5.8 % Storebrand fonder 4.8 % Fjärde AP fonden 4.6 % Banco fonder 3.4 % Source: SIS Ägarservice Parent company The sales for the parent company during the interim period were SEK 13.9 million (16.9). The operating loss during the interim period were SEK 17.8 million ( 9.9). The sales for the parent company during the second quarter were SEK 3.0 million (8.5). The operating loss during the second quarter were SEK 11.1 million ( 3.5). At the end of the interim period, 31 people were employed in the parent company. Liquid funds at the close of the second quarter amounted to SEK 20.3 million (16.3). The parent company has no debts to credit institutions, as of the end of the second quarter. There were investments of SEK 0.4 million (0.2) in fixed capital assets.
Page 7 of 13 During the interim period, expenses for development work have been capitalized in the order of SEK 1.7 million (2.9), which includes SEK 1.4 million (1.1) for the second quarter. Upcoming financial reporting dates Interim Report, January September October 19, 2006 Interim Statement, January December February 8, 2007 Accounting principles This interim report has been drafted in accordance with IAS 34, Interim Reports. For information about applicable accounting principles, please see the company s annual report for 2005. Starting January 1, 2006, the company is applying the amendment to IAS 21 Effects of Changes in Foreign Exchange Rates Net Investment in a Foreign Operation, which entails for the company that certain internally generated exchange rate differences on receivables and liabilities are applied directly against equity and do not appear in the income statement. Previous periods have been recalculated, which entails that the results have been amended but that equity remains unchanged. Otherwise, accounting and valuation principles are unchanged when compared with those used in 2005. Lund, Sweden, July 20, 2006 Christer Bergman, President and CEO, Precise Biometrics AB (publ)
Page 8 of 13 Auditor s Review Report We have reviewed the interim report of Precise Biometrics AB (publ) for the period of January 1 to June 30, 2006. Management is responsible for the preparation and presentation of this interim report in accordance with the Annual Accounts Act and IAS 34, Interim Financial Reporting. Our responsibility is to express a conclusion on this interim financial information based on our review. We conducted our review in accordance with Standard on Review Engagements (SÖG) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by FAR. A review consists of making inquiries, 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 Standards on Auditing in Sweden (RS) and other generally accepted auditing practices. The procedures performed in a review do not enable us to obtain a level of assurance that we would become aware of all significant matters that might be identified in an audit. Therefore, the conclusion expressed based on a review does not give the same level of assurance as a conclusion expressed based on an audit. Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information is not, in all essential respects, prepared in accordance with the Annual Accounts Act and IAS 34. Öhrlings PricewaterhouseCoopers AB Dan Andersson Authorized Public Accountant Åke Christiansson Authorized Public Accountant Auditor in charge
Page 9 of 13 Income Statement, Group (Figures in thousands SEK) Q2 Q2 Q1-Q2 Q1-Q2 Full year 2006 2005 2006 2005 2005 Net sales 7,927 13,726 28,895 28,485 45,053 Cost of goods sold -4,719-6,712-12,474-17,332-28,907 Gross profit/loss 3,208 7,014 16,421 11,153 16,146 Selling expenses -11,343-8,564-21,511-16,200-32,733 Administrative expenses -4,152-2,775-7,344-4,895-10,081 R&D costs -3,138-4,986-6,786-8,818-17,617 Other operating income and changes in value -1,541 3,781-1,687 4,814 3,860 Result from participations in associated companies 68-2,341 - - -20,106-12,544-34,987-25,099-56,571 Operating profit/loss -16,898-5,530-18,566-13,946-40,425 Financial costs 0-58 -151-118 -371 Profit/loss after financial items -16,898-5,588-18,717-14,064-40,796 Tax 5-1 2-2 -238 Profit/loss for the period -16,893-5,589-18,715-14,066-41,034 Results per share, SEK -0.23-0.08-0.26-0.19-0.63
Page 10 of 13 Balance Sheet, Group (Figures in thousands SEK) 6/30/2006 6/30/2005 12/31/2005 Assets Intangible fixed assets 24,837 22,580 25,556 Tangible fixed assets 2,231 1,798 2,312 Financial fixed assets 151-151 Participations in associated companies 34,101 - - Fixed assets held for sales - - 8,752 Inventories 6,809 6,001 8,588 Accounts receivable - trade 18,612 16,302 17,988 Other current receivables 5,504 3,821 3,128 Cash and bank balances 23,021 23,824 59,230 Total assets 115,266 74,326 125,705 Equity and liabilities Equity 93,545 59,536 104,404 Long-term liabilities - 253 - Current liabilities 21,721 14,537 21,301 Total equity and liabilities 115,266 74,326 125,705 Pledged assets 9,115 6,715 9,115 Contingent liabilities - - - Cash Flow Statement, Group (Figures in thousands SEK) Q2 Q2 Q1-Q2 Q1-Q2 Full year 2006 2005 2006 2005 2005 Cash flow from operating activities before changes in working capital -14,344-5,236-16,630-11,193-27,530 Cash flow from changes in working capital -1,266-3,173-551 -8,044-6,993 Cash flow from operating activities -15,610-8,409-17,181-19,237-34,523 Cash flow from investing activities -3,580-1,227-19,028-9,416-21,267 Cash flow from financing activities 29 6,801 0 7,645 70,188 Cash flow for the period -19,161-2,835-36,209-21,008 14,398 Liquid funds at the beginning of the period 42,182 26,659 59,230 44,832 44,832 Liquid funds at the end of the period 23,021 23,824 23,021 23,824 59,230
Page 11 of 13 Key Figures, Group 6/30/2006 6/30/2005 12/31/2005 12/31/2004 Working capital (thousands SEK) 32,225 35,411 67,633 49,326 Liquid ratio 217% 302% 377% 464% Equity/assets ratio 81% 80% 83% 84% Return on average equity - - neg neg Capital employed (thousands SEK) 93,545 59,789 104,404 67,769 Return on capital employed - - neg neg Profit/loss per share (SEK) -0.26-0.19-0.63-0.65 EBITDA (thousands SEK) -15,191-9,895-27,062-25,878 Equity per share (SEK) 1.28 0.96 1.45 1.11 Number of shares 72,915,450 61,965,450 71,790,450 60,915,450 Number of employees at the end of the period 66 60 69 35 Average number of employees during the period 68 60 65 34 Definitions - Key Figures Working capital: Current assets less current liabilities Liquid ratio: Current assets less inventories divided by current liabilities Equity/assets ratio: Equity as of the balance sheet date divided by total assets as of the balance sheet date Return on equity: Profit/loss for the period divided by average equity Capital employed: Balance sheet total minus non-interest-bearing liabilities and provisions The average capital employed has been calculated as initial plus outgoing capital employed divided by two Return on capital employed: Profit/loss after financial items plus financial expenses divided by the average capital employed Profit/loss per share: Profit/loss after tax divided by the average number of shares. The options are not included in the calculation since the subscription price is higher than the market rate at the 30th of June 2006. If all outstanding options are called upon the number of shares will be 74 215 450 EBITDA: Profit/loss before net financial items, depreciations, write-downs and tax Equity per share: Equity at the end of the period divided by the number of shares at the end of the period Quarterly return ratios are not reported. Changes in Equity, Group Q1-Q2 Q1-Q2 Full year (Figures in thousands SEK) 2006 2005 2005 Initial Equity 104,404 67,769 67,769 New share issue 7,819 7,392 76,537 Options - - 262 Translation difference 37-1,559 870 Profit/loss for the period -18,715-14,066-41,034 Equity at the end of the period 93,545 59,536 104,404
Page 12 of 13 Turnover and Profitability by Business Area Q2 2006 (Figures in thousands SEK) Americas EMEA 2) NID 3) ICAO 4) 2006 2005 2006 2005 2006 2005 2006 2005 Net sales 2,386 1,859 993 1,723 1,753 5,818 344 - Expenses 1) -3,411-3,126-3,479-2,642-940 -890-382 -492 Operating profit/loss -1,025-1,267-2,486-919 813 4,928-38 -492 Fyrplus Loqware Others 5) 2006 2005 2006 2005 2006 2005 Net sales 4,060 4,301 - - -1,609 25 Expenses 1) -4,053-4,031-1,529-1,176-964 Operating profit/loss 7 270-1,529 - -433-939 Turnover and Profitability by Business Area Q1-Q2 2006 (Figures in thousands SEK) Americas EMEA 2) NID 3) ICAO 4) 2006 2005 2006 2005 2006 2005 2006 2005 Net sales 3,336 8,079 4,563 4,953 6,213 6,007 916 - Expenses 1) -6,318-8,830-8,107-5,913-1,921-1,638-1,218-1,068 Operating profit/loss -2,982-751 -3,544-960 4,292 4,369-302 -1,068 Fyrplus Loqware Others 5) 2006 2005 2006 2005 2006 2005 Net sales 8,496 9,191 7,800 - -2,429 255 Expenses 1) -8,398-8,849-2,870-1,319-1,432 Operating profit/loss 98 342 4,930 - -1,110-1,177 1) The above expenses include Cost of Goods Sold as well as operation expenses for each business area/unit 2) Europe, Middle East and Africa 3) National ID Card Group 4) International Civil Aviation Organization 5) In Others the Group's elimination of internal sales is included
Page 13 of 13 Further to the publication of this Interim Report, shareholders and journalists are invited to participate in the following information sessions to be held today Telephone conference in English The conference commences at 11.00 (CET) To participate, call +46 (0) 8 672 81 51 Enter password: Precise Biometrics An operator will record your name and provide access to the conference. He or she will also give you information about how to pose questions. Telephone conference in Swedish The conference commences at 12.00 (CET) To participate, call +46 (0) 8 672 81 50 Enter password: Precise Biometrics An operator will record your name and provide access to the conference. He or she will also give you information about how to pose questions. From Precise Biometrics Christer Bergman, President and CEO Niklas Andersson, CFO Ann Sofi Höijenstam, Corporate Communications Manager There is also a presentation available for download from our website, www.precisebiometrics.com For further information, please contact: Christer Bergman, Group President and CEO, Precise Biometrics AB Telephone +46(0)730 35 67 26 or +1 (703) 405-8255 E-mail christer.bergman@precisebiometrics.com Precise Biometrics AB (headquarters) Scheelevägen 19 C 223 70 Lund, SWEDEN Telephone: +46(0)46 31 11 00 Fax: +46(0)46 31 11 01 E-mail: info@precisebiometrics.com Precise Biometrics AB (publ.) is an innovative security company that supplies world-leading systems for fingerprint and smart card-based authentication. The company s solutions replace keys, PIN codes and passwords and enhance the integrity of ID cards and passports. With its proprietary Precise Match-on- Card(TM) technology, the company is a market leader within smart ID cards. Through its subsidiary Fyrplus Teknik, Precise Biometrics can deliver complete biometrics solutions on the Scandinavian market based, for example on fingerprint, iris and facial recognition. The product line includes systems for access control to buildings, computers and networks and for integration into ID cards and passports. The group headquarters are in Lund, Sweden. It also has subsidiaries in London and Washington, DC. The subsidiary Fyrplus Teknik is based in Karlstad and the subsidiary Loqware is based in Gothenburg. Precise Biometrics is listed on the O-list of the Stockholm Stock Exchange (symbol: PREC A). For more information, please visit http://www.precisebiometrics.com/