SPI Lasers plc
AIM : SPIL

SPI Lasers plc

March 24, 2006 02:11 ET

SPI Lasers plc: Preliminary Results

LONDON, UNITED KINGDOM--(CCNMatthews - March 24, 2006) - SPI Lasers plc (AIM:SPIL), a leader in the design, development, engineering, and manufacture of optical fibre-based lasers, reports its Preliminary Results for the year ended 31 December 2005.

Highlights

- turnover doubled to Pounds Sterling 3.5 million

- gross loss of Pounds Sterling 1.4 million reduced by 43% (before exceptionals)

- strong growth in product sales

- opening of new market verticals

- group restructuring completed and balance sheet strengthened

- successful AIM IPO which raised Pounds Sterling 10.5 million net

Commenting on the Preliminary Results, David Parker, President and Chief Executive of SPI Lasers plc, said: "2005 was a year of significant progress in all aspects of our business. Not only have we completed our transition into becoming a manufacturer of fibre laser sources, but we have also released the first wave of products for industrial material processing and have engaged with a diverse customer base.

"This has led to a solid set of maiden operating results: a key element of which is our top line growth of 100%. It is significant that in this regard we exceeded market expectations, but more importantly, we created momentum in the sales channel that bodes well for sustained growth in 2006 and beyond."



For further information:

SPI Lasers plc
David Parker, President and
Chief Executive Tel: +44 (0) 1489 779 696
david.parker@spilasers.com
Steve Berg, Chief Financial Officer and
Company Secretary
steve.berg@spilasers.com www.spilasers.com

Media enquiries:

Abchurch
Henry Harrison-Topham / Dana Thomas Tel: +44 (0) 20 7398 7700
henry.ht@abchurch-group.com www.abchurch-group.com


Chairman's Statement

Introduction

I am pleased to present my first report as Chairman of SPI Lasers plc for the year ended 31 December 2005. The Company achieved a successful flotation on the AIM market on 26 October 2005, raising Pounds Sterling 10.5 million net of expenses to help finance the Company's development. Significantly, all the private equity investors who financed the early years of SPI have retained their investment, and have been joined by a broad spread of institutional and individual shareholders.

The flotation has also marked the end of the transitional period for the business in which it refocused away from communications towards the fast growing fibre laser arena. Having released its first products and achieved sales, the Company is using the capital raised to expand its product portfolio and channels to market.

Performance during 2005

The Company achieved a number of significant milestones during 2005. Turnover doubled over the previous year's outcome, with both product sales and contract revenues growing strongly. The Company currently derives a considerable amount, though minor proportion, of its revenues from contract development and bespoke products, though this proportion will decline as the range and market penetration of SPI's standard products grow. Customer evaluations of SPI products increased, over thirty accounts were opened and increasingly our revenues are being generated from repeat business from established purchasers.

The Board

During the second half of 2005 we have established a Board appropriate for the needs of an AIM listed company. Amongst the non-executive directors, there is a blend of continuity and new faces. Dave Cheesman and Dave Shrigley have been joined by Dr. Peter Schultz and me as Chairman. The Board is developing quickly into an effective team, responding well to the challenges demanded of a quoted company. A good start has been made in addressing the issues arising in today's Corporate Governance environment. Further progress will be made in this area in 2006.

Employees

On behalf of the Board I would like to thank all our employees for their contribution and support during the past year. My thanks also go to my fellow Board members and the senior management for all their efforts.

Strategy

The overall strategy for the Company has developed further during the year. In the near term we will continue to broaden our addressed sectors in the MICRO market aided by the introduction of the 200W laser and the release of our first product for the fast growing laser MARKING market. In the medium term we continue to investigate entry strategies into the MACRO market.

SPI Lasers is a young company. In 2005 we demonstrated that we could achieve traction in the rapidly growing fibre laser arena. The exciting challenge for 2006 and beyond is to sustain that momentum with a broader range of products and across a wider range of applications.

Graham Meek

Non-Executive Chairman

24 March 2006

Chief Executive's Review

Introduction

I am pleased to report that 2005 was a year of significant progress in all aspects of our business. In summary, we completed our transition into becoming a manufacturer of fibre laser sources, released the first wave of products for industrial material processing and engaged with a diverse customer base. This has led to a solid set of maiden operating results: a key element of which is our top line growth of 100%. It is significant that in this regard we exceeded market expectations, but more importantly, we created momentum in the sales channel that bodes well for sustained growth in 2006 and beyond.

There are a number of areas I would highlight as particularly significant:

Markets, Customers and Channel

The laser industry is a large and established market. During 2005 the fibre laser became recognised not only as an interesting technology, but as a tool that delivers real advantages for many end users. I believe that SPI Lasers joining the market as the second supplier to IPG Photonics of industrial grade products has been a factor in this maturing process.

SPI's customers are system integrators. That is to say that they build the end user system that incorporates our lasers as the optical source. In some cases these integrators are part of the end user entity, but in the majority of cases they are an intermediary. Consequently we have invested heavily in creating awareness of the many advantages of fibre lasers in the end user community to create "pull through" in the sales channel. I am pleased to report that this approach is proving to be successful.

In 2005 we concentrated on the MICRO sector. Of note within this was the progress we made in penetrating the medical device manufacturing market, where the fibre laser's ability to cut and weld fine feature size items rapidly and with high quality has been a differentiator. Initial success was in cutting stents (a stent is a spring-like structure expanded within veins and arteries) with a number of industry leaders now deploying SPI product. Having established ourselves in this sub-sector we are now engaged with a number of other customers and working on new applications.

This is typical of our approach to the market: namely to excel at an application and then to drive penetration. In parallel with this success, we have succeeded in adding further market verticals such as stencil cutting, printing and micro welding. To support this, we have added to our channel resource, both direct and through specialist distribution partners, and established an applications and support capability in the UK and the USA.

Towards the end of 2005, we announced a family of products designed for the rapidly growing MARKING sector. Two supply contracts were signed and a number of customer relationships established that should lead to sales in 2006.

All of this activity is consistent with our strategy of utilising our specialised optical fibre capability to establish a technology platform that can be sold into multiple markets. We continue to strive for products that deliver the advantages in performance and cost of ownership that industry watchers believe will fuel rapid growth in this sector.

Operational

Evidence of the emphasis on the operational functions of the business in 2005 was the development and manufacturing transfer of our initial product set. We successfully introduced a range of products from 10 to 150 watts, consistent with the needs of the MICRO sector. This, along with execution of our awarded contracts, was pivotal in achieving our revenue objectives for the year.

In parallel with this, we achieved significant progress in the design of a novel pulsed laser for the MARKING sector which is designed to operate faster than the competitive offering.

As evidenced by the signing of the two significant supply contracts and the acquisition of several other customers, our pulsed product has generated a larger amount of business than we anticipated for a pre-release product. Whilst this is clearly positive for the future, it will result in SPI needing to accelerate manufacture of the product faster than our planned cost reduction activity; with an associated shorter term pressure on gross margins. This is primarily due to the cost of some bought in components and will be resolved by working with our suppliers during FY2006. We consider this to be a justifiable investment that should result in greater market share than originally foreseen over the medium term.

Progress was also made in scaling the power of our technology platform to address other areas of MICRO and future MACRO products. In the latter case the results obtained have been so encouraging that we will increase investment in this area in 2006 to position the Company to enter this large market sector in 2007.

As regards organisational development, we established a manufacturing organisation, and made improvements in our operating business and quality systems. Again, the emphasis here was in preparation for continued strong growth in 2006.

Outlook and Key Events

In 2006 we expect to sustain the momentum built last year. We will expand our sales channel, R&D and manufacturing resources to enable us to address multiple new market verticals. The new 200W product will broaden our offering in the MICRO sector. This, combined with the general release of our MARKING laser, will more than double the available market for SPI Lasers. We also expect that by leveraging our contract R&D and through organic investment we will make significant strides towards the commercialisation of our technology in MACRO. These initiatives, along with investment in physical infrastructure, are occurring earlier and at a faster pace than we would have anticipated last year. We believe that they are essential to prepare the Company for the forecast growth in this sector which has also increased.

The exciting challenge for 2006 and beyond is therefore to deliver on the increasing number of opportunities by developing new products and accelerating those already introduced to take advantage of this expanding market.

Dr. David Parker

Chief Executive Officer

24 March 2006

Financial Review

Overview

2005 was a year of change for the SPI Group, structurally, commercially and operationally. We started the year as a Delaware registered private company, Southampton Photonics, Inc. and ended the year as a UK public company, SPI Lasers plc. Commercially, we saw very strong growth in the Company's sales of fibre laser products in all of our geographic markets. Our investment in manufacturing expansion, product development and particularly in sales and marketing were all important factors in achieving strong top-line growth and led to an increased need for working capital. This financing need lies behind the decision to take the Company public, thereby raising the necessary funds to drive the Company forward so as to better address the opportunities for success open to us.

Structural Changes

The Company started the year as Southampton Photonics, Inc., a Delaware registered company with Southampton Photonics Ltd as its 100% owned UK subsidiary. Through a process of group restructuring SPI Lasers plc, a newly incorporated company, became the parent of the group with two subsidiaries: SPI Lasers UK Ltd and SPI Lasers LLC.

In order to provide meaningful information to shareholders, this restructuring is reflected in the accounts of the Company, as a merger in accordance with the requirements of FRS6 regarding group restructures. Accordingly the prior year comparatives have been presented as if the Group had existed in its present form during that period.

Commercial Changes

Sales

Total sales grew by 100% over 2004 to Pounds Sterling 3.5 million with an underlying product sales growth of 58%. Product sales have grown from Pounds Sterling 0.2 million in 2002 to Pounds Sterling 2.0 million in 2005.

Contract sales, which relate to our US and UK defence and aerospace development contracts, grew by over 200% in the year, building on an initial US contract award in 2002 that generated revenues from late 2002 through to early 2004.

The USA remains our biggest market with Pounds Sterling 2.1 million of total sales, an increase of 79% on the prior year's sales of Pounds Sterling 1.2 million. However, SPI's dependency upon sales to the US has continued to reduce: 60% of sales in 2005, down from 67% in 2004, as other market areas were further expanded: Asia up from 7% to 10% and Europe (excluding the UK) up from 6% to 17%. The balance of sales was in the UK, which while increasing in absolute terms by almost a third, reduced in proportional terms from 20% to 13% of the total.

Operational Changes

Gross Loss

The gross loss of Pounds Sterling 1.4 million was 59% lower than in 2004; a 43% reduction ignoring the prior year's exceptional impairment charge. This reduction in the gross loss is a reflection of the improving cost structure of the business, whereby SPI has been able to leverage off its predominantly fixed-cost manufacturing base as volumes have increased. This trend will continue as volumes continue to grow.

Administrative Expenses

Administrative expenses include Pounds Sterling 3.0 million of Company funded product research and development (R&D). In addition, and charged against cost of sales, SPI spent Pounds Sterling 1.1 million on customer funded R&D. The total incurred investment in R&D was therefore Pounds Sterling 4.1 million, 117% of 2005 sales, which compares with Pounds Sterling 3.3 million in 2004. The balance of the administrative expenses relates to sales and marketing and general administration costs.

Administrative expenses before exceptional costs in total were Pounds Sterling 1.6 million higher than in 2004, an increase of 28%. This reflects, in the main, the increased investment in sales and marketing that was necessary to achieve the growth in sales.

The exceptional charge of Pounds Sterling 0.3 million relates to costs associated with the flotation of the Company that are not chargeable to the share premium account.

Taxation

SPI has an unrecognised potential deferred tax asset of Pounds Sterling 10.0 million, which has primarily arisen from the losses incurred to date. In 2005, an R&D tax credit of Pounds Sterling 0.5 million (Pounds Sterling 0.5 million in 2004) was recognised; the associated cash payment from HM Revenues & Customs is expected to be received in the second half of 2006 (the 2004 related tax credit was received in September 2005).

Loss after Taxation

The loss after taxation for 2005 was Pounds Sterling 8.4 million (2004 Pounds Sterling 8.5 million). Before exceptional charges, the loss increased by Pounds Sterling 0.6 million (9%) over the equivalent loss in 2004. This is due to the ramp-up of resources within operations and sales and marketing.

Dividend

The directors do not propose to pay a dividend (2004: nil).

Headcount

Average heads increased from 73 in 2004 to 88 in 2005. Sales increased from Pounds Sterling 24,000 per head in 2004 to Pounds Sterling 39,000 per head in 2005 and the loss after tax for 2004 and 2005 reduced from Pounds Sterling 116,000 per head to Pounds Sterling 96,000 per head respectively.

Fixed Assets

Gross fixed assets grew by Pounds Sterling 0.5 million during 2005, an increase of 4% on the balance as at 31 December 2004. This comparatively low level is a reflection of the significant investment in fixed assets in earlier years, particularly pre-2004, which created the inherent capability to produce fibre lasers in volume. SPI's investment in fixed assets is now mostly related to some further increase in capacity rather than the underlying capability.

Depreciation for 2005 was Pounds Sterling 0.5 million (2004: Pounds Sterling 1.2 million). The reduction in the charge from the 2004 level is primarily due to the exceptional asset impairment that took place as at 31 December 2004, which, as a result, has reduced the ongoing annual depreciation charge. Depreciation at 31 December 2005 stands at 81% of the gross cost of the assets.

Working Capital

Net current assets, excluding cash and short term investments (working capital), increased from Pounds Sterling 0.5 million at 31 December 2004 to Pounds Sterling 1.7 million at 31 December 2005. Stocks increased by Pounds Sterling 1.5 million and debtors by Pounds Sterling 1.4 million, offset by an increase in creditors of Pounds Sterling 1.7 million. The net increase in working capital of Pounds Sterling 1.2 million was primarily as a result of the strong sales volume growth experienced by SPI during 2005. Actions are already in place to improve our business processes and systems during 2006 that will improve our logistics efficiency and so help increase the working capital turns.

Loans

A venture loan was provided in June 2005 by ETV Capital S.A. (Luxembourg) to provide working capital for the Company in advance of it being able to access finance from the IPO in October 2005. The loan is secured on the fixed assets of the Company and is repayable over 36 months at an interest rate of 12.65% per annum.

Equity Raised

Pre-IPO: the Group received Pounds Sterling 3.8 million of equity investment from its existing Venture Capital investors during the first half of 2005.

AIM listing: the listing on AIM in October 2005 raised Pounds Sterling 12.0 million gross. This, after transaction costs of Pounds Sterling 1.5 million was reduced to a net injection of Pounds Sterling 10.5 million into the Company. Of these costs, Pounds Sterling 1.2 million were direct costs of the share issue and have been set off against the share premium account; the remaining costs are shown as exceptional costs within the profit and loss account. The cash balance at 31 December 2005 was Pounds Sterling 8.1 million, in line with expectations.

Steve Berg

Chief Financial Officer

24 March 2006



Group profit and loss account
for the year ended 31 December 2005

2005 2004
Pounds Pounds
Sterling Sterling
Notes 000 000

Turnover 2 3,468 1,730
Cost of sales:
Excluding exceptional items (4,872) (4,179)
Exceptional items 3 - (1,006)

-------------------
Total cost of sales (4,872) (5,185)
-------------------

-------------------
Gross loss (1,404) (3,455)
-------------------

Administrative expenses (7,354) (5,750)
Exceptional items 3 (315) -

-------------------
Total administrative expenses (7,669) (5,750)
Other net operating income 131 161
-------------------
(7,538) (5,589)
-------------------

Operating loss (8,942) (9,044)
Interest receivable and similar income 161 85
Interest payable and similar charges (190) -

-------------------
Loss on ordinary activities before taxation (8,971) (8,959)
Tax credit on loss on ordinary activities 535 477

-------------------
Loss on ordinary activities after taxation (8,436) (8,482)
-------------------

Retained loss for the financial year 5 (8,436) (8,482)
-------------------

Loss per ordinary share

Basic and diluted 4 (47.7p) (47.9p)

All amounts are derived from continuing activities.



Group statement of total recognised gains and losses
for the year ended 31 December 2005

2005 2004
Pounds Pounds
Sterling Sterling
000 000

Loss for the financial year (8,436) (8,482)
Foreign exchange differences on retranslation
of net assets of subsidiary undertakings 25 380

-------------------
Total recognised gains and losses relating to
the year (8,411) (8,102)
-------------------



Group balance sheet
at 31 December 2005

2005 2004
Pounds Pounds
Sterling Sterling
Notes 000 000

Fixed assets
Tangible assets 2,424 2,505
-------------------

Current assets
Stocks 2,084 576
Debtors 2,686 1,299
Short term investment - 256
Cash at bank and in hand 8,126 1,638
-------------------
12,896 3,769
-------------------

Creditors: amounts falling due within one year (3,074) (1,372)

-------------------
Net current assets 9,822 2,397
-------------------

-------------------
Total assets less current liabilities 12,246 4,902
-------------------

Creditors: amounts falling due after more
than one year (1,039) -
Provisions for liabilities and charges (165) (103)

-------------------
Net assets 11,042 4,799
-------------------

Capital and reserves
Called up share capital 5 442
Share premium account 5 10,605
Merger reserve 5 50,389
Profit and loss account 5 (50,394)

----------
Total equity shareholders' funds 11,042
----------

---------
Net Investment 4,799
---------



Group cash flow statement
for the year ended 31 December 2005

2005 2004
Pounds Pounds
Sterling Sterling
Notes 000 000

Net cash outflow from operating activities 6 (9,997) (6,818)


Returns on investments and servicing of
finance
Interest received 161 85
Interest paid (190) -
-------------------
Net cash (outflow)/inflow from returns on
investments and servicing of finance (29) 85
-------------------


Taxation
UK tax credit received 451 440
-------------------
Net cash inflow from taxation 451 440
-------------------


Capital expenditure and financial investment
Payments to acquire tangible fixed assets (453) (251)
Receipts from sales of tangible fixed assets - 1
-------------------
Net cash outflow from capital expenditure and
financial investment (453) (250)
-------------------


Management of liquid resources
Decrease/(increase) in current asset
investments 256 (127)
-------------------
Net cash inflow/(outflow) from management of
liquid resources 256 (127)
-------------------


-------------------
Net cash outflow before financing (9,772) (6,670)
-------------------



Financing
Issue of share capital on listing 12,003 4,775
Issue of share capital prior to group
reconstruction 3,841 -
Payments of expenses on issue of equity shares (1,190) -
New borrowings 2,565 -
Repayment of borrowings (898) -
-------------------
Net cash inflow from financing 16,321 4,775
-------------------

-------------------
Increase/(decrease) in cash in period 6,549 (1,895)
-------------------


Preliminary announcement - Notes at 31 December 2005

1. Nature of financial information

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2005 or 2004. The financial information for the financial year ended 31 December 2005 is based on the statutory accounts for that year, upon which the auditors issued an unqualified opinion that did not contain statements under s237(2) or (3) Companies Act 1985 and which have yet to be delivered to the Registrar of Companies. The 31 December 2005 statutory accounts are the first set of accounts for SPI Lasers plc.

Basis of preparation

The accounting policies used in this document are consistent with those used in the full financial statements for 31 December 2005 which have yet to be published. The accounting policies adopted are consistent with those set out in the admission document dated 20 October 2005. In addition, we have adopted policies which were not applicable to the admission document relating to merger accounting.

For the consolidated financial statements, in accordance with Financial Reporting Standard 6 'Acquisitions and Mergers' (FRS 6) the accounts have been prepared using merger accounting and are presented as if the Group had been in existence throughout both the current and prior periods. Consequently the consolidated accounts include a profit and loss covering the year to 31 December 2005 with comparative figures for the prior year, both of which have been prepared as if SPI Lasers plc had existed throughout that period. Equally, Group balance sheets and statements of cash flows have been included to complement the profit and loss accounts.

2. Turnover and segmental analysis

Turnover represents the amounts derived from the provision of goods and services which fall within the group's ordinary activities, stated net of value added tax. In the opinion of the directors, the Company has only one class of business and turnover and losses were generated predominantly in the United Kingdom.



Geographical analysis of turnover by destination

2005 2004
Pounds Pounds
Sterling Sterling
000 000

North America 2,077 1,161
United Kingdom 452 346
Rest of Europe 589 107
Asia 350 116

3,468 1,730


Geographical analysis of net assets by location

2005 2004
Pounds Pounds
Sterling Sterling
000 000

North America 775 316
United Kingdom 10,267 4,483

11,042 4,799


3. Exceptional items

2005 2004
Pounds Pounds
Sterling Sterling
000 000
Recognised in arriving at operating loss

Impairment of tangible fixed assets - 1,006
Transaction costs 315 -

315 1,006


In 2004 there was an exceptional item of Pounds Sterling 1,006,000 within cost of sales that relates to an impairment of assets deployed in the manufacture of products for telecommunications customers. In 2005 there is an exceptional item of Pounds Sterling 315,000 that relates to costs associated with the flotation of the Company but which are not considered to be direct costs of the share issue.

4. Loss per ordinary share

Basic loss per share for the year ended 31 December 2005 of 47.7p per ordinary share is calculated using 17,699,035 shares, being the weighted average number of shares that would have been in issue had the shares been issued on 1 January 2005.

For the year ended 31 December 2005, the loss attributable to ordinary shareholders and weighted average number of shares for the purpose of calculating the diluted loss per share are identical to those used for the basic loss per ordinary share. This is because the potential diluting effect of reducing the loss per ordinary share is not dilutive under the terms of FRS 22.



5. Reserves

Group

Share Share
capital premium Merger Profit
reserve account reserve and loss Total
Pounds Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling Sterling
000 000 000 000 000

On incorporation 50 - - - 50
Repurchase of initial
shares issued (50) - - - (50)
Merger accounting 234 - 50,389 (41,983) 8,640
Arising on share issues 208 11,795 - - 12,003
Share issue costs (1,190) - - (1,190)
Retained loss for the year - - (8,436) (8,436)
Exchange differences of
retranslation of net
assets of subsidiary
undertakings - 25 25

At 31 December 2005 442 10,605 50,389 (50,394) 11,042


6. Notes to the statement of cash flows

(a) Reconciliation of operating loss to net cash outflow form operating
activities

2005 2004
Pounds Pounds
Sterling Sterling
000 000

Operating loss (8,942) (9,044)
Depreciation charges 534 1,180
Fixed asset impairment charges - 1,006
Loss on disposal of fixed assets - 10
(Increase)/decrease in debtors (1,303) 288
Increase in stocks (1,508) (436)
Increase in creditors 1,136 44
Exchange difference 86 134

Net cash (outflow) from operating activities (9,997) (6,818)


(b) Reconciliation of net cash flow movement in net funds

2005 2004
Pounds Pounds
Sterling Sterling
000 000

Increase/(decrease) in cash in the year 6,549 (1,895)
Cash inflow from increase in debt finance (2,565) -
Cash outflow from decrease in debt 898 -
(Decrease)/increase in liquid resources (256) 127

Change in net debt resulting from cash flows 4,626 (1,768)

Exchange differences (61) 245

Movement in net debt in the year 4,565 (1,523)

Opening net funds 1,894 3,417

Closing net funds 6,459 1,894


(c) Analysis of debt

At At
1 January Cash Exchange 31 December
2005 flow differences 2005
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
000 000 000 000

Cash at bank and in hand 1,638 6,549 (61) 8,126
Liquid resources 256 (256) - -
Loans - short term - (628) - (628)
Loans - long term - (1,039) - (1,039)

1,894 4,626 (61) 6,459


(d) Major non-cash transactions

There were no major non-cash transactions in the year.

(e) Exceptional items

Cash flows relating to operating exceptional items: there were cash flows of Pounds Sterling 315,000 relating to operating exceptional items in the year (2004: Pounds Sterling nil).

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