Kromek Group PLC Interim Results (7165Z)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Kromek Group Plc	LSE:KMK	London	Ordinary Share	GB00BD7V5D43	ORD 1P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	-0.20	-2.67%	7.30	7.00	7.60	7.55	7.30	7.55	651,480	11:46:24

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Miscellaneous Metal Ores,nec	17.31M	-6.1M	-0.0102	-7.16	43.82M

Kromek (LSE:KMK)
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RNS Number : 7165Z

Kromek Group PLC

19 December 2017

Kromek Group plc

("Kromek" or the "Group")

Interim Results

Kromek (AIM: KMK), a radiation detection technology company focusing on the medical, security screening and nuclear markets, announces its interim results for the six months ended 31 October 2017.

Financial Highlights

   --      Revenue increased 27% to GBP4.8m (H1 2016/17: GBP3.8m) 
   --      Gross margin improved to 63% (H1 2016/17: 53%) 
   --      Loss before tax was GBP1.8m (H1 2016/17: GBP1.8m) 
   --      EBITDA* improved to GBP0.3m loss (H1 2016/17: GBP0.6m loss)

-- Gross cash and cash equivalents at 31 October 2017 were GBP15m** (30 April 2017: GBP20.3m; 31 October 2016: GBP3.8m).

*EBITDA defined as earnings before interest, taxation, depreciation, amortisation and share-based payments as detailed below.

**This excludes GBP1.3m that has been invested into a money market account that is classified as an investment rather than cash and cash equivalents.

Operational Highlights

Another period of good progress and upscaling in commercial activities with revenue growth driven by higher product sales in Kromek's key markets.

Medical Imaging

The medical imaging detection systems significantly advance the early identification of disease, such as cancer, dementia and osteoporosis, by producing superior quality and higher resolution colour digital images from its SPECT cameras.

-- Won a five-year contract, worth a minimum of $5.38m, to provide detector modules for a new product offering for an existing BMD customer

-- Progressed the development of CZT-based SPECT cameras for a key customer and significantly advanced towards achieving a full clinical validation

-- Won a four-year contract, post period end, worth a minimum of $1.5m, from a new OEM customer to provide customised CZT-based gamma cameras

Nuclear Detection

The D3S is the world's most advanced, portable, nuclear radiation detection device used by counter-terrorist agencies to protect civilians, key infrastructure in cities including ports, borders and transport hubs.

-- D3S sensors continued to be field-tested in major areas of strategic importance to the US by DARPA, and by other public administrations across the globe

-- Named as a qualified contractor under the recently-announced $8.2bn U.S. Department of Defense IDIQ for the Joint Enterprise - Research, Development, Acquisition, and Production/Procurement contract award vehicle following extensive due diligence

Security Screening

The Group's security screening solutions are being incorporated into the next generation liquid and luggage scanners. These upgraded machines are replacing legacy machines and are enhancing the safety of passengers while minimising the inconvenience of the security process at airports.

-- Won a five-year, $2m contract, from a new OEM customer to upgrade its baggage security screening systems to enable enhanced detection of threat materials

-- Commenced work on the Group's first long-term Security Screening contact: a five-year agreement with an existing US-based customer to provide OEM components

Five new patents were filed and 18 granted during the period.

Dr Arnab Basu, CEO of Kromek, said: "During the period, Kromek continued to deliver significant revenue growth and took meaningful steps towards our stated aim of achieving EBITDA breakeven this year. In the first half, we saw growth in sales through executing on our previously-signed agreements while, at the same time, continuing to win new high-value contracts.

"We also succeeded in enhancing our reputation in our key target markets. Our D3S product was successfully deployed in high-profile situations for safeguarding against nuclear terrorism; and we achieved a significant milestone in SPECT by finalising the development of a system capable of producing clinical grade images that will improve early stage diagnosis of diseases such as cancer and dementia.

"We have entered the second half of 2017/18 well-positioned to deliver revenue growth for the full year and achieve EBITDA breakeven, in-line with market expectations. This position is underpinned by good visibility of revenues, with a significant proportion under signed contract. With our increasing traction with existing and potential customers, and with a strengthened order book, the Board looks to the future with confidence."

Enquiries

 
 Kromek Group plc 
--------------------------------  --------------- 
 Arnab Basu, CEO                   +44 (0)1740 
  Derek Bulmer, CFO                 626 060 
--------------------------------  --------------- 
 
 Cenkos Securities plc 
--------------------------------  --------------- 
 Bobbie Hilliam (NOMAD)            +44 (0)20 7397 
  Julian Morse (Sales)              8900 
--------------------------------  --------------- 
 
 Luther Pendragon Ltd 
--------------------------------  --------------- 
 Harry Chathli, Claire Norbury,    +44 (0)20 7618 
  Alexis Gore                       9100 
--------------------------------  ---------------

Arnab Basu, CEO, and Derek Bulmer, CFO, will be hosting a presentation for analysts at 9.00am GMT at the offices of Luther Pendragon, 48 Gracechurch Street, London, EC3V 0EJ.

About Kromek Group plc

Kromek Group plc is a UK technology Group (global HQ in County Durham) and a leading developer of high performance radiation detection products based on cadmium zinc telluride ("CZT") and other advanced technologies. Using its core technology platforms, Kromek designs, develops and produces x-ray and gamma ray imaging and radiation detection products for the medical, security screening and nuclear markets.

The Group's products provide high resolution information on material composition and structure and are used in multiple applications, ranging from the identification of cancerous tissues to hazardous materials, such as explosives, and the analysis of radioactive materials.

The Group's business model provides a vertically integrated technology offering to customers, from radiation detector materials to finished products or detectors, including software, electronics and application specific integrated circuits ("ASICs").

The Group has operations in the UK and US (California and Pennsylvania), and is selling internationally through a combination of distributors and direct OEM sales.

Currently, the Group has over one hundred full time employees across its global operations. Further information on Kromek Group is available at www.kromek.com and https://twitter.com/kromekgroup.

Overview

Kromek's vision is to enable its customers and users to take more timely decisions based on superior information - whether this is to combat terrorism or treat cancer - and the Group took important strides towards reaching this goal during the first half of the 2017/18 financial year. The Group continued to execute on contracts that it had previously been awarded as well as to enter into several new high-value agreements. The shift in the Group's sales mix from R&D to products sales was sustained, with product sales accounting for 87% of total revenue compared with 74% in H1 2016/17. This transition reflects the increasing value of the contracts being awarded, alongside a growing number of customers moving from R&D programmes to full commercialisation.

The Group also enhanced its engagement and reputation with leading organisations within its target markets. Key products were deployed in significant trials and the Group reached performance milestones, which contributed to the satisfaction of due diligence conducted by customers ahead of potential order placement. As a result, the Group strengthened its market position as a key supplier of CZT detection systems to both commercial and government customers globally, and is better positioned to capture the opportunities that exist across all its target markets.

Medical Imaging

Kromek's Medical Imaging solutions are capable of producing high resolution, digital images with superior specificity to standard medical cameras currently available in the market. This is providing clinicians with the necessary equipment to accurately detect and monitor medical disorders, resulting in more efficient treatment of patients.

Kromek made good progress in Medical Imaging during the period. A key driver of revenue growth in the period was delivery on contracts won over the last two years. The Group continued to win new contracts, including a new five-year contract, worth a minimum value of $5.38m, from an existing customer in the bone mineral densitometry ("BMD") sector, for the incorporation of its CZT-based detector modules into a new medical diagnostics product.

The Group also continued to make significant progress under its contract, which was signed in 2014, for the development and delivery of CZT-based single-photon emission computed tomography ("SPECT") modules, for an established manufacturer of x-ray diagnostics and analysis equipment. The Group significantly advanced towards achieving full clinical validation of its newly-developed product for this market. This achievement is the culmination of several years of intensive R&D. The Group's management believe that the Kromek CZT-based SPECT camera will significantly enhance the identification and management of diseases such as cancer and dementia.

Post period end, the Group was awarded a four-year contract by a new OEM customer to provide superior imaging and diagnostic capability to the customer's existing imaging systems. Kromek will leverage its expertise to customise its existing CZT-based gamma camera product platform to meet the customer's requirements. Under the terms of the agreement, which has already commenced, the Group will receive a minimum of $1.5m.

Nuclear Detection

Kromek's state-of-the-art D3S gamma neutron spectroscopic personal radiation detector, linked to a central server, produces a detailed map of radiation levels across large urban areas. This enables threats and non-threats to be clearly differentiated. The data collected will subsequently trigger alarms if there is an unexpected detection of radiation. The D3S can be worn by front line security workers as part of a larger network, contributing to the identification of unexplained build-ups of radioactive isotopes. As a result, it offers an extensive and effective safeguard against the threat of nuclear terrorism.

Kromek continued to advance in the Nuclear Detection market during period. Its key product offerings underwent several high-profile deployments and trials, resulting in the Group enhancing its reputation with government agencies and global OEMs.

The Group's standalone radiation detector, the D3S, for intelligent radiation-detection networks continued to be field-tested in major areas in the US by the Defense Advanced Research Projects Agency ("DARPA"), an agency of the U.S. Department of Defense. It was also used by European authorities to protect the President of the United States during his visit to Brussels in May 2017 and by other public administrations across the globe for protection of government, parliamentary and defence buildings. It is being well-received by these parties and Kromek expects this to materialise into product purchase orders in due course.

In further progress with the U.S. Department of Defense, Kromek was named as a qualified contractor under the department's $8.2bn Indefinite Delivery Indefinite Quantity ("IDIQ") Joint Enterprise - Research, Development, Acquisition, and Production/Procurement (JE-RDAP) contract award vehicle. This followed an extensive process of due diligence conducted on Kromek by the U.S. Department of Defense. The JE-RDAP vehicle has been allocated $8.2 billion to invest over a ten-year period in a number of programmes. These programmes will be conducted jointly with companies selected from the list of qualified contractors. While there is no certainty that the Group will be awarded a contract under the JE-RDAP, the Group's management believes that Kromek is well-placed to be selected under the programme for the research, development, acquisition and production/procurement of a 'Man-portable Radiological Detector System (MRDS)', which is designed to 'provide the Army with a capability to detect and identify a Weapons of Mass Destruction threat'.

Security Screening

In the Security Screening market, Kromek's solutions for baggage screening and for identifying the presence of hazardous material within a container enhance national security and improve the safety of passengers while minimising the inconvenience of the security process at airports and other ports of entry and exit.

Kromek continued to deliver on contracts secured during previous periods with global security groups for the supply of OEM components for baggage screening products used in aviation security. In particular, the Group commenced work under its first long-term contract in the Security Screening market, a five-year agreement, which was awarded in H2 2016/17 by an existing US-based customer that is an emerging leader and global company in the homeland security marketplace. In addition, during the period, Kromek received its second long-term contract in this market with the award of another five-year contract, worth $2.0m, by a new OEM customer that is a leading company in x-ray imaging systems. This customer will incorporate Kromek's technology into its baggage security screening systems to enhance detection of an extensive range of threat materials.

These developments represent the growing traction that Kromek continues to gain through the increasing adoption of its technology in the Security Screening market. This applies both to the provision of OEM components and the use of Kromek's bottle scanners, which are installed in over 50 airports in 11 countries in Asia, Europe and Australia.

R&D

The Group has continued to work on both externally and internally funded R&D activities to develop products and platform technologies that form important elements of its future product roadmap. In particular, the Group's investment in product development increased slightly as it sought to capture the market opportunity with new and enhanced products at a commercial price point. The Group expects investment in R&D to remain at a steady level over the next few years. During the period, five new patents were filed and 18 patents were granted.

Financial Review

During the six-month period to 31 October 2017 revenue increased by 27% to GBP4.8m (H1 2016/17: GBP3.8m) with product sales across Nuclear Detection and Medical Imaging being key contributors to the growth in the period. Product sales grew by 24% over the six-month period ended 31 October 2016 and also continued to expand as a proportion of total revenue, accounting for 87% of H1 2017/18 revenue compared with 74% in H1 2016/17 as summarised in the table below:

 
 Revenue       H1 2017/18          H1 2016/17        Full year 2016/17 
  Mix 
---------  ------------------  ------------------  -------------------- 
            GBP'000   % share   GBP'000   % share    GBP'000    % share 
--------- 
 Product      4,179     87%       2,782     74%        6,671     74% 
--------- 
 R&D            623     13%         991     26%        2,297     26% 
---------  --------            --------            --------- 
 Total        4,802               3,773                8,968 
---------  --------  --------  --------  --------  ---------  ---------

Gross margin for H1 2017/18 improved to 63% compared with 57% for FY 2016/17 and is an increase of 10 percentage points over the 53% gross margin for the comparative six-month period to 31 October 2016. This increase in gross margin was due to product mix and production efficiencies. However, the gross margin is expected to normalise in the second half of 2017/18, resulting in the FY 2017/18 gross margin being at a similar level to that of FY 2016/17.

On an underlying basis, excluding the impact of foreign exchange movements, the Group's administrative cost base reduced by GBP0.4m to GBP4.5m for H1 2017/18 compared with GBP4.9m in H1 2016/17. This reduction in costs for the period has been achieved through a net increase in the capitalised development costs, less the higher amortisation charge in the period. However, on a reported basis, the Group's administrative expenses (including operating expenses) increased by GBP1.0m (27%) to GBP4.7m for the period (H1 2016/17: GBP3.7m) due to the negative impact of foreign currency exchange movements on current assets held in foreign currencies as detailed in the table below:

 
                                      GBP'm 
 
 Balance sheet and working capital 
  conversion six months end 31 
  October 2016 (Net gain in the 
  P&L)                                  1.2 
 Balance sheet and working capital 
  conversion six months end 31 
  October 2017 (Net loss in the 
  P&L)                                (0.2) 
                                     ------ 
 Net movement in foreign exchange 
  impact to 31 October 2017             1.4 
                                     ======

The EBITDA loss reduced during the period to GBP0.3m (H1 2016/17: GBP0.6m loss), due to the higher margin but partially offset by the foreign exchange movement on current assets noted above. The loss before tax remained static at GBP1.8m (H1 2016/17: GBP1.8m loss) due to the offset of higher product and intangible amortisation of GBP1.0m in the period (H1 2016/17: GBP0.7m).

Both EBITDA and loss before tax were negatively impacted by the GBP1.4m net movement in foreign exchange. EBITDA is calculated as per the following table:

 
                                                   Full Year 
                       H1 2017/18                    2016/17 
                                     H1 2016/17 
                      (Unaudited)   (Unaudited)    (Audited) 
------------------  -------------  ------------  ----------- 
                          GBP'000       GBP'000      GBP'000 
------------------  -------------  ------------  ----------- 
 Loss before 
  tax                     (1,847)       (1,810)      (3,794) 
------------------  -------------  ------------  ----------- 
 Adjustments:- 
------------------  -------------  ------------  ----------- 
      Net interest            124             7           40 
------------------  -------------  ------------  ----------- 
      Depreciation            409           379          762 
------------------  -------------  ------------  ----------- 
      Amortisation            957           692        1,417 
------------------  -------------  ------------  ----------- 
       Share-based 
          payments             46            96           99 
------------------  -------------  ------------  ----------- 
      Other income              -             -           15 
------------------  -------------  ------------  ----------- 
 EBITDA                     (311)         (636)      (1,461) 
------------------  -------------  ------------  ----------- 
 Foreign exchange 
  on working 
  capital                     170       (1,233)        (792) 
------------------  -------------  ------------  ----------- 
 Adjusted EBITDA            (141)       (1,869)      (2,253) 
------------------  -------------  ------------  -----------

EBITDA is a non-GAAP measure that the Group uses internally as a key measure of profit and cash generation. Share-based payments are also added back in the measure of EBITDA because it is a non-cash charge that, at this stage in the Group's development, represents a disproportionate share of the Group's operating expenses. Adjusted EBITDA is a further non-GAAP measure that further excludes from EBITDA the impact of foreign exchange movements, and the Group considers this measure to best reflect the underlying profitability.

Investment in product development was GBP1.9m (H1 2016/17: GBP1.7m) reflecting the commitment to invest for future growth of the business, capture the market opportunity with new and enhanced products, and to meet the demands of accelerated customer programmes.

Cash and cash equivalents at:

-- 31 October 2017 were GBP15m (including GBP3.0m utilised on the revolving credit facility (RCF) and excluding GBP1.3m invested into a money market account that is classified as an investment rather than cash and cash equivalents)

   --     30 April 2017 were GBP20.3m (including GBP3.0m utilised on the RCF) 
   --     31 October 2016 were GBP3.8m (including GBP1.5m utilised on the RCF)

The net decrease in cash and cash equivalents in the six months to 31 October 2017 was GBP5.3m. This consists largely of the EBITDA loss of GBP0.3m; investment in development costs of GBP1.9m; net movement in working capital of GBP1.8m; and investment of GBP1.3m into a long-term money market account that is classified as non-current asset investment.

During the period the Group secured new premises for its US operations in Pittsburgh. The new building, under a 20-year lease, has been purpose-built and provides the Group with a significantly more efficient and cost-effective office and manufacturing space. The building is at a location that is more suitable for attracting talent, has better connectivity and is closer to the growing high-tech hub in Pittsburgh. The new facility also allows for further expansion of the manufacturing facility and provides security to the business as the previous lease was coming to an end. An estimated capital investment of $3m in the facilities element of the building, including new clean rooms and HVAC, will be covered by a $3m loan from the landlord secured up to 50% through a letter of credit. The Group deposited GBP1.3m into a long-term money market account to operate as security.

Auditors

Kromek would like to welcome KPMG LLP as the newly appointed Group auditors replacing the former Group auditors, Deloitte. Kromek would like to extend its thanks to Deloitte for the past 11 years of engagement. However, as a form of best practice in Corporate Governance, the Group has formally appointed KPMG. KPMG has a significant presence in the North East of England, based in Newcastle upon Tyne, and has an extensive portfolio of AIM-listed clients.

Outlook

Kromek entered the second half of 2017/18 well-positioned to deliver revenue growth for the full year and achieving EBITDA breakeven in-line with market expectations. This expectation is underpinned by good visibility of revenues with a significant proportion under signed contract.

The Group continues to benefit from its customers commercially launching next-generation CZT-based products and from the increasing adoption of CZT-based technology across its target markets. The Group's products continue to gain traction in all its business segments and Kromek is strengthening its relationships with existing customers as well as enhancing its reputation among potential customers. As a result of this, combined with a strengthened order book and improved revenue visibility, the Board looks to the future with confidence.

Kromek Group plc

Consolidated condensed income statement