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Citel PLC
Citel plc
("Citel" or the "Company")
Interim Results for 6 months ended 30 September 2007
Citel designs, develops and markets a range of VoIP solutions for the business
telephony market that enable enterprises to migrate their telephone systems from
the traditional voice network to an IP-based data network, without replacing
existing handsets and wiring infrastructure.
Sales
-- Continued focus on direct sales to enterprise and through Tier 2/3
Carriers and ISPs
-- Secured supply agreements and stocking orders with four Tier 2/3
Carriers: Cable and Wireless Jamaica, Centennial, BroadConnect and
McLeod. These Carriers are aggressively rolling out hosted VoIP and
winning customer sales
-- Recent customer wins include Sam Houston State University, and Citel is
currently at advanced stage with three other major universities
-- Numerous test projects with Verizon enterprise customers. Certification
testing with Verizon complete and awaiting final certification report
-- Foreign distributors signed in Netherlands, Mexico and Guatemala
Financial Performance
-- Turnover of £1.33 million, an increase of 15.1% over the prior year
period. In U.S. dollars, the Company's primary operating currency, the
increase was 23.4%
-- Sales of the flagship Portico TVA product grew five fold over the prior
year period
-- Loss for the period was £2.0m compared with a loss of £2.5 million in
the prior year period
-- Management action taken to materially reduce expense base and cash burn,
saving approximately £0.9m annually
-- Under the current operating plan management believes the cash balance of
£1.2 million at 30 September 2007 together with available credit
facilities should enable the Company to achieve cash break-even
Product and Technology Enhancements
-- Citel's Feature Pack 3 adds Siemens interoperability and robust
productivity-enhancing tools
-- Portico TVA is now compatible with key Avaya IP telephony solutions.
This allows enterprises to benefit from Avaya's next generation SIP IP
platform, while using existing infrastructure
-- Completed development of new platform that combines both Extender and
Portico TVA products which should enable manufacturing efficiencies
-- Accepted into the Cisco Technology Developer Program. Additionally
working to complete certification with other Enterprise IP PBX
manufacturers
Commenting on the interim results Jose S David, Interim CEO of Citel, said:
"Our strategy to focus on direct selling and Tier 2/3 carriers is driving more
immediate revenues. Progress has been encouraging with this shift from earlier
exclusive focus on Tier l Carrier distribution. The market for VoIP migration
remains large and we continue to be the only provider of this migratory VoIP
solution. Our pipeline of opportunities continues to grow and we believe our
aggressive sales strategy will drive the business forward. We remain confident
in the strength of Citel's market position."
Contact Details:
Citel Plc
Jose David, CEO 001 206 965 8925
Panmure Gordon (UK) Limited
Dominic Morley +44 (0)20 7459 3600
Giles Stewart
Andrew Collins
CEO's Statement
Strategy
Our strategy remains focused on providing a VoIP migration solution directly to
end users, Carriers, and Internet Service Providers (ISPs) in order to
capitalize on the substantial growth in the VoIP marketplace. Citel is well
positioned to capitalize on the growing migration of voice communication from
legacy circuit-switched networks to new voice-enabled IP data networks. Growth
in the VoIP market is being driven by end users seeking to capture the feature
and savings benefits that VoIP offers, and by telecommunications service
providers seeking to profit from the margin enhancement opportunities provided
by their client's conversion to IP communications.
Sales and Marketing
In the period under review, we have secured supply agreements with four Tier 2/3
Carriers which include their placing stocking orders. Centennial in Puerto Rico,
Cable and Wireless of Jamaica, BroadConnnect in Canada and McLeod in the US have
rolled out hosted VoIP programs and are beginning to win customers. These
smaller Carriers are quicker to react to new technologies than Tier 1 Carriers
because VoIP represents incremental revenue opportunities for them.
Recent customer wins include the sale of Portico TVA to Sam Houston State
University. We have product deployed and successfully tested at a number of
other major universities and await final buying decisions. We believe the
education market represents significant potential for Citel's VoIP migration
solution and the Company is currently in discussions with numerous major
colleges, universities and school districts in the US. State and local
governments are another key vertical that has expressed significant interest in
our migration products.
Our refocused direct selling effort has resulted in product deployments, and the
rebranded TVA product has been successfully tested with a number of Tier One
carrier's customers. Additionally, we are beginning to see a number of Tier One
Carriers selectively marketing Citel's products. Whilst this represents
improvement over the past it remains difficult to predict the timing of Tier One
Carrier's momentum with their hosted VoIP initiatives. We believe the growth of
Tier Two/Three VoIP providers, together with our direct selling initiatives,
will provide the catalyst for Tier One Carriers to become more proactive in
marketing their VoIP services.
Product Development
We have been accepted into the Cisco Technology Developer Program as an
Affiliate member. We are pursuing interoperable certification with Cisco Unified
Communications Manager. Early in the period we announced our Portico TVA is now
compliance-tested by Avaya for compatibility with Avaya Communication Manager IP
telephony software and the Avaya Converged Communication Server. We are
beginning development work with Nortel's IP PBX. Now, businesses with multiple
locations and PBX handsets from multiple vendors can connect to Cisco's, Avaya's
and Nortel's SIP-based IP platform, reduce total costs, and minimize the
internal disruption to their business as they migrate to a Voice over IP
network.
At the end of the period we rolled out our Feature Pack 3 which introduced
several features to help reduce installation time and increase configuration
capabilities for the end user customer, making the conversion to VoIP even more
user friendly.
Development is complete and testing is underway our new combined (Extender and
Portico TVA) gateway hardware platform which should enable us to expand our
product capabilities, simplify our supply chain, and reduce our cost of goods.
Financial Review
Sales increased 15.1% to £1.3 million in the six months ended 30 September 2007
from £1.2 million in the six months ended 30 September 2006. In U.S. dollars,
the Group's primary operating currency, the increase was circa 23%. A fivefold
increase occurred in the telephone VoIP adapter (TVA) product line. Gross margin
decreased to 59.5% from 61.7%, due to the purchase of a small business in
January 2007 and promotional programs for Portico TVA.
Operating expenses increased £483,000 over the same six month period. Most of
the increase was attributable to an increase in sales and marketing activity
relating to maximizing the Group's opportunity in TVA products. At the same
time, the Group reduced general and administration expenses. More than
offsetting that improvement, however, were (a) an accrual of £169,000 to reflect
decisions in September 2007 to close a facility and reduce the number of
employees and (b) £120,000 of currency loss on invested cash that ceased to be
offset by currency gains on bought-out debt (next paragraph). The closure of the
Calgary office and employee separation is expected to reduce future operating
expenses by about £900,000 annually or £450,000 per six month period.
Net income (expense) improved by £860,000. The six months ended 30 September
2006 included £700,000 of finance costs attributable to converting debt to
equity in connection with the Company's initial public offering in June 2006.
The six months ended 30 September 2007 included a £125,000 gain from early
buyout of the remainder of the Group's debt, plus an associated reduction in
borrowing costs.
The Group's cash resources have declined about £6 million since the initial
public offering to £1.2 million at 30 September 2007. The cash has been used
mostly to fund operations, (£4.5 million), and pay off debt, (£1.5 million).
Under the current operating plan management believes the current cash balance of
£1.2 million at 30 September 2007 together with available credit facilities
should enable the Company to achieve cash break-even.
Outlook
Our strategy to focus on direct selling and Tier 2/3 carriers is driving more
immediate revenues and progress has been encouraging. The market for VoIP
migration remains large and we continue to be the only provider of this
migratory VoIP solution. Our pipeline of opportunities continues to grow and we
believe our aggressive sales strategy will drive the business forward. We remain
confident in the strength of Citel's market position.
Jose S David
Interim CEO, CFO
Citel plc
Condensed Consolidated Interim Income Statement
For the Six Months Ended 30 September 2007
Twelve
Six Months Six Months Months
To 30 Sep To 30 Sep To 31 Mar
2007 2006 2007
£000s £000s £000s
Note Unaudited Unaudited Unaudited
Revenue £1,325 £1,151 £2,493
Cost of sales (536) (441) (948)
------------ ------------ ------------
Gross profit 789 710 1,545
Operating expenses
Sales and marketing (1,099) (623) (1,678)
Research and development (718) (747) (1,540)
General and administration (979) (1,112) (1,796)
Other operating expense 3 (169) - (17)
------------ ------------ ------------
Total operating expenses (2,965) (2,482) (5,031)
------------ ------------ ------------
Operating loss (2,176) (1,772) (3,486)
Finance income (expense)
Interest income 73 86 213
Borrowing costs (17) (65) (95)
Finance cost of conversion of debt to
equity - (700) (702)
Gain on early buyout of debt 125 - -
------------ ------------ ------------
Net finance income (expense) 181 (679) (584)
------------ ------------ ------------
Loss for the period before tax (1,995) (2,451) (4,070)
Income taxes 4 - - 213
------------ ------------ ------------
Loss for the period £(1,995) £(2,451) £(3,857)
============ ============ ============
Loss for the period per share 5
Basic and diluted (9.1p) (17.6p) (19.9p)
Citel plc
Condensed Consolidated Interim Balance Sheet
30 September 2007
30 Sep 2007 30 Sep 2006 31 Mar 2007
£000s £000s £000s
Unaudited Unaudited Unaudited
Non-current assets
Goodwill £737 £629 £742
Other intangible assets 9 - 12
Property, plant and equipment 110 191 153
--------------- -------------- --------------
856 820 907
Current assets
Inventories 981 487 589
Trade and other receivables 738 657 1,231
Cash and cash equivalents 1,190 6,291 4,595
--------------- -------------- --------------
2,909 7,435 6,415
Current liabilities
Borrowings (31) (86) (1,524)
Trade and other payables (374) (333) (462)
Provisions (133) (286) (149)
--------------- -------------- --------------
(538) (705) (2,135)
--------------- -------------- --------------
Net current assets 2,371 6,730 4,280
Non current liabilities
Long term borrowings - (1,204) -
--------------- -------------- --------------
Net assets £3,227 £6,346 £5,187
=============== ============== ==============
Equity
Share capital £830 £824 £825
Share premium 8,757 8,742 8,724
General reserves 21,286 21,284 21,286
Foreign exchange reserve (54) (91) (25)
Retained earnings (27,592) (24,413) (25,623)
--------------- -------------- --------------
Total equity £3,227 £6,346 £5,187
=============== ============== ==============
Citel plc
Condensed Consolidated Interim Cash Flow Statement
For the Six Months Ended 30 September 2007
Twelve
Six Months Six Months Months
To 30 Sep To 30 Sep To 31 Mar
2007 2006 2007
£000s £000s £000s
Unaudited Unaudited Unaudited
Operating activities
Loss for the period £(1,995) £(2,451) £(3,857)
Non-cash expenses of non-current assets:
Depreciation and amortisation 43 38 75
Impairments 30 - -
Foreign exchange translation (23) (91) (4)
Non-cash, share based payments 26 49 245
Net finance (income) expense (181) 679 584
(Increase) decrease in inventories (392) (37) (139)
(Increase) decrease in receivables 493 813 239
(Decrease) increase in payables (88) (148) (19)
(Decrease) increase in provisions (16) (300) (491)
-------------- ------------ ------------
(2,103) (1,448) (3,367)
Investing activities
Purchase of a business - - (80)
Purchases of PP&E and intangible assets (28) (52) (63)
-------------- ------------ ------------
(28) (52) (143)
Financing activities
Issue of equity share capital 38 8,200 8,208
Expenses of issuing equity share capital - (1,071) (1,094)
Net (payments) receipts of borrowings (977) (850) (852)
Foreign exchange effects of borrowings - (45) (135)
Net interest received (paid) 56 21 106
-------------- ------------ ------------
(883) 6,255 6,233
-------------- ------------ ------------
Net increase (decrease) in cash, cash
equivalents, and bank overdrafts £(3,014) £4,755 £2,723
Cash, cash equivalents, and bank
overdrafts
at beginning of period 4,173 1,450 1,450
-------------- ------------ ------------
Cash, cash equivalents, and bank
overdrafts
at end of period £1,159 £6,205 £4,173
Citel plc
Condensed Consolidated Interim Statement of Changes in Equity
For the Six Months Ended 30 September 2007
Foreign
Share Share General Exchange Retained Total
Capital Premium Reserves Reserve Earnings Equity
£000s £000s £000s £000s £000s £000s
Balance 1 April 2006 £384 £20,545 £580 - £(22,011) £(502)
Loss for the period - - - - (2,451) (2,451)
Share based payments - - - - 49 49
Foreign exchange differences - - - (91) - (91)
----------------------------------------------------------
Subtotal - gains and losses - - - (91) (2,402) (2,493)
Reclassify share premium - (20,545) 20,545 - - -
Ordinary shares issued for cash 328 7,872 - - - 8,200
Expenses of issuing new shares - (1,071) - - - (1,071)
Conversion of loan stock 108 2,017 - - - 2,125
Warrants exercised with
convertible loan stock 4 83 - - - 87
Conversion options on new loans
revalued to conversion date - (159) 159 - - -
----------------------------------------------------------
Balance 30 September 2006 £824 £8,742 £21,284 £(91) £(24,413) £6,346
Loss for the period - - - - (1,406) (1,406)
Share based payments - - - - 196 196
Foreign exchange differences - - - 66 - 66
----------------------------------------------------------
Subtotal - gains and losses 66 (1,210) (1,144)
Expenses of issuing new shares - (25) 2 - - (23)
Exercise of stock options 1 7 - - - 8
----------------------------------------------------------
Balance 31 March 2007 £825 £8,724 £21,286 £(25) £(25,623) £5,187
Loss for the period - - - - (1,995) (1,995)
Share based payments - - - - 26 26
Foreign exchange differences - - - (29) - (29)
----------------------------------------------------------
Subtotal - gains and losses (29) (1,969) (1,998)
Shares issued in debt buyout 2 33 - - - 35
Exercise of stock options 3 - - - - 3
Balance 30 September 2007 £830 £8,757 £21,286 £(54) £(27,592) £3,227
Citel plc
Notes to Condensed Consolidated Interim Financial Statements
For the Six Months Ended 30 September 2007
1. Basis of presentation
The accompanying condensed consolidated interim financial statements have been
prepared using changed accounting policies. The new policies (a) are set forth
in Note 2, (b) reflect the recognition and measurement principles of
International Financial Reporting Standards (IFRS) as adopted by the EU, and (c)
are expected to be effective at 31 March 2008, the Group's first annual
reporting date at which it is required to use IFRS. They replace the accounting
policies included with the Group's 31 March 2007 financial statements that
reflected United Kingdom Generally Accepted Accounting Principles (UK GAAP).
Changes from UK GAAP to IFRS are explained and reconciled in Note 6 starting
from the Group's prescribed date of transition to IFRS, 31 March 2006.
The Group's assets and liabilities at the transition date, and all changes
thereto throughout all periods presented in these financial statements, are
valued and accounted according to IFRS as represented in Note 2, subject to
exemptions taken on first time adoption. Those exemptions regard accounting for
business combinations and foreign currency differences completed prior to
transition to IFRS. They also are explained in Note 2.
The condensed consolidated interim financial statements do not represent full
financial statements and should be read in conjunction with the statements
previously issued for the year ended 31 March 2007.
A new parent company Citel plc, was incorporated on 28 January 2006 to be the
vehicle for capital raising and admission to the Alternative Investment Market.
This company acquired the whole of the issued share capital of the former parent
company, Citel Technologies Limited, by way of a share for share exchange. The
transaction is not covered by IFRS 3, Business Combinations, so is subject to a
general IFRS rule, which requires application of an appropriate accounting
policy, for which the Group chose merger accounting principles. The effective
date of the merger was 20 June 2006. The accompanying financial statements
report the results of Citel plc consolidated with the results of the merged
companies from 31 March 2006.
Although most of the Group's trading is denominated in US dollars, which
therefore is the Group's functional currency, the Group has retained £ sterling
as its presentation currency being both consistent with previous periods and the
currency of investment.
2. Principal accounting policies
Basis of consolidation
The accompanying financial statements consolidate the accounts of Citel plc and
its subsidiary undertakings drawn up to their co-terminus year ends.
Intercompany balances and unrealised gains on transactions among companies
within the Group are eliminated. Unrealised losses also are eliminated except
when a transaction provides evidence of impairment of a transferred asset (see
impairment of assets below).
Amounts reported in the separate financial statements of subsidiaries have been
adjusted where necessary to ensure consistency with accounting policies adopted
by the Group.
Revenue
Revenue represents goods and services provided for consideration and are
measured by the fair value of the consideration received or receivable,
excluding VAT. Revenue is recognised when the Group has fulfilled a contracted
obligation to a customer. When fulfillment continues over a period of time,
associated revenue is deferred then taken into the income statement on the basis
of work completed.
Provision is made against invoiced revenue if a customer has any right to
receive future rebate, e.g. an annual volume discount, or to return purchased
goods, e.g. goods returnable under warranty. Such provisions are based upon
prudent assessment of the likely total credits to be issued.
Royalties
Royalties are recognised on an accrual basis in accordance with the substance of
the associated agreements.
Interest
Interest is recognised using the effective interest method which calculates the
amortised cost of a financial asset or liability and allocates the interest
income or expense over the relevant period. The effective interest rate is the
rate which exactly discounts estimated future cash flows through the expected
life of the financial instrument to the net carrying amount of the financial
instrument.
Contributions to pension funds
Pension costs charged against profits represent the Group's portion of
contributions to personal pension plans of the directors and employees in
respect of the accounting period.
Depreciation and amortisation
Depreciation represents write-down of property, plant and equipment, and
amortisation represents write-down of amortisable intangible assets, in each
case to estimated residual values over the assets' estimated useful economic
lives. The write-downs are computed straight line in equal annual installments.
In event that assessments of either residual values or estimated useful economic
lives change, the computations are adjusted accordingly.
Impairment of assets
Impairment occurs when an asset's carrying amount exceeds its recoverable
amount. Recoverable amount is the larger of (a) current fair market value, if
determinable, less cost to sell, or (b) present value of future cash flows
attributable to the asset. Future cash flows attributable to an asset represent
an allocation from the asset's cash generating unit, which is the smallest
grouping of assets, including the asset being assessed, for which there are
separately identifiable cash flows, e.g. a business unit or product line.
Typically, current and financial assets are assessed individually at market,
property, plant and equipment as groups at market, and intangible assets,
including goodwill, through cash flow computations. Even so, exceptions are
possible. The general rule is to assess with the least distortion from other
assets as is practical.
Goodwill, other intangible assets with indefinite useful lives or not yet
available for use, and cash generating units including those assets are
evaluated for impairment at least annually. All other assets are evaluated
whenever circumstances change such that the asset's current carrying value may
not be recoverable.
Impairment losses recognised for cash-generating units, to which goodwill has
been allocated, are credited initially to the carrying amount of the goodwill.
Any remaining impairment loss is allocated pro rata to the other assets in the
cash generating unit. With the exception of goodwill, all assets are
subsequently reassessed for indications that impairment losses previously
recognised may no longer exist.
Disposal of assets
Gain or loss arising from disposal of an asset is determined as the disposal
proceeds net of the carrying value of the asset (cost or depreciated or
amortised cost net of accumulated impairment losses) and disposal costs. The
gain or loss is included in other operating expense in the income statement.
Business combinations
To the date of the accompanying financial statements all of the Group's business
combinations have been acquisitions of 100% owned and controlled subsidiaries.
Such acquisitions are accounted using the purchase method. The purchase method
involves recognition, at a subsidiary's acquisition date, of the fair value of
all of its identifiable assets and liabilities, including contingent
liabilities, regardless of whether or not the assets and liabilities had been
recorded in the subsidiary's financial statements prior to acquisition. On
initial recognition, the subsidiary's assets and liabilities are included in the
consolidated balance sheet at fair values, which are used as bases for
subsequent measurement under the Group's accounting policies. Any excess of
acquisition cost over fair value of the Group's share of the identifiable net
assets at the acquisition date is recorded as goodwill.
IFRS allows an exemption for first time adopters to use prior accounting at the
IFRS transition date to measure goodwill arising from business combinations
completed prior to the transition date. The Group has elected the exemption. As
such, IFRS requires that the carrying value of goodwill at the transition date
be deemed wholly cost, and the Group has complied.
Goodwill
Goodwill arises in acquisition of a business and represents the excess of
acquisition cost over the fair value of the Group's share of the net assets
acquired. It is carried at cost less accumulated losses arising from annual
impairment reviews without possibility of reversal of prior impairment losses in
event of increase in fair value. Similarly, amortisation of goodwill taken prior
to transition to IFRS is not subject to reversal.
Intangible assets except goodwill
Intangible assets are non-monetary assets having no physical substance. Apart
from goodwill, they include purchased assets, currently a non-compete agreement
and capitalised legal expenditure for patents, and internally generated assets
representing capitalised development expenditure, currently none. The purchased
assets have estimated useful lives of two to five years and no estimated
residual values. They are carried at amortised cost (cost less accumulated
amortisation) net of accumulated impairment losses.
Development expenditure is capitalised when all the following conditions are
satisfied:
+ Completion of the asset is technically feasible, so that it will be available
for use or sale.
+ The Group intends to complete the asset and use or sell it.
+ The Group has the ability to use or sell the asset.
+ The asset will generate probable future economic benefit. Among other things,
this requires that there is a market for the asset itself or its output, or, if
the asset is to be used internally, it will be used in generating such benefit.
+ There are adequate technical, financial and other resources to complete the
development and to use or sell the asset.
+ The expenditure attributable to the asset during its development can be
measured reliably.
Development expenditure not meeting the listed conditions at time of incurrence,
and all research expenditure, including that associated with any capitalised
development expenditure, is expensed as incurred. Associated expenditure
incurred before the conditions are first met also is expensed.
The cost of an internally generated intangible asset consists of all directly
attributable costs necessary to create, produce, and prepare the asset to be
capable of operating in the manner intended by management. Directly attributable
costs include costs expended specifically for the development project plus
reasonably allocated overheads of the development function. General or other
overheads are excluded.
Internally generated intangible assets become amortisable when they begin their
intended use. The estimated economic useful lives assigned reflect the estimated
durations of the use. Before an asset becomes amortisable, it remains subject to
assessment for impairment.
Property, plant and equipment
Property, plant and equipment consist primarily of computer hardware and
software having estimated useful lives of four years and no estimated residual
values. The assets are carried at depreciated cost (cost less accumulated
depreciation) net of accumulated impairment losses.
Leased assets
Economic ownership of a leased asset is transferred to the lessee if the lessee
bears substantially all the risks and rewards of ownership of the asset. The
asset is recognised at time of inception of the lease at fair value or, if
lower, the present value of the minimum lease payments plus incidental payments,
if any, to be borne by the lessee. A corresponding amount is recognised as a
finance leasing liability.
The interest element of leasing payments represents a constant proportion of the
capital balance outstanding and is charged to the income statement over the
period of the lease.
All other leases are regarded as operating leases and the payments made under
them are charged to the income statement on a straight line basis over the lease
term. Lease incentives are spread over the term of the lease.
Inventories
All inventories are purchased or contract-manufactured and are valued at the
lower of cost or net realisable value. Costs are assigned using both weighted
average and first in, first out formulas.
Financial assets
Financial assets include trade and other receivables. They are non-derivative
financial assets with fixed or determinable payments that are not quoted in an
active market. Current receivables are measured at face value less provision for
impairment. Non-current receivables are measured, subsequent to initial
recognition, at amortised cost, using the effective interest method, less
provision for impairment. Each measurement approximates fair value. Associated
interest income is recognised in net finance income or cost in the income
statement.
Impairment provisions are made when there is objective evidence that the Group
will not be able to collect all amounts due to it in accordance with the
original terms of the underlying agreements. The amount of the impairment loss
is determined as the difference between the asset's carrying amount and the
present value of estimated future remittances.
A financial asset is derecognised only where the contractual rights to the cash
flows from the asset expire, or the asset is transferred and that transfer
qualifies for derecognition. A financial asset is transferred if the contractual
rights to receive the cash flows of the asset have been transferred or if the
Group retains the contractual rights to receive the cash flows but assumes a
contractual obligation to pay them to one or more recipients. A financial asset
that is transferred qualifies for derecognition if the Group transfers
substantially all the risks and rewards of ownership of the asset, or if the
Group neither retains nor transfers substantially all the risks and rewards of
ownership but does transfer control of the asset.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and demand deposits, together
with other short-term, highly liquid investments that are readily convertible
into known amounts of cash and which are subject to insignificant risk of
changes in value from causes other than foreign exchange.
Financial liabilities
Financial liabilities consist of current and non-current borrowings and trade
and other payables. They are obligations to pay cash or other financial assets
and are recognised when the Group becomes a party to the contractual provisions
of a financial instrument. Current financial liabilities are recorded initially
at face value, and non-current financial liabilities are recorded initially at
fair value and subsequently measured at amortised cost using the effective
interest method. Each approximates fair value. Associated interest charges are
recognised in finance cost in the income statement. Finance charges, including
premiums payable on settlement or redemption and direct issue costs, are charged
to the income statement on an accrual basis using the effective interest method
and are added to the carrying amount of the instrument to the extent that they
are not settled in the period in which they arise.
A financial liability is derecognised only when the obligation is extinguished,
that is, when the obligation is discharged or cancelled or expires.
Dividends
Dividends are recognised in trade and other payables and retained earnings when
approved in a general shareholders' meeting prior to the balance sheet date.
Taxation
Current tax is the tax currently payable based on taxable income for the year.
Deferred income taxes are calculated using the liability method on temporary
differences. Deferred tax generally is provided on the difference between the
carrying amounts of assets and liabilities and their tax bases. However,
deferred tax is not provided on the initial recognition of goodwill, nor on the
initial recognition of an asset or liability unless the related transaction is a
business combination or affects tax or accounting profit. Deferred tax on
temporary differences associated with shares in subsidiaries and joint ventures
is not provided if reversal of these temporary differences can be controlled by
the Group and it is probable that reversal will not occur in the foreseeable
future. In addition, tax losses available to be carried forward as well as other
income tax credits to the Group are assessed for recognition as deferred tax
assets.
Deferred tax liabilities are provided in full, with no discounting. Deferred tax
assets are recognised to the extent that it is probable that the underlying
deductible temporary differences will be able to be offset against future
taxable income. Current and deferred tax assets and liabilities are calculated
at tax rates that are expected to apply to their respective period of
realisation, provided they are enacted or substantively enacted at the balance
sheet date.
Changes in deferred tax assets or liabilities are recognised as a component of
tax expense in the income statement, except where they relate to items that are
charged or credited directly to equity (such as the revaluation of land) in
which case the related deferred tax is also charged or credited directly to
equity.
Foreign currencies
Transactions in foreign currencies are translated at exchange rates ruling at
the transaction dates.
Translations of monetary assets and liabilities denominated in foreign
currencies are updated to rates of exchange ruling at the balance sheet date.
Translations of non-monetary assets and liabilities denominated in foreign
currencies are updated only for items measured at fair value and then to rates
of exchange ruling at the dates the fair values were determined. Goodwill
relating to a separate operation is considered denominated in the separate
operation's currency.
With one exception, currency gains and losses from the foregoing transactions
are recognised in income or loss for the period at the times the transactions
occur. The exception is, when a currency gain or loss is associated with another
gain or loss, which is accounted apart from income or loss for the period, the
currency gain or loss is accounted the same as the associated gain or loss.
When financial statements of foreign subsidiaries are consolidated, their assets
and liabilities are translated at exchange rates ruling at the balance sheet
date, and their income and expenses are translated at average rates of exchange
for the reporting period. The latter is deemed to approximate the actual
exchange rates in effect when the income and expense transactions occurred. The
resulting exchange differences are taken directly to a foreign exchange reserve
in equity. At such time that a foreign operation is disposed, its portion of the
foreign exchange reserve is transferred to the gain or loss on disposal.
Although the Group's prior method for foreign currency translation under UK GAAP
was similar to that specified herein under IFRS, the classification of the
resulting currency adjustments was different. Accordingly, the Group has elected
an exemption for first time adopters of IFRS to deem cumulative translation
differences for all foreign operations to be nil at the IFRS transition date, 31
March 2006. Electing the exemption means that future gains and losses from
disposal of foreign operations will exclude currency effects occurring prior to
31 March 2006.
Equity
Equity comprises the following:
"Share capital" represents the nominal value of equity shares.
"Share premium" represents the excess over nominal value of the fair value of
consideration received for equity shares, net of expenses of the share issue.
"Merger reserve" represents the share premium generated in Citel Technologies
Limited preceding its merger into Citel plc in preparation for the latter's
initial public offering.
"Capital contribution reserve" represents the difference between the initial
public offering price of shares and the discount value at which convertible debt
was converted into shares at the date of the initial public offering.
"General reserves" comprise merger reserve plus capital contribution reserve.
"Foreign exchange reserve" represents foreign currency exchange differences
arising from retranslation of opening net investment in subsidiaries.
"Retained earnings" represents retained, cumulative income or loss net of
cumulative share based payments and cumulative dividends.
Share based payments
All share-based payment arrangements are recognised in the financial statements.
IFRS 2 has been applied to grants before 7 November 2002 only where the Group
has disclosed publicly the fair value of those equity instruments, determined as
at the grant date in accordance with IFRS 2.
All goods and services received in exchange for the grant of any share-based
payment are measured at their fair values. Where employees are rewarded using
share-based payments, the fair values of employees' services are determined
indirectly by reference to the fair value of the instrument granted to the
employee. This fair value is appraised at the grant date and excludes the impact
of non-market vesting conditions, for example profitability and sales growth
targets.
All equity-settled share-based payments are ultimately recognised as an expense
in the income statement with a corresponding credit to retained earnings.
If vesting periods or other non-market vesting conditions apply, the expense is
allocated over the vesting period, based on the best available estimate of the
number of share options expected to vest. Estimates are subsequently revised if
there is any indication that the number of share options expected to vest
differs from previous estimates. Any cumulative adjustment prior to vesting is
recognised in the current period. No adjustment is made to any expense
recognised in prior periods if share options ultimately exercised are different
from that estimated on vesting.
Upon exercise of share options the proceeds received net of attributable
transaction costs are credited to share capital, and where appropriate share
premium.
3. Accounting error in year ended 31 March 2007
In recording share based payments for the first time in the year ended 31 March
2007, the Group recorded a prior period adjustment of £17,000 relating thereto.
In the accompanying financial statements, that prior period adjustment is shown
as other operating expense within the year ended 31 March 2007.
4. Income taxes
The directors consider that it would be imprudent to create a deferred tax asset
in respect of tax losses until the profit trend of the Group is more
established. No tax credits for claims in respect of research and development
were anticipated in the six months ended 30 September 2007 and 2006 pending
completion of the relevant project analyses.
5. Loss per share
Twelve
Six Months Six Months Months
To 30 Sep To 30 Sep To 31 Mar
2007 2006 2007
£000s £000s £000s
Loss for the period £(1,995) £(2,451) £(3,857)
Weighted average number of outstanding
shares 21,816,561 13,961,000 19,403,103
Basic and diluted loss per share (9.1p) (17.6p) (19.9p)
6. Transition to IFRS
As stated in Note 1, the accompanying condensed consolidated interim financial
statements comprise the Group's initial financial reporting pursuant to IFRS.
They cover part of the first annual consolidated financial statements to be
prepared in accordance with IFRS. For such issuance IFRS establishes a
transition date as of which the reporting entity must prepare an opening balance
sheet, which complies with IFRS, subject to certain mandatory and optional
exemptions of which two of the latter have been elected by the Group. One
permits business combinations occurring prior to the transition date to be
valued at the transition date using prior accounting. The second deems
cumulative gains and losses from translation of subsidiaries' foreign currency
financial statements to be nil at the transition date.
The Group's transition date to IFRS is 31 March 2006. Following are
reconciliations, required by IFRS 1, from UK GAAP, the Group's prior accounting
and reporting basis, to IFRS. There are three reconciling items:
+ Amortisation of goodwill (Note A in reconciliations): under IFRS amortisation
of goodwill is not allowed, but under UK GAAP it is permitted and was elected.
Effects of this change will continue for as long as the Group holds goodwill.
+ Currency gains and losses from translation of subsidiaries' foreign currency
financial statements (Note B in reconciliations): under IFRS such gains and
losses are recognised in an equity reserve pending disposal of the subsidiaries,
at which time they are moved to gain or loss on disposal; under UK GAAP the
gains and losses were moved to retained earnings apart from income or loss for
the period. Effects of this change will continue as long as the Group operates
foreign subsidiaries.
+ Fair values of embedded derivatives (conversion options) in convertible loan
notes previously converted in connection with 2006 initial public offering (Note
C in reconciliations): under IFRS such conversion options are recognised at
times of loan takedown and re-evaluated at balance sheet dates, while under UK
GAAP they were accounted at loan conversion. Because all aspects of the loan
setups and conversions occurred within the two years ended 31 March 2006 and
2007, all effects of this reconciling item are offset within those two years.
UK
GAAP Note A Note B Note C IFRS
£000s £000s £000s £000s £000s
----------------------------------------------------
RECONCILIATION OF EQUITY AT 31 MARCH 2006 (IFRS TRANSITION DATE)
Non-current assets
Goodwill £629 - - - £629
Other intangible assets - - - - -
Property, plant and equipment 177 - - - 177
Current assets
Inventories 450 - - - 450
Trade and other receivables 1,470 - - - 1,470
Cash and cash equivalents 2,030 - - - 2,030
Current liabilities
Borrowings (3,268) - - 541 (2,727)
Trade and other payables (481) - - - (481)
Provisions and other (586) - - - (586)
Long term borrowings (1,464) - - - (1,464)
----------------------------------------------------
Net assets £(1,043) - - £541 £(502)
====================================================
Equity
Share capital £384 - - - £384
Share premium 20,545 - - - 20,545
General reserves - - - 580 580
Foreign exchange reserve - - - - -
Retained earnings (21,972) - - (39) (22,011)
----------------------------------------------------
Total equity £(1,043) - - £541 £(502)
====================================================
RECONCILIATION OF INCOME STATEMENT FOR THE 6 MONTHS ENDED 30 SEPTEMBER 2006
Revenue £1,151 - - - £1,151
Cost of sales (441) - - - (441)
----------------------------------------------------
Gross profit 710 - - - 710
Operating expenses (2,623) 141 - - (2,482)
----------------------------------------------------
Operating loss (1,913) 141 - - (1,772)
Net finance income (loss) (718) - - 39 (679)
----------------------------------------------------
Loss for the period before tax (2,631) 141 - 39 (2,451)
Income taxes - - - - -
----------------------------------------------------
Loss for the period (2,631) 141 - 39 (2,451)
Gain (loss) other than income statement
Gain (loss) on foreign currency
net
net investment previously moved
separately to retained earnings (91) - 91 - -
UK
GAAP Note A Note B Note C IFRS
£000s £000s £000s £000s £000s
----------------------------------------------------
RECONCILIATION OF EQUITY AT 30 SEPTEMBER 2006
Non-current assets
Goodwill £488 £141 - - £629
Other intangible assets - - - - -
Property, plant and equipment 191 - - - 191
Current assets
Inventories 487 - - - 487
Trade and other receivables 657 - - - 657
Cash and cash equivalents 6,291 - - - 6,291
Current liabilities
Borrowings (86) - - - (86)
Trade and other payables (333) - - - (333)
Provisions and other (286) - - - (286)
Long term borrowings (1,204) - - - (1,204)
----------------------------------------------------
Net assets £6,205 £141 - - £6,346
====================================================
Equity
Share capital £824 - - - £824
Share premium 8,742 - - - 8,742
General reserves 21,284 - - - 21,284
Foreign exchange reserve - - (91) - (91)
Retained earnings (24,645) 141 91 - (24,413)
----------------------------------------------------
Total equity £6,205 £141 - - £6,346
====================================================
RECONCILIATION OF INCOME STATEMENT FOR THE 12 MONTHS ENDED 31 MARCH 2007
Revenue £2,493 - - - £2,493
Cost of sales (948) - - - (948)
----------------------------------------------------
Gross profit 1,545 - - - 1,545
Operating expenses (5,238) 207 - - (5,031)
----------------------------------------------------
Operating loss (3,693) 207 - - (3,486)
Net finance income (loss) (623) - - 39 (584)
----------------------------------------------------
Loss for the period before tax (4,316) 207 - 39 (4,070)
Income taxes 213 - - - 213
----------------------------------------------------
Loss for the period (4,103) 207 - 39 (3,857)
Gain (loss) other than income statement
Gain (loss) on foreign currency
net
net investment previously moved
separately to retained earnings (24) (1) 25 - -
UK
GAAP Note A Note B Note C IFRS
£000s £000s £000s £000s £000s
----------------------------------------------------
RECONCILIATION OF EQUITY AT 31 MARCH 2007
Non-current assets
Goodwill £536 £206 - - £742
Other intangible assets 12 - - - 12
Property, plant and equipment 153 - - - 153
Current assets
Inventories 589 - - - 589
Trade and other receivables 1,231 - - - 1,231
Cash and cash equivalents 4,595 - - - 4,595
Current liabilities
Borrowings (1,524) - - - (1,524)
Trade and other payables (462) - - - (462)
Provisions and other (149) - - - (149)
Long term borrowings - - - - -
----------------------------------------------------
Net assets £4,981 £206 - - £5,187
====================================================
Equity
Share capital £825 - - - £825
Share premium 8,724 - - - 8,724
General reserves 21,286 - - - 21,286
Foreign exchange reserve - - (25) - (25)
Retained earnings (25,854) 206 25 - (25,623)
----------------------------------------------------
Total equity £4,981 £206 - - £5,187
====================================================
7. Publication of non-statutory accounts
The financial information set out in this interim report does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. The UK
GAAP figures for the year ended 31 March 2007 have been extracted from statutory
financial statements previously filed with the Registrar of Companies and
corrected for an error, which increased loss for the year by £17,000. The
auditor's report on those financial statements is unqualified. The financial
information for the six months ended 30 September 2006 and six months ended 30
September 2007 is unaudited.
The 2007 interim report will be made available on the Company's website at
www.citel.com.
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