Audited Final Results

RNS Number : 8187I

Quixant PLC

06 April 2020

 

6 April 2020

Quixant plc

("Quixant" or the "Group")

Audited Final Results

Quixant (AIM: QXT), a leading provider of innovative, highly engineered technology products principally for the global gaming and broadcast industries, announces that further to the trading update provided on 31 March 2020, the Group publishes its audited full year results for the 12 months ended 31 December 2019.

FINANCIAL HIGHLIGHTS

· Revenue decline of 20% to $92.3 million (2018: $115.2 million)

o  Quixant Gaming division revenue $56.2m (2018: $77.6m)

§ Gaming Platforms revenue $46.6m (2018: $62.5m)

§ Gaming Monitors revenue $9.6m (2018: $15.1m)

o  Densitron division revenue of $36.2m (2018: $37.5m)

· Adjusted¹ pre-tax profit of $10.7m (2018: $18.2m)

· Pre-tax profit of $9.4m (2018: $14.3m) 

· Adjusted² diluted EPS $0.139/share (2018: $0.260/share)

· Diluted EPS of $0.124/share (2018: $0.213/share)

· Net cash from operating activities up 33% to $14.9m (2018: $11.3m)

· Net cash at period end of $16.1m (2018: $9.7m)

· Covid-19 presents a material uncertainty to the Group's future operations

1.  Adjusted by adding back items included in the adjusted PBT reconciliation in note 2 to the financial statements totalling $1.3m (2018: $3.9m).

2.  Adjusted by adding back the items included in note 1 above and subtracting the associated tax effect as set out in note 3 to the financial statements. In 2019 these amounted to $1.0m (2018: $3.1m).

OPERATIONAL HIGHLIGHTS

· Revenue decline in Gaming due to major customers facing stiff competition which has led to a reduction in demand for our products.

· No major customers lost during the year.

· New products launched by Densitron to target the broadcast market expected to generate revenue in 2020 and increased pipeline of new business of $12m.

· Appointment of key senior management, including a Densitron Managing Director, Densitron Product Director, Gaming Product Director and a new Gaming Global Sales Director.

· Enhanced systems and sales discipline to improve revenue visibility.

· Acquisition of IDS to enhance Densitron product offering in Broadcast sector

· Unpredictability in 2020 and beyond due to the impact of Coronavirus/Covid-19

For further information please contact:

Quixant plc	Tel: [phone]
Jon Jayal, Chief Executive Officer Guy Millward, Chief Financial Officer
Nominated Adviser and Broker:
finnCap Ltd	Tel: [phone]
Matt Goode / Simon Hicks (Corporate Finance)
Alice Lane (Corporate Broking)
Financial PR:	Tel: [phone]
Alma PR
John Coles / Hilary Buchanan

About Quixant

Quixant, founded in 2005, designs and manufactures highly optimised computing solutions and monitors principally for the global gaming industry. The Company is headquartered in Cambridge in the UK where the global sales function is based. North America sales and sales support is run from their subsidiary in Las Vegas. Quixant has its own manufacturing and engineering operation based in Taiwan and software engineering and customer support team based in Italy. All the specialised products software and manufacturing are produced in-house and Quixant owns all its own IP some of which is protected by patents and design rights.

In November 2015 Quixant acquired Densitron Technologies plc. Densitron has a strong heritage in the sale of electronic display solutions to global industrial markets. Through Densitron's experienced sales team, Quixant has a robust platform to build its business into wider industrial markets. In-depth information on the Company's products, markets, activities and history can be found on the corporate website at www.quixant.com.

CHAIRMAN'S STATEMENT

First year of reduced revenue in the company's history masks strengthened underlying business

Against the backdrop of a significant softening in some of our largest gaming customers' businesses, unfortunately I am reporting to you the first year in Quixant's history in which the business has seen a fall in revenue and profit.  While clearly disappointing, we are confident in the business' ability to deliver growth and have made significant steps in the year to address areas of weakness. 

Intense competition among the gaming machine manufacturers has reduced demand for some of our largest customers' machines and consequentially impacted demand for our gaming platforms and monitors.  The outlook for the industry, however, remains buoyant with significant long-term opportunities and we continue to see evidence of the outsource trend which has fuelled our gaming division growth over the last 15 years.  We believe long-term this intense competition will lead to more business opportunities as new customers seek to streamline their businesses.  We have taken steps during the year to improve our revenue visibility to be more equipped to predict such shocks in our customer demand. 

Our Densitron Broadcast strategy remains very positive as we start to see the first revenue being generated from the new business pipeline which continues to grow.

We delivered strong cash generation in the year, despite lower than anticipated profits and as a result we end the year with an extremely strong balance sheet with a healthy net cash position.  Given the current Covid-19 situation, the Board will review whether it is able to pay an interim dividend later in the year.

Gaye Hudson has decided to step down from the Board at the AGM in 2020.  I would like to take this opportunity to thank Gaye for her contribution to Quixant over the last three years.  The Board will begin a search for a new non-executive immediately.  At the end of May 2020, JJ (C-T) Lin will also step down from the board and Nick Jarmany and Gary Mullins will become non-executive directors.  JJ was the founder of Quixant's operation in Thailand, is responsible for much of Quixant's success over the years and is still a large shareholder.  I would like to thank him for his massive contribution over many years.

Our future outlook remains positive and we believe that the business is well progressed in moving towards a more diversified series of growth drivers.  A robust start to 2020 is tempered by the unpredictability for the full year due to Coronavirus' impact across the Gaming business and the industrial sectors Densitron supplies into.  We are closely monitoring the situation on our business from a demand and supply side and have executed a number of contingency plans to mitigate the risk to our staff and our financial performance.  Despite these, we expect continued challenges with the business throughout 2020 as a result of the virus outbreak. 

Michael Peagram
Chairman

 

CHIEF EXECUTIVE'S REPORT

COVID-19 - Impact Assessment

It is clear that the COVID-19 pandemic will have a significant impact on the business and consequently we have taken a number of actions to weather the storm. When the pandemic first appeared in China, the initial threat was to our supply chain.  It is now very clear that the risk to customer demand is by far our greatest challenge and we are prepared for a significant downturn in sales for the duration of the pandemic.

We have no experience of a similar crisis so it is difficult to accurately predict the extent that the effect of COVID-19 will have on our revenues. It is not yet clear how widespread the virus will become, how long the pandemic will last and what the medium to long term effect of this pandemic will be on consumer and business behaviour. 

The global technology industry relies almost entirely on Far Eastern manufacturing for the electronic components used in its products.  We manufacture our Gaming division products in Taiwan which has skilfully handled the outbreak and therefore seen limited impact from reduced manufacturing capacity.  However, many of the components which are used on the gaming manufacturing lines are sourced from China and we have therefore suffered some delays in the delivery of such components in the first quarter.  Densitron saw a more direct and immediate supply side impact from the COVID-19 outbreak.  Many of the products in the Densitron business are manufactured in China in factories which were operating at a fraction of their normal capacity during February. 

The Chinese government's rapid and weighty response to the outbreak has meant that capacity returned very quickly to most of our suppliers over the course of February and into March and we have seen an ongoing improvement in the delivery dates we can quote customers.  Our strategic stock holding and the intelligent handling of the outbreak by the Taiwanese authorities has meant our production impact has been minimised.  We are continuing to monitor the effects on our manufacturing capability.

With a return to relative normality on the supply side, we are now focused on customer demand.  The impact of Macau closing for two weeks immediately after the Chinese New Year holiday was an 88% reduction in overall gaming revenues in February in the territory (a fall of around $2.8bn compared to prior year).  As COVID-19 has spread outside Asia, we have now started to see the impact on the key Australian and American casino markets with MGM Resorts and Wynn closing down their Las Vegas resorts for an indeterminate period.  On 17 March there was a state directive for all gaming machines in Nevada to be switched off for 30 days.  We have since seen other markets such as the US tribal gaming market and the Australian market closing down their operations.  Globally, we are seeing the few gaming venues which haven't closed applying severe restrictions and "distancing measures" (turning off every other machine to distance players from one another).  This loss in casino revenues is already weighing heavily on our customers' income and longer term will likely weigh on demand for new machines and therefore our customers' consumption of our products this year.

From a position where the focus was on our ability to meet expected delivery dates, the Densitron business has seen the first signs of customers looking to postpone/cancel orders as their manufacturing facilities close and demand for products across most industrial markets reduces.  We have nonetheless seen continued demand in certain sectors and have been actively offering help to our medical customers to source components where they have faced challenges.

We have been in constant dialogue with customers to understand the direct impact on our Gaming Division at a senior management level.  Given the greater unpredictability around lead-times, we have been seeking orders further out into the year to solidify deliveries.  Gradually we are forming a clearer picture of their short term (next few months') demand which unsurprisingly has been significantly reduced.  The uncertainty principally relates to the outlook for the second half which will be heavily influenced by governments' response to the crisis.  Some Densitron customers have signalled reduced demand and requested postponed deliveries while others have continued or even accelerated demand. 

Our priority is to do all we can to keep our offices as safe as possible for customers and staff. At the same time, we must prepare the business for varying levels of sales declines. To that end we have modelled the effects of differing levels of sales declines along with all the measures we can take to ensure that the Company remains within its cash and bank facilities, and have prepared cash flow forecasts for a period in excess of 12 months.

The Board's central case scenario is based on the existing debts being recovered, irrevocable sales orders already received from customers and their related costs of sales being fulfilled, and an assumption that we will only recover 50% of debts from these new fulfilments. Under this scenario, the Group would have sufficient funding to pay existing overheads without reducing them until the second half of 2021.  The analyses depend greatly on the amount of orders assumed to be collectable in cash, major changes to this could significantly change the result.  In all scenarios considered the Board assumed that the Group's medical sector revenues did not stop, including revenues from displays sold as components for ventilators.

The Board's severe downside forecasts are based on a scenario where customers stop paying entirely for new orders delivered from April 2020 onwards and do not begin buying any further goods until December 2020. Orders delivered and invoiced up to the end of Q1 2020 are assumed to be paid for.  Cost reductions can be made to offset this reduction in cash receipts by a 25% reduction in staff costs and a reasonable reduction in other controllable costs. The Group have a $3.0m loan facility in Taiwan that is currently undrawn and is part of the mortgage on the Group's property in Taiwan. In this scenario, the Group have sufficient cash until March 2021 without drawing on its bank facilities. The Board therefore consider that the Group's strong balance sheet and material net cash position means it is well positioned to navigate through the impact of COVID-19.

While the Directors' have no reason to believe that customer revenues and receipts will decline to the point that the Group no longer has sufficient resources to fund its operations, should this occur, the group may need to seek additional funding beyond the facilities that are currently available to it, as well as making significant reductions in its fixed cost expenses.  There would be an opportunity to mortgage or sell certain property and inventory assets to accelerate cash generation and/or mitigate risk, but in the economic environment that would see customer revenues and receipts decline severely, such sales would be likely to be difficult to achieve.  The potential impact of changes in assumptions arising from matters outside the Group's control, or the unlikely event of a culmination of events, may result in the group requiring additional working capital beyond the group's existing facilities. 

2019 Review

Looking back to last year, despite 2019 having been a challenging year financially for the Group, we took significant steps to improve the business and the fundamentals which underpin our growth opportunity remain intact.  In the year, Group revenues fell by 20% to $92.3m due to an unexpected and pronounced decline in expected consumption from some of our bellwether gaming customers.  Most of this loss of revenue has been due to these customers experiencing fierce competition, reducing demand for their machines and hence their production volumes with the consequential effect on demand for Quixant's gaming products integrated into their machines.  While we have continued to drive revenue from new customers it has been insufficient to offset declines in our established customer base. 

Densitron performed in line with expectations in 2019, delivering broadly flat year on year revenue despite us closing the non-performing Nordic business.  Our focus on the broadcast vertical continues to progress, with a strong pipeline forecasting further growth, which will not only deliver in the near term but also into future years.

Despite the difficult year Quixant remains profitable and cash generative, generating profit before tax of $9.4m (2018: $14.3m), adjusted profit before tax of $10.7m in 2019 (2018: $18.2m) out of which we generated cashflow from operations in excess of 140% of profits. 

Segmental Revenue Analysis

		2019	2018
		$m	$m
Gaming platforms		46.6	62.5
Gaming monitors		9.6	15.1
Densitron		36.2	37.5
Total		92.3	115.2

Customer headwinds in the land-based gaming business

In the gaming division, our long standing major customer, Ainsworth Game Technology, has been detrimentally impacted by the exceptional success of one of its rivals: Australian listed Aristocrat Leisure.  The latter launched a game called Lightning Link in 2015 which has become the top performing slot game in Australia and North America and in doing so has fuelled the company's market capitalisation growth from under AU$5bn to AU$24bn.  In the Australian market, Lightning Link holds more than 60% of the "pokies" market according to Goldman Sachs. The success of Lightning Link, and the derivative games which have followed, has been unprecedented in the last 20 years in gaming and propelled Aristocrat to the dominance it has today. Aristocrat's success has also impacted, albeit to a lesser extent, revenue from several of our other customers.

It is important to note that, during this period, Quixant has not lost any customers.  Improvements in the demand for these customers products will immediately positively impact our revenue.  Nonetheless, the impact has weighed heavily on our financial performance in 2019 across both the gaming platforms and gaming monitors product lines. 

We shipped just over 40,000 gaming platforms in 2019 compared to 61,000 in 2018, a reduction of 34%.  Several of our customers to which in previous years, we have shipped in excess of 5,000 platforms a year reduced orders to 1,000 and 5,000 in 2019 as shown in the chart.

Sales by customer unit purchase quantity

		2019	2018
<1k pcs		7,330	8,869
1k - 5k pcs		15,276	5,579
>5k pcs		18,082	46,632
Total		40,688	61,080

We sold 16,981 gaming monitors and button decks in 2019 compared with 30,800 in 2018. 

The average selling price of our products increased slightly as we saw an increase in demand for the mid-range platforms with reductions in demand for the cost-effective range and (mainly due to the major customer declines) a reduction in high-end product sales.  We also shipped several hundred of the Ultimate platform range in the year as this new product range starts to gather traction in the market.

Quantity of gaming platforms sold split by product family

		2019	2018
Cost Effective		9,134	17,013
Mid-Range		10,195	9,938
High-End		20,993	34,091
Ultimate		367	38
Total		40,689	61,080

New business wins with long term growth prospects

During the year we secured a significant win for gaming boards with a major Japanese manufacturer who currently has extensive business in the North American, Australian and Asian markets.  This is expected to develop into a multi-million dollar annual revenue stream in the coming years. We already supply this customer with electronic button deck solutions, but from the fourth quarter of 2021 will be supplying them with our highest performing gaming computer product, the QMax-2.  The business was won on the technical depth of hardware and software features of the product, as well as the expert, gaming-focused support infrastructure Quixant has globally.  This is an exciting business win and while not due to contribute significantly to revenue until next year, positions us well to benefit from their existing international markets and from the casino resorts opening in Japan in the middle of the decade.  We have already shipped samples to them for their engineering teams to work on developing the new machines.

In addition, we have converted around $3.5m of new business pipeline to revenue in 2019 which we expect to grow over coming years as the customers reach their full year run rate.  Our new business pipeline gives us confidence in achieving healthy growth in 2021 and 2022, subject to any extended impact of COVID-19. 

The major game manufacturers, aside from Aristocrat, have all had challenging periods in their land-based gaming businesses.  Their focus on content to reinvigorate their competitiveness has led to opportunities for us to pitch for strategic outsource arrangements which have been supported by the sales and product team members we brought in during Q3 2019 and Q1 2020.

As we look to build on the recent new business wins, we are focusing on delivering market appropriate solutions to our current and prospective customers, based upon a segmentation and needs analysis.  For our Strategic Accounts, our value proposition is clear in that we can help our customers deliver a higher quantity of better games faster, with reduced costs and reduced time to market.  Our business enables a global standard for Strategic Accounts (Tier 1) to build their next generation games upon, and our market leading hardware, and embedded Gaming Ecosystem® allows game developers to excel creatively, whilst ensuring the hardware can deliver the ultimate player experience.  For our Key Accounts (Tier 2), we are focusing on account retention and new account penetration via a focused product range, at differing price points, and SKU distribution maximisation across the portfolio of current products.  For our Core Accounts (Tier 3) we are bringing to market turnkey outsource options, enabling these customers to focus solely on game design and distribution, with Quixant providing every element of the solution.  Our sales team structured around this market segmentation, ranging from Strategic Account Directors for the Strategic Accounts, to a Tele-Accounts function for our Tier 3 customers, ensuring the appropriate level of contact and focus to maximise the account experience.

Sports Betting market entry

In 2019, we launched Quixant's entry to an adjacent market to Gaming: Sports Betting.  The legalisation of Sports Betting in the US has led to a major focus on this market as a growth driver in the gambling industry.  There is already a well-established European sports betting industry in which technology (online and retail) plays a significant role.  A number of the existing slot machine manufacturers already have business in sports betting but all are viewing the market as a revenue growth driver alongside the limited growth available in global slots.  Many of our prospective customers in sports betting are businesses new to Quixant, so this industry represents a diversifier to our land-based gaming business. 

At a high level, Quixant is offering two products to the sports betting market: an optimised computer platform designed to drive customers' own sports betting terminals onto which they integrate their sports book software and a turnkey, full terminal solution which integrates our computer platform into a regulatory compliant cabinet.  We have already received significant interest for both of these solutions since their launch at the G2E trade show in Las Vegas in October 2019 and will have first pre-production samples shipping to customers in H1 2020.

While we had expected to generate revenue from the sports betting opportunity in 2020, the suspension of almost all sporting events and the consequential shutdown of most sports betting operations means that we believe there is uncertainty around this revenue being realised during the year.  Nonetheless, we continue to be optimistic of future business in the sector and have a a weighted new business pipeline which builds up to business worth several million dollars annually over the next 5 years.

Densitron - Densitron 2.0 - Control Surface Growth Strategy

Within Densitron, we have continued to execute our change plan across all areas of the business as we pivot towards Densitron 2.0 (one product to many customers) to generate growth through our range of Broadcast-centric control surfaces, while protecting our traditional Densitron 1.0 display component core business (typically one product for one customer).  Densitron 2.0 control surface products bring together our expertise in display, touch/tactile, embedded computing and mechanical engineering to help our customers modernise the human interaction with their products while accelerating their time to market and reducing their execution risk.

Broadcast industry progress with Densitron 2.0 products

Our Densitron 2.0 control surface product sales efforts are focussed in the broadcast vertical.  Of the 100 blue-chip broadcast equipment manufacturers in this space we chose to focus on when we launched this strategy, we are now actively engaged in sales conversations with the majority.  The pipeline of new business in this vertical stands at over $12m and continues to grow, as we now move to focus on the next 100 priority target customers.  In 2020 we forecast c. $0.5-1.0m of this pipeline will convert into in-year revenue, the point in the range dependent on how quickly our customers are able to move into mass production after telling us we have won the deal - something we are unable to control. 

In addition, our One Densitron culture and operating structure change plan is yielding tangible results because we are now structured internally to allow us to deal globally with large customers such as Panasonic and Grass Valley. 

Acquisition of (IDS) launching our Densitron 3.0 product set

In July 2019, we completed the acquisition of a small UK-based technology business called IDS.  This took our product strategy one step further by adding market leading software to the base of our expertise in control surfaces.  We call this addition of software to our control surface products Densitron 3.0.  The IDS technology is already in use extensively in the most prestigious broadcasters including the BBC, CNN and Channel 4.  The product enables content distribution, such as world time clocks or programme schedule data to be displayed across a network of end-points driven by a GUI based server.  The real power of IDS however comes from its support to automate and control a wide range of third-party hardware and software products.  IDS can save broadcast systems integrators and equipment manufacturers development time through adoption of a scalable, flexible off the shelf solution.

IDS is already contributing to revenue in the business and we are investing in the technology which we purchased to launch an enhanced solution which will additionally be offered under as SaaS model.

New senior gaming business hires

We made two key hires to the business in 2019.

Abhinay Bhagavatula joined us in September 2019 as Gaming Product Director.  With overall responsibility for our gaming business product strategy and innovation, this is a key role to ensure our products align well with the market requirements and are driving technology change in the gaming industry.  Abhinay joins us from the leading gaming manufacturer, Aristocrat where he was Director, Product & Commercial Strategy.  His deep knowledge from 10 years working in game manufacturers positions him uniquely in Quixant with a knowledge of computer technology, game design and commercial value creation in our customers.

We also introduced Duncan Faithfull as the new Global Sales Director in January 2020.  Duncan is responsible for leading our gaming sales team.  His focus will firstly be on retention and growth in our existing customer base, ensuring predictability and reliability in our revenue, and secondly, through redefining our proposition to the top tier accounts, boosting our new business pipeline for revenue delivery in 2021 and beyond.  He comes from a background as Sales & Marketing Director at Cardtronics and prior to that G4S with experience in strategic outsource selling to some of the largest global financial institutions. 

Given the strengthened senior management team we have in place, the founders of the business will also be changing their roles as we look to streamline operations.  Effective 31 May 2020, Nick Jarmany will become non-executive deputy chairman and Gary Mullins will move to a non-executive director role.  C-T Lin will be stepping down from the board.

Global SAP and Salesforce deployment

We successfully completed the implementation of our global SAP Business One ERP system in December 2019, with just one or two smaller parts of the business to begin using it in 2020.  This two-year project has been undoubtedly the most complex technology project the group has undertaken but now gives us a strong, global infrastructure to run the business.  In 2020 we will continue to build out the reporting functionality and automation in the business to maximise its benefit.

During H2 2019 we brought Salesforce.com to the gaming division, having already used the product in the Densitron business.  We continue to refine the usage and integration of the system with SAP and other Quixant technology systems, but already are running our sales pipeline and activity tracking from it.  We believe this, alongside enhanced SAP reporting and improved sales process and discipline will lead to improvements in our revenue visibility going forward.

Summary and Outlook

While the challenges of 2019 in the Gaming division have been painful to endure, the actions to enhance our sales discipline to improve revenue visibility and forecasting accuracy were already being addressed during the year and are now complete. 

We have an undiminished opportunity with the land-based gaming business to grow, despite the short-term headwinds from major customer slowdowns and an uncertain negative impact across the global economy from COVID-19.  Allied with the new growth sources in sports betting and Densitron this leads to the desired diversification to de-risk this growth.  We constantly monitor the risks to the business as a result of the COVID-19 outbreak and while it will certainly have a profound impact on our business in both Gaming and Densitron divisions in 2020, at this point the magnitude of this impact remains uncertain and hence we believe it necessary to withdraw our guidance for 2020 and thereafter.  We are necessarily cautious and tracking the situation daily but believe our strong balance sheet provides a high degree of resilience.  Nonetheless, our severe downside modelling case indicates scenarios in which there may be a requirement to access additional funding in Q4 2020 and we continue to closely monitor this position.

Over the medium to long term we are confident in our ability for Quixant to grow materially.  We have made many of the adjustments necessary to position the business for this growth from a sales, product and operational perspective as the challenges presented by COVID-19 subside.

The Board remains confident in the long-term future of the Group and our ability to weather the current crisis.

Jon Jayal,

Chief Executive Officer

 

FINANCIAL REVIEW

The Quixant Group achieved revenues of $92.3 million in the year, a decrease of 20% on 2018 ($115.2 million).

Revenue

Gaming division revenues were $56.2 million, a decrease of 28% on 2018 (2018: $77.6 million). This was split between Gaming platform revenue of $46.6 million, a 25% decrease on 2018 (2018: $62.5 million), and Gaming monitor revenue of $9.6 million, a 36% decrease on 2018 (2018: $15.1 million). Densitron division revenues, including the IDS acquisition in 2019, were $36.2 million, a decrease of 3% on 2018 (2018: $37.5 million).

The decline in the Gaming division has largely been driven by reduction in demand from larger customers who have in turn seen sales of their gaming machines go down in the face of competition from other industry suppliers who currently have more popular games. Densitron revenues declined marginally as sales of new products are yet to ramp up to replace declining older product revenue.

Gross profit and gross profit margin

Our gross profit for the year was $34.3 million representing a gross margin of 37%. This compares with a gross profit achieved in 2018 of $39.8 million and a gross margin of 35%. The underlying gross margin for each part of the business has been improved in the year with the improvement in Gaming coming from the move away from low margin gaming monitor sales and in Densitron because of the move to sell higher margin Broadcast products.

Profit before tax (PBT)

PBT decreased by 34% to $9.4 million (2018: $14.3 million).  Adjusted PBT decreased 41% to $10.7 million (2018: $18.2 million). Adjustments to profit before tax amounted to $1.3 million in 2019 (2018: $3.9 million) and comprise share-based payments and amortization and impairment of acquired intangibles that are not cash expenses ($0.9m in both 2019 and 2018) and a loss on the disposal of the Densitron business in Finland, acquisition costs for IDS and restructuring costs, which are not comparable with the prior year, as we closed a warehouse in the UK and sold the loss-making Finnish business - see note 1.  The Company profit for the year includes an impairment charge on the investment in Densitron which has arisen from the cash flow forecasts used for the Group goodwill impairment testing.

Expenses

During the year the Group expenditure on research and development increased by 2% to $6.6 million (2018: $6.4 million) representing 19% of gross profit (2018: 16%). These costs relate to investment activities principally undertaken in Taiwan, Italy and Slovenia. $2.2 million of these costs were capitalised (2018: $2.6 million) with amortisation for the year on total capitalised development costs of $1.4 million (2018: $1.3 million).

We have continued to strengthen the business across all areas in the year, including increasing our headcount to 227 people (2018: 203 people). Staff costs, being the largest contributor to overheads, remained flat in the year at $16.3 million (2018: $16.3 million).

Taxation

The tax charge for the year increased to $1.1 million (2018: $0.2 million), representing a corporation tax charge of 11.7% on pre-tax profits (2018: 1.2%), due to higher overseas profits as a proportion of total profits. The Group continues to benefit from enhanced tax reliefs available in respect of qualifying research and development expenditure and has also benefited from patent box relief, tax relief on the exercise of employee share options and the use of brought forward losses in Densitron.

Earnings per share

Basic earnings per share decreased by 41% to $0.1252 per share (2018: $0.2137 per share). Diluted earnings per share decreased 41% to $0.1243 per share (2018: $0.2125 per share). Adjusted fully diluted earnings per share as set out in note 10 to the financial statements decreased by 47% to $0.1396 per share (2018: $0.260 per share).

Balance Sheet and Cash Flow

Non-current assets have increased in the year to $25.6 million (2018: $22.5 million) due to the acquisition of IDS. Inventory has remained relatively flat at $20.2 million (2018: $19.4 million), with the small increase due to the acquired IDS inventory. Raw material inventory has increased as we have made purchases to counter long lead times and to ensure we have sufficient components that are no longer sold by suppliers to continue to deliver our product set. Finished goods have increased owing to planned sales in the fourth quarter not coming through, the reduced trading had corresponding impacts on trade receivables.

The cash generated from operating activities in the year amounted to $14.9 million (2018: $11.3 million). The increase in cash generated is largely due to stronger control of receivables in the year. The Group has continued to invest in the business, spending $5.3 million (2018: $4.1 million) on investing activities including capitalised product development.

Dividend

The Board will review whether an interim dividend can be paid in 2020 when the Covid-19 situation becomes clearer.

Guy Millward

Chief Financial Officer

 

CONSOLIDATED STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME

For the years ended 31 December 2019 and 2018

	2019	2018
	Total	Total
	$000	$000
Revenue	92,320	115,150
Cost of sales	(58,033)	(75,392)
Gross profit	34,287	39,758
Operating expenses	(24,733)	(25,174)
Operating profit	9,554	14,584
Financial expenses	(136)	(251)
Profit before tax	9,418	14,333
Taxation	(1,102)	(177)
Profit for the year	8,316	14,156
Other comprehensive income for the year, net of income tax	(144)
Foreign currency translation differences		(176)
Total comprehensive income for the year	8,172	13,980
Basic earnings per share	$0.1252	$ 0.2137
Diluted earnings per share	$0.1243	$ 0.2125

 

CONSOLIDATED BALANCE SHEET

As at 31 December 2019 and 2018

	Group
	2019 $000	2018 $000
Non-current assets
Property, plant and equipment	5,926	6,104
Intangible assets	18,449	15,538
Right-of-use assets	894	-
Investment property	-	631
Deferred tax assets	340	236
	25,609	22,509
Current assets	20,180
Inventories		19,439
Trade and other receivables	23,902	31,087
Cash and cash equivalents	16,954	11,082
	61,036	61,608
Total assets	86,645	84,117
Current liabilities	(82)
Other interest-bearing loans and borrowings		(530)
Trade and other payables	(17,756)	(21,052)
Tax payable	-	(759)
Lease liabilities	(406)	-
	(18,244)	(22,341)
Non-current liabilities	(738)
Other interest-bearing loans and borrowings		(823)
Provisions	(343)	(306)
Deferred tax liabilities	(1,469)	(1,214)
Lease liabilities	(564)	-
	(3,114)	(2,343)
Total liabilities	(21,358)	(24,684)
Net assets	65,287	59,433
Equity attributable to equity holders of the parent	106
Share capital		106
Share premium	6,698	6,499
Share-based payments reserve	1,345	1,102
Retained earnings	57,044	51,488
Translation reserve	94	238
Total equity	65,287	59,433

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEARS ENDED 31 DECEMBER 2019 and 2018

	Share	Share	Translation	Share-Based	Retained
	Capital	Premium	Reserve	Payments	Earnings	Total Equity
	$000	$000	$000	$000	$000	$000
Balance at 1 January 2018	106	6,102	414	991	39,647	47,260
Total comprehensive income for the period
Profit	-	-	-	-	14,156	14,156
Other comprehensive loss	-	-	(176)	-	-	(176)
Total comprehensive income for the period	-	-	(176)	-	14,156	13,980
Transactions with owners, recorded directly in equity
Share-based payments	-	-	-	111	-	111
Dividend paid	-	-	-	-	(2,315)	(2,315)
Exercise of share options	-	397	-	-	-	397
Total contributions by and distributions to owners	-	397	-	111	(2,315)	(1,807)
Balance at 31 December 2018	106	6,499	238	1,102	51,488	59,433

	Share	Share	Translation	Share Based	Retained
	Capital	Premium	Reserve	Payments	Earnings	Total Equity
	$000	$000	$000	$000	$000	$000
Balance at 1 January 2019	106	6,499	238	1,102	51,488	59,433
Total comprehensive income for the period	-	-	-	-	8,316	8,316
Profit
Other comprehensive loss	-	-	(144)	-	-	(144)
Total comprehensive income for the period	-	-	(144)	-	8,316	8,172
Transactions with owners, recorded directly in equity	-	-	-	243	-	243
Share-based payments
Dividend paid	-	-	-	-	(2,760)	(2,760)
Exercise of share options	-	199	-	-	-	199
Total contributions by and distributions to owners	-	199	-	243	(2,760)	(2,318)
Balance at 31 December 2019	106	6,698	94	1,345	57,044	65,287

 

CONSOLIDATED CASH FLOW STATEMENTS

FOR THE YEARS ENDED 31 DECEMBER 2019 and 2018

	2019	2018
	$000	$000
Cash flows from operating activities	8,316
Profit for the year		14,156
Adjustments for:	2,853
Depreciation, amortisation and impairment		2,745
Depreciation of leased assets	680	-
Change in fair value of investment property	631	-
Movement in provisions	36	-
Taxation expense	1,102	177
Financial expense	16	251
Lease liability interest expense	120	-
Equity-settled share-based payment expenses	243	111
	13,997	17,440
Decrease/(increase) in trade and other receivables	7,491	(10,992)
(Increase)/decrease in inventories	(488)	1,807
(Decrease)/increase in trade and other payables	(3,636)	3,751
	17,364	12,006
Interest paid	(16)	(251)
Lease liability interest paid	(120)	-
Tax paid	(2,282)	(481)
Net cash from operating activities	14,946	11,274
Cash flows from investing activities	(2,392)
Acquisition of subsidiary, net of cash acquired		-
Acquisition of property, plant and equipment	(316)	(632)
Acquisition of intangible assets	(2,598)	(3,457)
Net cash from investing activities	(5,306)	(4,089)
Cash flows from financing activities	(534)
Repayment of borrowings		(5,382)
Payment of lease liabilities	(674)	-
Dividends paid	(2,760)	(2,315)
Proceeds from issue of shares	200	397
Net cash from financing activities	(3,768)	(7,300)
Net increase/(decrease) in cash and cash equivalents	5,872	(112)
Cash and cash equivalents at 1 January	11,082	11,194
Cash and cash equivalents at 31 December	16,954	11,082

 

NOTES TO THE FINANCIAL STATEMENTS

1. General information

Whilst the information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRSs") as adopted by the European Union and as issued by the International Accounting Standards Board, this announcement does not itself contain sufficient information to comply with IFRSs. The accounting policies adopted in this preliminary announcement are consistent with the Annual Report for the year ended 31 December 2019.

The financial information set out in this document, which was approved by the Board on 6 April 2020, is derived from the full Group accounts for the year ended 31 December 2019 and does not constitute the statutory accounts within the meaning of section 434 of the Companies Act 2006.  The Group accounts on which the auditors have given an unqualified report, which does not contain a statement under section 498(2) or (3) of the Companies Act 2006 in respect of the accounts for 2019, will be delivered to the Registrar of Companies in due course. The Board of Quixant plc approved the release of this preliminary announcement on 6 April 2020.

Pursuant to AIM Rule 20, the Annual Report and Accounts for the financial year ended 31 December 2019 ("Annual Report") is available to view on the Group's website: www.quixant.com and will be posted to shareholders who have requested a paper copy shortly. Quixant will hold its AGM on 19 May 2020.

Going concern

In determining the appropriate basis of preparation of the financial statements, the Directors are required to consider whether the Group can continue in operational existence for the foreseeable future. 

In the early months of 2020, a global pandemic has broken out causing governments around the world to impose various restrictions on economies and human populations.

The Board has carried out a going concern review and concluded that apart from the uncertainties in the impact of the pandemic noted below, the Group has adequate cash to continue in operational existence for the foreseeable future.

The Directors have prepared cash flow forecasts for a period in excess of 12 months from the date of signing the financial statements. The main effects the pandemic could have on the forecasts include delays in recovering debts from customers who may be facing financial difficulties, drop in customer demand in the coming months and the timing of sales recovering to levels prior to the pandemic.

The Board's severe downside forecasts are based on a scenario where customers stop paying entirely for new orders delivered from April 2020 onwards and do not begin buying any further goods until December 2020. Orders delivered and invoiced up to the end of Q1 2020 are assumed to be paid for.  Cost reductions can be made to offset this reduction in cash receipts by a 25% reduction in staff costs and a reasonable reduction in other controllable costs. The Group have a $3.0m loan facility in Taiwan that is currently undrawn and is part of the mortgage on the Group's property in Taiwan. In this scenario, the Group have sufficient cash until March 2021 without drawing on its bank facilities. 

A less severe scenario was based on the existing debts being recovered, irrevocable sales orders already received from customers and their related costs of sales being fulfilled, and an assumption that we will only recover 50% of debts from these new fulfilments. This would provide us with enough cash to pay existing overheads without reducing them until the second half of 2021, well beyond the period the Board is required to look at to assess going concern.

The analyses depend greatly on the amount of orders assumed to be collectable in cash, and major changes to this could significantly change the result.  In all scenarios considered, the Board assumed that the Group's medical sector revenues, including revenues from displays sold as components for ventilators, continued at forecasted levels prior to the pandemic. The analysis assumes that there are no issues in recovering these debts, considering the increasing demand in this sector as a result of the pandemic and the nature of the customers.

While the Directors' have no reason to believe that customer revenues and receipts will decline to the point that the Group no longer has sufficient resources to fund its operations, should this occur, the group may need to seek additional funding beyond the facilities that are currently available to it, as well as making further significant reductions in controllable costs.  There would be an opportunity to sell certain property and inventory assets to accelerate cash generation and/or mitigate risk, but in the economic environment that would see customer revenues and receipts decline severely, such sales would be likely to be difficult to achieve.

The potential impact of changes in assumptions arising from matters outside the Group's control, or the unlikely event of a culmination of events, may result in the group requiring additional working capital beyond the group's existing facilities.

Based on the above, these circumstances represent a material uncertainty that may cast significant doubt about the Group's ability to continue as a going concern such that the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.

Nevertheless, at the time of writing, the Directors' believe that the Group will continue to have acceptable financial resources to meet obligations as they fall due and accordingly have formed a judgement that it is appropriate to prepare the financial statements on a going concern basis.  These financial statements do not include any adjustments that would result if the going concern basis of preparation is inappropriate.

2. PBT reconciliation

PBT and adjusted PBT for the current and prior year have been derived as follows:

	PBT
	2019	2018
	$000	$000
Profit for the year	8,316	14,156
Adding back:	1,102
Taxation expense		177
PBT	9,418	14,333
Adjustments:	663
Amortisation of customer relationships and order backlog1		757
Share-based payments expense2	243	111
Loss on disposal of subsidiary3	124	-
IDS acquisition costs3	63	-
Restructuring cost3	169	3,036
Adjusted PBT	10,680	18,237

1.  The amortisation of customer relationships and order backlog has been excluded as it is not a cash expense to the Group.

2.  Share-based payments expense has been excluded as they are not a cash-based expense.

3.  Other items of income and expense - where other items of income and expense occur in a particular year and their inclusion in PBT means that a year on year comparison of year on year results is not on a consistent basis the directors will exclude them from the adjusted numbers. During the years under review the directors have excluded the costs arising from restructuring costs from the closure of the UK warehouse, the loss on disposing of Densitron Nordic and the acquisition costs of buying IDS due to their incomparability with the previous year.

3. Earnings per ordinary share (EPS)

	2019	2018
	$000	$000
Earnings
Earnings for the purposes of basic and diluted EPS being net profit attributable to equity shareholders	8,316	14,156

Number of shares	Number	Number
Weighted average number of ordinary shares for the purpose of basic EPS	66,404,468	66,239,967
Effect of dilutive potential ordinary shares:	499,053
Share options		380,383
Weighted number of ordinary shares for the purpose of diluted EPS	66,903,521	66,620,350
Basic earnings per share	$0.1252	$0.2137
Diluted earnings per share	$0.1243	$0.2125

Calculation of adjusted diluted earnings per share:	$000	$000
Earnings
Earnings for the purposes of basic and diluted EPS being net profit attributable to equity shareholders	8,316	14,156
Adjustments
Share-based payment expense	243	111
Amortisation of customer relationships and order backlog	663	757
Loss on disposal of Densitron Nordic	124	-
IDS acquisition costs	63	-
Restructuring costs	169	3,036
	9,578	18,060
Tax effect of adjustments	(239)	(764)
Adjusted earnings	9,339	17,296

4. Subsequent events

As discussed above, the Covid-19 pandemic may result in severe reductions in future revenues, profits and cash flows.  There are short-term actions, as well as the Group's existing cash reserves, that are already being taken to ensure the Group survives over the next 12 months.  At present levels of uncertainty it is not practical to conclude on an appropriate valuation basis for all assets on the balance sheet except cash but we continue to monitor the situation closely.

 

END

 

 

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