Embargoed Release: 07:00hrs, Wednesday, 26th November 2008
Block Shield Corporation plc
(`Block Shield', `the Company' or `the Group')
Interim Results
For the six month period ended 31 August 2008
Block Shield Corporation Plc, powering customer innovation through
leading electronics technologies in electromagnetic compatibility (`EMC') and
Radio Frequency Identification (`RFID') applications, is pleased to announce
its interim results for the six month period ended 31 August 2008 (`the
period').
During the period the Group finalised the strategic acquisition of
Mu-Gahat Holdings Inc (`MGH') (together with an associated equity placement),
which has now been completed with the successful integration of both
businesses. The Group also undertook a strategic review of its operations in
response to the integration of MGH and recognising the effect of the
deteriorating macro-economic climate on customer appetite for capital
equipment purchases as well as the continued delay in the mass adoption of
RFID. This review was pertinent and imperative to clearly mapping a way for
the future success of the Group while its implementation has been harsh and
significant to better ensure the achievement of that vision. The
implementation is complete in all material aspects.
Highlights
At Group Level:
- Turnover fell 68% to $1.1 million ($3.4 million H108) due mainly
to the absence of equipment sales during the period. Product and services
sales (i.e. excluding equipment sales) fell 8% to $1.1 million ($1.2 in H108);
- Gross margins were 27% (44% H108) due to the absence of the
higher gross margin yielding equipment sales during the period;
- Strategic acquisition of MGH in June 2008, resulting in the
addition of complementary, patent-pending technologies in laser patterning and
RFID-enabled gaming, along with a synergistic management team;
- Successful commercial launch of our integrated RFID product
business that enables customers to migrate seamlessly from bespoke low volume
prototyping to high volume (at low cost) production orders. The RFID market
overall, however, continues to ramp up more slowly than industry forecasts;
- The appointment of a new Group chief executive officer, Mr. Edwin
Oh, previously a director of MGH;
- Following the period end, the appointment of a new acting chief
financial officer, Mr. Kenneth J. Purfey;
- Successful equity placement in May raising � 4,151,001 (including
the application of �1.5 million of existing loans by Cloverleaf) in
conjunction with the MGH acquisition;
- Sales and marketing and general administrative expenses increased
10% to $2.2 million due to additional expenses associated with the MGH
acquisition and associated capital raising;
- Overall engineering and R&D expenditures decreased by 19% to $1.2
million, reflecting the shift from technology development to
commercialisation;
- Net cash of $2.2 million at August 31, 2008 ($0.45 million at 21
October 2008) with a committed $5 million working capital facility available
for drawdown; and
- Loss before tax of $15.2 million and loss per share was $0.35
($0.07 H108). This was primarily due to writing off the non-cash portion of
MGH's Intangible Assets, specifically Goodwill. Due to the adverse impact of
the economic deterioration in both the U.S. and Asia on customer willingness
to purchase capital equipment items, as well as a continuation of the slower
than expected ramp up in RFID product and equipment sales, the Board decided
that it would be prudent to write down the intangible assets of the Group,
specifically including goodwill of $11.3 million. Less important drivers for
the loss per share included an increase in bad debt reserves, mostly in
relation to the RFMon and Valde receivables and a more conservative approach
towards the carrying value of assets on the Group's balance sheet.
RFID Division:
- Reversal of the RFMon purchase order for the Group's RFID Dedivol
manufacturing module due to the customer's inability to pay, which we believe
is symptomatic of the negative capital equipment purchasing climate; no
revenue was ever recognised for this activity;
- The launch of the `Rfidium' brand, combining the strengths of
WaveZero's and Mu-Gahat's RFID businesses to offer customers a single point
source for end-to-end manufacturing of RFID solutions from prototyping through
to high volume inlay production;
- The release of four new RFID inlay products: the 202 and 202
short for data backup tapes, the Choctaw for pallets, and the Leprechaun for
box-level tagging;
- Subsequent to the period end, the Group's appointment by Impinj,
the leading supplier of UHF RFID chips and readers, as their designated custom
inlay manufacturer; and
- Signing of a formal Industry Solutions Reseller (`ISR') agreement
between Avnet/IBM and our Native American channel partner Mu-Gahat Enterprises
(`Enterprise') supporting deployment of the Group's patent pending
RFID-enabled gaming technology.
EMC Shielding Division:
- Secured an initial six-month blanket purchase order contract to
provide EMC for EMC solutions as part of a multi-year programme with a leading
automotive supplier for its Telematics Automotive Systems division to protect
a United States automaker's voice activated mobile phone and digital music
system that will be installed as standard in a range of car models to be
launched this year;
- Release of a new product - Form/Met Fence and Lid - offering
customers an improved attachment method for automated production;
Mr. Edwin Oh, the Group's President and Chief Executive Officer,
commented:
"Following the acquisition and integration of Mu-Gahat Holdings,
the Board and new management team undertook a comprehensive strategic and
operating review of all of our business activities. As a result, we have
focused Group attention on the highest potential opportunities, specifically
including the delivery of complete RFID antenna/inlay services and RFID
products of interest to the gaming industry, both of which are the result of
technology and know-how secured by the Mu-Gahat Holdings acquisition. Given
the deteriorating economic climate for capital equipment purchases, the Group
has decided to focus less of its finite energies and resources on long lead
time capital equipment sales and more on bringing its application-specific
RFID solutions to market in a timely manner.
As we move into the second half of this year, we are focused on
expanding our RFID distribution network and customer base and bringing to
market our new RFID-enabled gaming products whilst operating within the
financial constraints we face."
For further information contact:
Block Shield Corporation Plc +1 408 830 5100
Edwin Oh, Chief Executive Officer
Kenneth J. Purfey, Interim Chief Financial Officer
Hansard Group 020 7245 1100
Vikki Krause
Ambrian Partners Limited 020 7634 4712
Samantha Harrison
Chairman's Statement
The fiscal half ending 31 August 2008 was a period of significant
changes as the Group restructured to address short-to-midterm market
conditions and position itself positively for future long-term growth.
Post-acquisition Restructuring
The Group appointed a new chief executive officer, Mr. Edwin Oh,
following the strategic acquisition of MGH in June 2008. Mr. Oh was previously
a director of MGH and has particularly relevant experience in the marketing of
new products and technologies and the management of companies undergoing a
market repositioning.
In less than three months, both organisations have been blended to
achieve desired synergies. The RFID and EMC divisions have been restructured
to take advantage of the new RFID capabilities acquired through the
acquisition of MGH, to streamline operations, and to provide enhanced value
and support to the market. We have also reduced headcount by 33% to more
properly size the team to reflect the state of current business and continue
to keep our cost base under review.
Part of the restructuring has involved a new focus on end-user
products as opposed to manufacturing equipment. Whilst the Group remains open
to the sale or lease/license of its EMC and high volume RFID (`Dedivol')
manufacturing equipment, turmoil in the capital markets, and a weakening
market for equipment in China, negatively influenced equipment sales for this
period. Given that we do not foresee a change in either the general capital
markets or the market for equipment in China, and given the highly irregular
nature of both revenue timing and Group resource utilisation, opportunities
for equipment sales will be pursued on a case-by-case basis only. We believe
these changes, whilst painful in the short-term, will provide increased
predictability of business, smoothing of revenues, and enhance our ability to
focus on our core products businesses.
IFRS Migration
Internally, the Group experienced some pains associated with the
transition from UK GAAP to the new IFRS standards resulting in the Group
missing the reporting deadline for the issuance of its statutory accounts for
the year ending 29th February 2009. As a consequence, the Group's shares were
temporarily suspended from AIM during a brief period of time in September,
2008. These accounting transition issues were subsequently dealt with and
trading resumed. On behalf of the Board, I would like to offer my sincere
apologies for this fiasco.
Post-period, the Group's former chief financial officer and
executive director, Mr. Gary Koos, resigned. Mr. Kenneth J. Purfey has been
appointed interim chief financial officer. Mr. David Whelan, the Group's
vice-chairman, has also been appointed to assume financial oversight
responsibilities at the board level with Mr. Purfey reporting to him.
Following his appointment as interim CFO, Mr. Purfey has now
largely completed a review and subsequent upgrade of the Group's internal
accounting policies and risk management processes. We have now instituted
several new internal accounting and financial controls tightening the reins on
expenditures and cash flow, while improving several internal policies and
procedures. I can assure shareholders that we have spent much time working
with new management and our auditors, KPMG, in order to assure that similar
problems and issues along this line do not happen again.
RFID Division
Since we manufactured the first proprietary prototypes of RFID
antennas in October 2004, we have experienced the impact of generalised
uncertainty and slowdown of RFID adoption. On the capital equipment sales
side, the RFMon purchase order for the Dedivol manufacturing module was wholly
derecognised due to the inability of the customer to pay. We believe this is
symptomatic of the negative capital equipment climate. Given that we do not
foresee a positive change in either the general economic climate or the market
for capital equipment purchases in China, and given the highly irregular
nature of both revenue timing and Group resource utilisation, opportunities
for RFID equipment sales will be pursued on a case-by-case basis only. We
still believe that the Dedivol is well positioned to play a major role in the
production of high volume low cost tags when the market for mass RFID retail
applications becomes established.
The market for high value bespoke RFID enabled products and
applications remains buoyant and I am pleased to report that the acquisition
of MGH and subsequent partnership with its surviving independent Native
American organisation have provided both new technologies and new roads to
market which are highly complimentary to our existing assets and, we believe,
position us well for the long-term.
In less than three months, the Group completed technical
synchronisation between MGH's laser process and Dedivol high volume deposition
process, allowing us to provide complete services to customers, from design to
prototyping to high volume production.
Subsequent to the acquisition and combination of capabilities, the
Group launched a new RFID brand - Rfidium - in August 2008. Rfidium provides
complete RFID antenna inlay services, including RFID design, prototyping, low
volume and high volume RFID antenna production. We also released four new
stock inlay products: the 202 and 202 short for data backup tapes, the Choctaw
for pallets, and the Leprechaun for box-level tagging. Moreover, following the
period end, Impinj, the leading supplier of UHF RFID chips and readers
globally, has made Rfidium its designated custom inlay product. Block Shield
also licenses its RFID technologies to provide innovative card, chip, and
associated casino and card room solutions which are manufactured and
represented by Enterprise, a 100% Native American owned company. Enterprise
has signed a formal Industry Solutions Reseller agreement between Avnet/IBM in
support of deployment of the Group's proprietary RFID-enabled gaming
technology, which is currently in alpha customer deployment.
EMC Division
With the acquisition of MGH and subsequent creation of Rfidium, the
WaveZero brand is now focused entirely on EMC products and services.
Similar to the market for RFID equipment, the market for EMC
equipment has also slowed. In relation to EMC equipment sold to RFMon last
year, whilst we continue to work with the customer on its production ramp up,
this project has slowed significantly due to the customer's financial
constraints. In light of this, the Group believes it prudent to take full
reserves against this receivable of $468,000 and has decided that further
opportunities for EMC equipment sales will be pursued on a case-by-case basis
only.
Research and development during the period was primarily related to
improving capabilities with direct customer and prospect impact, such as new
prototyping, surface preparation, and attachment methods.
In October 2008, we signed an initial contract with a leading
automotive supplier to provide vacuum metallised parts for a leading
automotive customer. We have received the initial six-month blanket order
contract for this multi-year programme with a leading automotive supplier,
with first production starting this November. To decrease any production risk
in the event we are unable to fulfill this contract, we are in process of
making back-up and substantive alternative arrangements with well-known and
reliable suppliers.
Our team made progress during the period in securing additional
customer prospects and orders for EMC product. Due to the combination of thin
gross margins across the industry and long lead times associated with
designing in custom solutions for the electronics industry, the EMC product
business continues to struggle to reach breakeven on a fully allocated cost
basis. With current worldwide turmoil in the financial and credit markets we
believe it is also appropriate to discuss our risk management activities and
steps we have taken to mitigate those risks.
Risk Mitigation
The Company is subject to many types of risk, the most prevalent being:
Credit risk. Credit risk refers to the risk that counterparty will
default on its contractual obligations resulting in financial loss to the
company. Credit risk arises from cash balances (including bank deposits and
cash and cash equivalents), as well as credit exposures to customers,
including outstanding receivables and committed transactions. Credit risk is
managed on group basis separately for financial and business related credit
exposures. The Company has implemented many additional accounting policies and
procedures, anti-fraud controls, and new disciplines upon the management and
staff. The Company banks in the United States with Wells Fargo bank and its
accounts are insured to the extent of $250,000 per account. The Company does
not normally keep more than $250,000 in any one account. Accounts receivable
from specific clients are isolated and reserved for either partially or
completely depending on management's credit assessment, with advice from Dun &
Bradstreet. The Company has hired additional accounting and collection staff
to administer and collect late paying accounts and results have been proven by
the collection of many past due accounts.
Currency risk. The Company publishes its consolidated financial
statements in United States dollars. As a result, it is not subject to foreign
currency exchange risk due to exchange rate movements, which will affect the
company's transaction costs and the translation of the results and underlying
net assets of its foreign operations, which are minimal. In September and
October, 2008 the Company transferred the bulk of its Pound Sterling account
to United States dollars, thus avoiding the recent weakness of the Pound
Sterling vs. the United States dollar.
Market risk. Market risk is the risk that the market value of
assets net of liabilities decreases due to changes in interest rates, credit
problems, equity markets, foreign exchange rates, supply/demand issues,
significant sales declines, or other market factors. The market value of
assets, net of liabilities, is measured as an economic view of the company's
equity. A decrease in the market value of assets net of liabilities directly
decreases a company's total value, even if it does not suffer any losses on an
earnings or cash-flow basis. IFRS rules require a Company to evaluate its
major acquisitions upon purchase, and to examine them for impairment of value
on an annual basis. The Company undertook such a process in compliance with
the IFRS rules. An independent consultant valued the Mu-Gahat Holdings
acquisition, and determined that as of August 31, 2008 the purchase
consideration was impaired for the reasons more fully discussed in Note 12.
Consequently, the Company wrote off the Goodwill associated with Mu-Gahat
Holdings.
Prospects and the Future
Following the acquisition and successful integration of MGH, we
undertook a comprehensive strategic review of the Group's operations. In light
of the continued deterioration in the global economy and specifically the
ability of customers to obtain finance to support purchases of expensive
capital equipment in immature markets, we have conservatively assumed that the
market for RFID and EMC equipment sales will uptake more slowly than
originally envisioned. As indicated above, irrespective of the determination
and hard work displayed by our team, the EMC product business remains
sub-scale. It is our intention therefore, to dispose of or close the division
in an orderly manner. The Company is actively exploring all options so as to
focus its finite financial and human resources on the most attractive and
near-term revenue opportunities.
The timing and outcome of the strategic review could not have come
to the Group at a more opportune time in light of macro economic events. As
consequence of this and the MGH acquisition, we have focused our commercial
efforts on high-value and near term RFID products and applications. During the
second half we expect to announce the results of a number of such initiatives
nurtured through the MGH acquisition, including completion of the alpha
testing of certain of our RFID gaming applications which, if successful, will
result in the generation of some long-term volume orders. Whilst these will
not ramp up until late 2009, we are optimistic that we will achieve reasonable
and steady growth in our core RFID inlay operations during the remainder of
the current financial year.
In the longer term, although we are ultimately dependent on an
improvement in the economic climate we believe that that our hard
restructuring, together with the synergistic acquisition of MGH and the
strengthening of our financial discipline should maximise the prospects for
longer-term growth.
Michael Fitzgerald
Interim Results for the six month period ended 31st August 2008
Consolidated Interim Income Statement
Unaudited Unaudited Audited
Note Six Six 12
months Ended months Ended Months Ended
31 August 08 31 August 07 29 Feb
US$000 US$000 08
US$000
Revenue 5 1,136 3,357 5,744
Cost of Sales (828) (1,878) (3,094)
Gross Profit 308 1,479 2,650
Administrative expenses before research and development
expenses:
-Equity settled share-based payment expenses (89) (354) (499)
-Other administrative expenses (2,407) (1,935) (4,364)
Administrative expenses before research and development (2,496) (2,289) (4,863)
Administrative expenses- research and development expenses (1,193) (1,483) (2,897)
Total administrative expenses (3,689) (3,772) (7,760)
Other operating expense (500) (6) -
Exceptional Item - Impairment reserve 12 (11,269)
Operating loss before interest and taxes (15,150) (2,299) (5,110)
Finance income - 5 5
Finance expenses (55) (14) (62)
Loss before tax (15,205) (2,308) (5,167)
Income tax 3 - - (2)
- -
Loss for the period attributable to equity holders of the parent (15,205) (2,308) (5,169)
Basic and fully diluted loss per share 4 (0.35) (0.07) (0.15)
Consolidated Interim Balance Sheet
Unaudited as Unaudited as Audited
Note at 31 Aug 08 at 31 Aug 07 as
US$000 US$000 at 29 Feb 08
US$000
Assets
Non-current assets
Intangible assets 6 3,951 1,217 1,164
Property, plant and equipment 1,323 1,425 1,222
Other note receivables 13 5,347 - -
Total non-current assets 10,621 2,642 2,386
Current assets
Inventories 1,572 270 1,555
Trade and other receivables 7 1,751 3,447 3,005
Cash and cash equivalents 2,214 556 304
Total current assets 5,537 4,273 4,864
TOTAL ASSETS 16,158 6,915 7,250
Liabilities
Current liabilities 8
Interest bearing loans and borrowings - 1 -
Trade and other payables 2,404 1,636 2,693
Deferred Income 140 - 140
Total current liabilities 2,544 1,637 2,833
Non-current liabilities 9
Interest bearing loans and borrowings - 1,150 2,923
Total non-current liabilities - 1,150 2,923
TOTAL LIABILITIES 2,544 2,787 5,756
Equity
Called up share capital 10 1,297 604 611
Share premium account 10 46,362 19,737 19,812
Merger reserve 10 7,227 7,227 7,227
Retained earnings (41,272) (23,440) (26,156)
TOTAL EQUITY 13,614 4,128 1,494
TOTAL EQUITY AND LIABILITIES 16,158 6,915 7,250
Consolidated Interim Statement of Changes in Equity
Merger Share Share Retained
Reserve Capital Premium earnings
US$ US$ US$ US$ TOTAL
Equity as at 1 March 2007 7,227 602 19,595 (21,486) 5,938
Retained loss for the year - - (5,169) (5,169)
New share capital issue (net of related costs)
- 9 217 - 226
IFRS2 equity settled options - - - 499 499
Equity as at 29 February 2008 7,227 611 19,812 (26,156) 1,494
Equity as at 1 March 2008 7,227 611 19,812 (26,156) 1,494
Retained loss for the six months - - - (15,205) (15,205)
New share capital issue (net of related costs)
for financing - 686 26,550 - 27,236
New share capital issue (net of related costs)
for acquisition
IFRS2 equity settled options 89 89
Equity as at 31 August 2008 7,227 1,297 46,362 (41,272) 13,614
Consolidated Interim Statement of Cash Flows
Unaudited Unaudited Audited
Six months Ended Six 12 Months Ended
31 August 08 months Ended 29 Feb 08
US$000 31 August 07
US$000 US$000
Cash flows from operating activities
Operating loss before interest and taxes (15,150) (2,299) (5,110)
Depreciation charge and valuation reserves 202 266 509
Impairment reserve 11,269 - -
Financial income - - 5
Financial expense - - -
Equity settled share-based payment expenses 89 354 499
Operating loss before changes in working capital and
provisions (3,590) (1,679) (4,097)
Decrease in trade and other receivables
1,254 826 1,267
Decrease/(increase) in inventories (17) 167 (1,118)
Increase/(decrease) in trade and other payables
(344) (951) 43
(Decrease)/increase in deferred revenue 140
Cash used in operations (2,697) (1,637) (3,765)
Finance costs - (14) -
Interest income received - 5 -
Income taxes paid - - (2)
Net cash used in operating activities (2,697) (1,646) (3,767)
Cash flows from investing activities
Acquisition of property, plant and equipment (281) (114) (104)
Acquisition of intangible assets (14,077) (82) (78)
Acquisition of other notes receivable (5,347)
Net cash from investing activities (19,705) (196) (182)
Cash flows from financing activities
Cash receipt from issue of share capital 27,545 144 226
Issue costs relating to share issue (310) - -
Proceeds from new loan - 650 2,423
Repayment of borrowings (2,923) - -
Payment of finance lease liabilities - (1) (1)
Net cash from financing activities 24,312 793 2,648
Net (decrease)/increase in cash and cash equivalents in
the period 1,910 (1,049) (1,301)
Cash and cash equivalents at start of period 304 1,605 1,605
Cash and cash equivalents at end of period 2,214 556 304
Notes to the Interim Results
1. Analysis of net funds
29 Feb 08 Cash 31 Aug
flow 08
US$000 US$000 US$000
Cash at bank, in hand 304 1,910 2,214
304 1,910 2,214
Debt due after one year (2,923) 2,923 -
Debt due within one year - - -
(2,923) 2,923 -
Net funds / (debt) (2,619) 4,833 2,214
2. Basis of preparation
The condensed consolidated interim financial statements for the six
months ended August 31, 2008 have been prepared under applicable International
Financial Reporting Standards (IFRS) adopted by the European Union which
include International Accounting Standards (IAS) and interpretations issued by
the International Accounting Standards Board (IASB) and its committees, which
are expected to be endorsed by the European Union.
The financial information included in this document is unaudited
and does not comprise statutory accounts within the meaning of section 240 of
the Companies Act 1985. The comparative figures for the year ended February
29, 2008 are extracted from the statutory financial statements for that
financial period which have been filed with the Registrar of Companies and on
which the auditor gave an unqualified report, without any statement under
section 237(2) or (3) of the Companies Act 1985.
The accounting policies applied by the Group in these Consolidated
Interim Financial Statements are the same as those applied by the Group in its
Consolidated Financial Statements for the year ended February 29, 2008.
3. Taxation
The Group had tax losses at February 29, 2008, which have been
carried forward. The losses carried forward have a tax value of US$5,684,000
at February 29, 2008 (February 28, 2007: US$4,246,000) and have not been
recognised as a deferred tax asset due to the uncertainty of their eventual
crystallisation. This will be reassessed at each period end.
4. Loss Per Share
Loss per share is based on the loss after tax of US$15,205,000
(February 29, 2008: loss of US$5,169,000; August 31, 2007: loss of
US$2,308,000) divided by the weighted average number of Ordinary shares in
issue in each of the relevant periods; August 31, 2008: 42,852,366 shares
(February 29, 2008: 33,388,861shares; August 31, 2007: 33,278,634). The
weighted average number of Ordinary shares used for the diluted loss per share
calculation is the same as the ordinary loss per share calculation and does
not include the conversion of any options or warrants since the effect of
these would be anti-dilutive
5. Revenue and segmental analysis
Revenue represents the amount receivable for good and services to
third party customers (excluding sales tax) and sales commissions.
The directors considers that the group has two business segments
which is the provision of innovative solutions and products which control
radio frequency (`RF') emissions for the purpose of achieving electromagnetic
compatibility (`EMC') of electronic circuits and equipment as well as for
implementing RF identification (`RFID') Tags. The administrative expenses and
research and development expenses are centralised and have not been allocated
to revenue category or by geographical destination of sales.
The revenue, gross profit and net assets by business segments are
as follows:
Unaudited Unaudited Audited Unaudited Unaudited Audited Unaudited Unaudited Audited
Six months Six months 12 months Six months Six months 12 months Six months Six months 12 months
Ended Ended Ended Ended Ended Ended Ended Ended Ended
31 Aug 08 31 Aug 07 29 Feb 08 31 Aug 08 31 Aug 07 29 Feb 08 31 Aug 08 31 Aug 07 29 Feb 08
US$000 US$000 US$000 US$000 US$000 US$000 US$000 US$000 US$000
EMC EMC EMC RFID RFID RFID Total Total Total
Segment
Revenue 1,068 3,357 5,744 68 - - 1,136 3,357 5,744
Segment
Gross Margin 279 1,479 2,650 29 - - 308 1,479 2,650
Segment
Operating costs 353 (755) 353 (755)
Unallocated
expenses (15,128) (3,778) (7,005)
Total
Operating (15,150) (2,299) (5,110)
loss
Segment assets 2,324 2,579 4,220 9,869 1,350 12,193 3,013 5,570
Unallocated
assets 3,965 - 1,680
Segment
liabilities (140) (1,391) (692) - (100) (750) (140) (1,491) (1,442)
Unallocated
liabilities (2,404) (4,314)
Segment
net assets/
(liabilities) 2,184 1,188 (882) 9,869 334 2,613 12,053 1,522 4,128
Unallocated net
assets 1,561 2,606 (2,634)
Net assets/
(liabilities) 13,614 4,128 1,494
Summary of the group revenue for the periods by geographical
destination, all of which originates from the US:
Unaudited Unaudited Audited
Six Six Twelve Months
Months Ended Months Ended Ended 29 Feb 08
31 Aug 08 31 Aug 07
US$000 US$000 US$000
US 1,136 1,307 3,694
Asia - 50 50
Europe - 2,000 2,000
Total 1,136 3,357 5,744
6. Intangible assets
Concessions, patents,
licenses, trade marks
and similar rights and
assets
Goodwill Total
US$000 US$000 US$000
Carrying amount at 1 March 2007 784 403 1,187
Additions for the year 78 - 78
Amortisation for the year (101) - (101)
Carrying amount at 29 February 2008 761 403 1,164
Additions for the six months 2,808 11,269 14,077
Amortisation for the six months (21) - (21)
Impairment reserve - (11,269) (11,269)
Carrying amount at 31 August 2008 3,548 403 3,951
7. Trade and other receivables
Unaudited Unaudited Audited
as at as at as at
31 Aug 08 31 Aug 07 29 Feb 08
US$000 US$000 US$000
Trade receivables 1,438 3,251 2,830
Other receivables 212 72 45
Prepayments and accrued income 101 124 130
1,751 3,447 3,005
8. Current liabilities
Unaudited Unaudited Audited
as at as at as at
31 Aug 08 31 Aug 07 29 Feb 08
US$000 US$000 US$000
Obligations under finance leases and hire purchase contracts
- 1 -
Interest bearing loans and borrowings - - -
Trade payables 2,404 1,491 2,693
Other payables including taxation & social security
- - -
Accruals and deferred income 140 145 140
2,544 1,637 2,833
9. Non current liabilities
Unaudited Unaudited Audited
as at as at as at
31 Aug 08 31 Aug 07 29 Feb 08
US$000 US$000 US$000
Interest bearing loans and borrowings - 1,150 2,923
- 1,150 2,923
Cloverleaf Holdings Ltd., a company controlled by Mr. Fitzgerald,
has made available a facility of US$5,000,000 to the Company. The facility is
unsecured, carries interest at US LIBOR plus 1%, penalty interest at LIBOR
plus 3% and is repayable on December 31, 2009. The balance due at August 31,
2008 was nil (February 29, 2008: US$ 2,923,000; August 31, 2007: 1,150,000).
Interest charged during the period to August 31, 2008 was US$33,917 (February
28, 2008: US$ 55,926; August 31, 2007: US$14,373). No penalty interest accrued
during the period.
10. Reserves and movements in equity
During the period from March 1, 2008 to August 31, 2008, 125,000
shares were issued to Directors and employees of the Company in lieu of their
annual fees and remuneration for the period. The Directors and employees
subscribed to the shares at a price of 58 pence per share.
As part of the acquisition of Mu-Gahat Holdings Inc., which is
discussed in more detail in note 11 below, there were 29,605,263 shares of
common stock issued, at a price per share of 33 pence. The common stock
consideration amount of this share issue was US$19,539,000. In addition, the
company assumed the liabilities of Mu-Gahat Holdings Inc. of $619,000 which
brought the total acquisition consideration to $20,158,000
The Company raised �4,151,001 (US$8,302,000), before expenses,
through a placing of 12,578,791 new ordinary shares of 33 pence each in the
Company. As part of the placing, Cloverleaf Holdings Limited (`Cloverleaf')
agreed that the unsecured loans of �1,500,000 (US$3,000,000) which it had made
to the Company were to be applied to subscribe for 4,545,455 new ordinary
shares
Following admission, the total issued share capital of the Company
has increased to 76,066,926 ordinary shares of 1p each.
11. Related party disclosures
Cloverleaf Holdings Ltd., a company controlled by Mr. Fitzgerald,
has made available a facility of US$5,000,000 to the Company. The facility is
unsecured, carries interest at US LIBOR plus 1%, penalty interest at LIBOR
plus 3% and is repayable on December 31, 2009. The balance due at August 31,
2008 was nil (February 29, 2008: US$ 2,923,000; August 31, 2007:
US$1,150,000). Interest charged during the period to August 31, 2008 was
US$33,917 (February 29, 2008: US$ 55,926; August 31, 2007: US$14,373). No
penalty interest accrued during the period.
During the six month period ended August 31 2007, the Company sold
equipment in the value of US$ 1,980,000 (12 month period ended February 29,
2008: US$ 1,980,000) to Transat Ltd., a company based in Monaco. Both Transat
Ltd. and Mu-Gahat Holdings share a common controlling interest administered by
Mr. Antoine Awad. As noted above Mu-Gahat Holdings was acquired by the Group
on June 13, 2008. As at August 31, 2008, US$717,400 (February 29, 2008:
US$1,186,000; August 31, 2007: US$1,780,000) was due from Transat Ltd. to the
Group. These sales were deemed to be at the fair market value of the
equipment. On Oct 4, 2008, Mr. Awad subsequently confirmed the amount and
value of the receivable of $717,400.
12. Acquisition
The Company acquired the entire issued share capital of Mu-Gahat
Holdings Inc (`Mu-Gahat'), a developer and producer of custom RFID and gaming
technology solutions, for a total consideration of 29,605,263 ordinary shares
of 33 pence each in the Company. The total share consideration amount of this
issue was US$19,539,000. When including the total liabilities assumed by the
company of $618,000 the total purchase consideration was $20,158,000. The
acquisition of Mu-Gahat was finalised June 13, 2008.
The Company raised �4,151,001 (US$8,302,000), before expenses,
through a placing of 12,578,791 new ordinary shares of 33 pence each in the
Company. As part of the placing, Cloverleaf Holdings Limited ("Cloverleaf")
agreed that the unsecured loans of �1,500,000 (US$3,000,000) which it had made
to the Company were to be applied to subscribe for 4,545,455 new ordinary
shares. The net proceeds of the placing were used to purchase process
equipment inventory and fund the accelerated rollout of Mu-Gahat's RFID gaming
technology, to repay the balance of the outstanding Cloverleaf loans and
interest (totaling approximately �1,500,000, or US$3,000,000) and for the
general working capital purposes of the enlarged Company including increased
sales and marketing efforts. Ambrian Partners Limited, the NOMAD for the
Company, acted as placing agent for the Company. The financing was finalised
June 13, 2008.
In accordance with paragraph 66 of IFRS 3 - Business Combinations,
the group is providing the following information with respect to the assets
and liabilities acquired, and the value that has been allocated to the various
assets.
The company engaged Global View Advisors, an independent valuation
consultant agency, to evaluate the values involved with the acquisition.
The following table shows the allocation of the purchase price of
Mu-Gahat Holdings as suggested by Global View, and as implement by the
company:
Allocation at
June 13, 2008
Purchase price allocated to: US$000
TANGIBLES:
Net Working Capital 5,216
Fixed Assets 246
INTANGIBLES:
Laser Ablation Control & Software System 989
Film Development Process Technology 923
Patents 568
RFID Gaming System 328
Goodwill 11,269
Purchase Consideration - In Shares 19,539
Liabilities Assumed 619
Total purchase price of Mu-Gahat Holdings 20,158
Under International Accounting Standard (IAS) 36, an asset is
impaired when its carrying value exceeds its recoverable value. An entity is
required to assess at the end of each reporting period whether there is any
indication that an asset may be impaired. If any such indication exists, the
entity shall estimate the recoverable amount of the asset. The entity shall
also test Goodwill acquired in a business combination for impairment on a
regular basis.
As of August 31, 2008, an impairment review was performed by Global
View Advisors, an independent valuation consultant, on the carrying values of
the purchased assets. Their conclusion, which the company has adopted, was
that the Intangibles were not impaired, but that Goodwill was materially
impaired and that the carrying value of the Goodwill should be written off.
The impairment reserve to write down the value was US$11,269,000, and this
amount was charged to the profit and loss statement.
The reasons for this impairment were due to several global and
macroeconomic factors which began to collide in the spring and summer of 2008
to form a perfect storm capable of having a major impact on the US economy.
These macroeconomic factors included dramatically higher worldwide energy
prices, weakness of the US dollar, sub-prime mortgage crises leading to a
virtual shut down of worldwide credit markets, growing unemployment, multiple
bankruptcies, loss of investor confidence in the stock market, slowness of
government reactions, and overall worldwide tensions. Taken together these
factors caused a loss of consumer and business confidence in the stock, bond,
and credit markets and a subsequent 40% depression of stock prices as measured
by the Dow-Jones averages. With higher costs, less confidence, and a weaker
outlook, business and consumers alike began to cut back on spending causing a
recession-like decrease in demand for the company's products and services with
the consequent reduction in both current and future sales. Accordingly, with a
much weaker outlook for revenue and earnings, the value of Mu-Gahat Holdings
became impaired and diminished by approximately $11.3 million within a short
period of time. This amount represents about 55% of the value of Mu-Gahat
assets originally acquired June 13, 2008.
13. Promissory Note From MGE
In May, 2008 and prior to the acquisition of Mu-Gahat Holdings Inc.
(`MGH') by Block Shield Corporation plc (`BLS'), Mu-Gahat Enterprises (`MGE')
funded its initial working capital and capital expenditure needs via a $5
million Note Receivable from MGH to MGE. Upon acquisition, BLS acquired the
Note, along with the other assets of MGH. The Note is for 5-Years and $5
million established on arm's length commercial terms. It is a relatively
straightforward interest bearing term Note at the rate of 10% per annum simple
interest on the outstanding balance, with no prepayment penalties, due and
payable January 31, 2013. There are no equity or voting rights associated with
it.
While there are no firm scheduled repayment amounts, BLS intends to
be repaid through the commercialisation of the RFID Gaming Systems being
developed by MGE. MGE has been awarded a substantial contingent purchase
agreement from a card room developer and is currently in "beta" testing with
that developer. While no guarantee of successful beta testing can be made,
results to date are promising. MGE has contractual responsibilities to pay to
MGH a royalty based upon a percentage of Gross Margins from successful
implementation of the RFID Gaming System. Management anticipates that
repayments of the Note will begin after proven successful commercialisation of
the gaming system occurs in late 2009 or 2010. While the programme is in beta
testing there is still uncertainty of the commercialisation of the gaming
system and therefore the timing and ability of MGE to generate returns
sufficient to repay the loan is largely undetermined. However, management is
monitoring the testing results on a daily basis and hope to have positive news
in the coming months. In the short-term, the developer is reimbursing MGE the
testing costs, and in the long-run, the Company has been contacted by multiple
additional gaming system customers who are anxiously awaiting these test
results.
The addressable market potential of this system is over 28,000
gaming tables worldwide and could be as large at $600 million per annum. It is
the Company's intention, via its exclusive relationship with MGE, to pursue
the Native American tables first, followed by California and Nevada tables,
which comprise the bulk of the US market. A moderate penetration of the US
market alone should be more than sufficient to repay the $5 million Note.
END
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