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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
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Secure Design | LSE:SDKK | London | Ordinary Share | JP3420970000 | ORD NPV (DI) |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
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0.00 | 0.00% | 8.00 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
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0 | 0 | N/A | 0 |
RNS Number:2368Q Secure Design KK 17 March 2008 FOR IMMEDIATE RELEASE 17 March 2008 SECURE DESIGN KK ("Secure Design" or "the Company") (A leading biometrics company based in Tokyo, Japan specialising in fingerprint authentication) Unaudited Preliminary Results for the year ended 31 December 2007 Chairman's Statement The past year has been a challenging year for our Company resulting in declining revenues, increased losses and management change but despite those challenges the Company has been able to both develop new products and forge alliances that augur well for its continued development in 2008 and 2009 with the purpose of being a leading provider of fingerprint sensor solutions. Profit and Loss Account Revenues have declined from JPY 522,214,000 (£2,291,420) to JPY 269,755,000 (£1,183,653) a decline of 48%. At least JPY 106,459,000 of the prior year sales have subsequently been fully provided for as a bad debt thus perhaps putting the apparent rapid decline into a wider context that ultimately led to the resignation of the Chief Executive Officer. Gross profits have declined from JPY 422,030,000 (£1,851,823) in 2006 to JPY 115,544,000 (£115,544) for 2007 a decline of 73% with gross margins falling from 81% to 43% due to product mix issues. Sales and Marketing expenses in the current year amounted to JPY 357,652,000 (£1,569,341)(2006: JPY 121,850,000) (£534,665) reflecting a total provision for Bad Debts of JPY 250,113,000 (£1,097470) A consequence of the poor operating performance has resulted in General Administrative Expenses declining from JPY 378,188,000 (£1,659,446) in 2006 to JPY 215,619,000 (£946,110) as the Company sought to cut back on its overall level of overheads in order that resources could be directed towards the future growth of the business. This is reflected in our R&D Expenditure increasing from JPY 135,665,000 (£595,287) to JPY 215,025,000 (£943,504) an increase of 58%. The overall loss for the year has increased to JPY 648,959,000 (£2,847,558) compared to the loss in 2006 of JPY 162,024,000 (£710,945). Balance Sheet There are a number of key balance sheet items that I wish to highlight for your attention but firstly I would draw your attention to the accounting policies accompanying this statement which highlight the fact that the Balance Sheet values have been prepared on a going concern basis. Accordingly the financial statements do not reflect any adjustments that would be necessary if the going concern assumption was no longer valid. I and the rest of the Board are confident that the Company will be able to secure further funding in order to continue to trade and increase Shareholder value. The Group has acquired a 40% stake in Beyond LSI and this has been equity accounted for JPY 3,180,000(£13,954). Intangible assets have increased from JPY 47,959,000 (£210,437) to JPY 77,518,000 (£340,143) primarily as a result of the acquisition of patents from I-O Network of which Mr Kiyomoto, the Chief Technical Officer, is a director. Other non-current assets have reduced from JPY 24,976,000 (£109,589) to JPY 4,858,000 (£21,316) primarily as a result of the termination of downsizing at the Group's office premises. Overall inventories have been reduced from JPY 193,535,000 (£849,208) to JPY 117,469,000 (£515,440) as a result of the reduced scope of the Group's activities and the necessity to improve working capital. Trade and other receivables have reduced from JPY 393,528,000 (£1,726,759) to JPY 136,433,000 (£598,654) due in large part to; a) the reduction in sales activity b) the provision for bad and doubtful debts of JPY 250,000,000 (£1,096,491) relative to amounts owed by four customers, two who have been provided for in full amounting to JPY 185,000,000 (£811,403), and the other two only partially provided for. The level of exposed debt not provided for amounts to JPY 134,000,000 (£587,719). Cash and cash equivalents at the year end amounted to JPY 9,515,000 (£41,749) and, as highlighted earlier, the Group requires to raise further funding in order to continue and to execute its plans as set out in the Operating Review. Management and Board As a result of the poor performance, Mr Takahashi resigned as Chief Executive and was replaced by Mr. Kiyomoto, our Chief Technical Officer, who has provided excellent stewardship to ensure that the Group has made substantial technical progress. In March 2008, Mr Kiyomoto indicated that he would prefer to revert back to his role as Chief Technical Officer. Consequently, for a brief interim period, I will combine the responsibilities of both Chief Executive and Chairman until we can identify an appropriate Chief Executive can be identified. Additionally, David Evans, the independent non-executive director, will assume the role of Deputy Chairman with specific additional responsibility for Corporate governance and Investor Relations. Outlook The year ahead for the Company will be challenging and its survival is dependent upon raising further funds, a process that I have supported personally in the new financial year to the extent of 30,000,000 JPY and I am optimistic that we will be able to raise additional funds to execute our plans. The real benefit of the work currently being undertaken will show through in 2009 but some early evidence of success are beginning to be seen with the placing of a JPY 4,000,000 (£17,544) order from Taiwan for prototype sensors. Additionally I anticipate that we will be able to leverage off the investment made in Beyond LSI Inc., where we currently own 40% (with arrangements in place to acquire a further 13.9%)of the company, to expand into China where our smart card solutions will meet an anticipated market need and, in the slightly longer term, where our miniature semiconductor sensor will fulfil a requirement for a mobile and flexible sensor with application not only in China but the Rest of the World. Finally I would like to thank you for your patience and forbearance as I have sought to rectify certain issues in the Company and you can rest assured that my interests both as Chairman and as the single largest shareholder are aligned with yours in ensuring value is enhanced in this and future years. Taketoshi Kashiwabara Chairman 17 March 2008 Operating Review In 2007 SDKK focused on the corporate development stage for future expansion: the introduction of new products to the market, business/ technology alliances with other companies and M&A. In particular, 2007 provided a good opportunity to establish a global alliance with other leading edge companies. We have established a new alliance with PCS Securities Pte Ltd. ("PCS") in Singapore for e-Passport scanners and a wireless authentication terminal. We have started a development project on design and mass-production of a semiconductor capacitance fingerprint sensor in collaboration with Oriental System Technologies, Inc. in Hsinchu, Taiwan and Sanyo Semiconductor ("SANYO") in Gunma, Japan. As pointed out in the Interim Report 2007, sales of the utility software SD-CHAP , which enables the web log-in by using the one time password (OTP) and the fingerprint authentication and fingerprint readers, including FP-STICK and FP-PLUS, contributed significantly. Three hundred units of ITubes(R), which have been one of our strategic products since we established SDKK, were delivered to Tokyo Metropolitan Cancer and Infectious Diseases Center Komagome Hospital in May 2007. Since June 2007, we have also been introducing FLO-Tube, which used the main body of ITube and Microsoft's ActiveDirectory(TM) In December 2007, the City Council of Yokosuka, Japan adopted FLO-Tube Manager deploying the FLO-Tube for each of the council members' PCs. These sales are establishing the reputation of SDKK in this field. In April 2007, we reached a sales agreement with NEC Fielding Ltd., which has a nationwide branch network in Japan, for SD-GATE which can use the fingerprint authentication as well as smart cards such as Felica and Myfare cards. Since then the sales of SD-Gate have doubled. During the year, SDKK established a technology and business alliance with PCS Securities Pte Ltd for developing new e-Passport control systems with fingerprint authentication capability: * Sentinel-Bio: a new e-Passport scanner platform with a fingerprint authentication system * e-Pass Kiosk: an automatic immigration service stand, and * WAT: a mobile wireless e-Passport reader for border security In fall 2007, SDKK and PCS officially announced the launch of Sentinel-Bio, e-Pass Kiosk and WAT at Biometrics Consortium Conference & Exhibition 2007 in Baltimore, USA and Biometrics Conference & Exhibition 2007 in London, UK. We also found a civilian application for Sentinel-Bio, where it can be used for checking employees passports. SDKK is establishing local sales representatives in the US, UK and South East Asia to offer RFID chips and multi-functional advisory service on e-Passport system. SDKK also launched its new fingerprint reader LS-192 incorporating a new fingerprint image sensor supplied by the Casio Computer Co., Ltd ("Casio"). The fingerprint reader is unique because it contains the world's first built in "liveness" detector, which is the best countermeasure against an artificial fingerprint attack. Incorporating this technology will give Secure Design's fingerprint reader an edge in terms of greater functionality and end-user applications. The new sensor has a larger image sensing area, which makes it particularly suitable for the e-Passport applications. The sensor has the advantage of being able to operate in direct sunlight, is water-resistant and can read wet as well as dry fingerprints. The sensor was used in BlueFinn-II to offer a more powerful bluetooth wireless fingerprint authentication system, and was exhibited at Biometrics Conference & Exhibition 2007 in London, UK. Laurel Bank Machines Co., Ltd. has adopted BlueFinn-II and its mass-production mode was delivered in December 2007. One of the most important projects was the introduction of the design of another new fingerprint image sensor and its authentication engine with Oriental System Technologies, Inc. In addition, SANYO has agreed to manufacture the sensor. The sensor is small, thin and particularly suitable for smart card and mobile devices such as cell phones and pocket-PCs. With this technology and business alliance, SDKK is also establishing a sales channel for the new miniature fingerprint image sensor and biometrics smart card in collaboration with Oriental System Technologies, Inc's existing sales networks. The biometrics smart card, which has an embedded fingerprint reader and matching capability, is called Authentication On Card ("AOC"). This type of self-contained smart card is ideal for multi-applications because the AOC based card brings the most secure solution to prevent ID fraud, in contrast to the vulnerability of conventional cards. This project is on schedule and successfully completed the design phase in February 2008. We have taken a 40% stake inBeyond LSI, Inc. ("BLSI") in Tokyo, Japan since November 2007 as part of our business strategy for biometrics smart card. BLSI will be in charge of ASIC design for our Authentication On Card. BLSI is also expected to play an important role in the Chinese market. Our sales team selling the above product lines has performed well However, with the focus still on sales within the Japanese market, we are looking to expand our solution business into other territories and we are currently reviewing our plans for increasing the level of exports. Our sales department overestimated the demand for one of our products without carrying out a full market analysis and committed a substantial amount from our development budget to meet the anticipated demand. As a result, we found that we lost a substantial amount of money and were faced with severalbad debts. As a consequence, the CEO resigned and subsequently left the board of the Company. The Market In the biometric industry, fingerprint recognition remains the largest revenue generator. Fingerprint recognition has 25 % of the market. (Source: Biometrics Market & Industry Reports 2007-2012, published by International Biometrics Group). Although the biometrics technology has somewhat declined in overall revenue terms, the annual biometrics industry revenues are estimated to be approximately US$3.8 billion in 2008. The commercial application of fingerprint authentication is really emerging. For instance, a recently released analysis of worldwide market data from 2007 reveals a greater than 10 times increase in the number of new models of mobile phones launched that protect user data through fingerprint recognition. Just as fingerprint sensors became a standard feature in notebook PCs starting in 2005, a similar situation is being reached in the mobile phone market, with more than 20 new fingerprint models introduced this past year. (Source: "Fingerprint Mobile Phone Market Surges In 2007," FindBiometrics, 11 February 2007) Homeland Security Presidential Directive 12 (HSPD-12), published in the US, requires the US government agencies to converge physical and logical access control onto a single credential. The most significant new capability is that smart cards can be used to secure access to government information systems and networks. These cards also feature more secure physical access control technology. Outlook Our current sales department has three divisions: the Information Security (IS) division which domestically promotes data security products including SD-CHAP, ITube(R), and FLO-Tube, the Physical Security (PS) division which sells SD-Gate and other entry access control devices in Japan, and the Custom System (CS) which handles division fingerprint authentication modules, readers including FP-STICK, FP-PLUS, and BlueFinn, and standalone devices including Sentinel-Bio. The semiconductor sensor business producing fingerprint sensor FPTS for smart cards will be one of our strategic products for 2008, it is our plan to establish the Semiconductor Sensor department to initiate marketing the engineering sample (prototype) of FPTS which will be available in H1 2008. The Semiconductor Sensor business expects to see first sales in 2008 with the aim of establishing and expanding its sales channel, the product delivery and the technical support. As of March 4, 2008, SDKK has signed non-disclosure agreements with two major Japanese smart card manufacturers, Dai Nippon Printing and Toppan, and we are conducting feasibility study with each of them for finalising the Authentication On Card design for their specific applications. Beyond LSI, Inc., which is our allied company, is engaged in designing a new Application Specific Integrated Circuit (ASIC) which will embed our fingerprint authentication algorithm. Because BLSI has been successfully expanding the Chinese market with products integrated with its ASIC technology, SDKK expect a huge opportunity of selling the fingerprint sensor in the Chinese market. This will be part of Secure Design's long-term goal of becoming a global provider of fingerprint authentication products and services. Furthermore, by utilising the worldwide networks of SANYO and Oriental System Technologies, Inc, we plan to start a global sales promotion of the miniature semiconductor sensor and the Authentication On Card system architecture to smart card manufacturers. For example, the Authentication On Card based smart card in the US has the potential to grow to one million cards annually. After a difficult period for SDKK, we are confident that we have a product set that should enable us to realise our potential. The areas of marketing and sales still require a substantial investment and the board is in active discussion with a view to raising further funding. Shoichi Kiyomoto Chief Executive 17 March 2008 For further information, please contact: Secure Design KK Taketoshi Kashiwabara Japan +81-3-5652 -0321 (Chairman) David Evans United Kingdom +44 (0) 7740 084 452 (Deputy Chairman) Masahiro Nishikawa Japan +81-3-5652 -0321 (Executive Vice President, Business Planning) Toshiya Kurita' Japan +81-3-5652 -0321 (Chief Financial Controller) Shinil Cho United Kingdom +44 (0) 7738 842 662 (Chief Information Officer) Japan +81-3-5652 -0321 United States +1-412-367-7063 Charles Stanley Securities +44 (0) 20 7149 6000 Nominated Adviser Russell Cook / Freddy Crossley Cubitt Consulting +44 (0) 20 7367 5100 Brian Coleman-Smith / James Verstringhe/ Nicola Krafft Secure Design KK CONSOLIDATED INCOME STATEMENTS FOR the years ended 31 December 2007 and 2006 NOTES Year Year Year Year Ended Ended 31/12/07 Ended 31/12/06 31/12/07 Ended 31/12/06 JPY'000 JPY'000 STG STG (£) (£) Revenue 2 269,755 522,214 1,183,653 2,291,420 Cost of sales 4 (154,211) (100,184) (676,659) (439,597) Gross profit 115,544 422,030 506,994 1,851,823 Other operating 27,337 5,910 119,953 25,932 income Sales and marketing 4 (357,652) (121,850) (1,569,341) (534,665) expenses General and 4 (215,619) (378,188) (946,110) (1,659,446) administrative expenses Research and 4 (215,025) (135,665) (943,504) (595,287) development expenses Loss from 4 (645,415) (207,763) (2,832,008) (911,643) operations Finance income 6 1,041 45,792 4,568 200,932 Finance costs 5 (1,405) (53) (6,166) (234) Net finance costs (364) 45,739 (1,598) 200,698 Share of loss of 13 (3,180) - (13,952) - equity accounted investee Loss before tax (648,959) (162,024) (2,847,558) (710,945) Income tax expense 18 - - - Loss for the year (648,959) (162,024) (2,847,558) (710,945) Loss per share 7 Basic (19.58) (6.15) (0.086) (0.027) Diluted (18.35) (5.76) (0.081) (0.025) Secure Design KK CONSOLIDATED BALANCE SHEETS AS AT 31 DECEMBER 2007 AND 2006 NOTES 2007 2006 2007 2006 JPY'000 JPY'000 STG STG (£) (£) ASSETS Non-current assets Property, plant and 8 9,683 18,006 42,490 79,010 equipment Investment securities 12 32,682 32,532 143,407 142,748 Investments in equity 13 57,071 - 250,418 - accounted investee Goodwill 10 12,500 14,400 54,848 63,186 Intangible assets 11 77,518 47,959 340,143 210,437 Other non-current assets 9 4,858 24,976 21,316 109,589 194,312 137,873 852,622 604,970 Current assets Inventories 14 117,469 193,535 515,440 849,208 Trade and other 15/23 136,433 393,528 598,654 1,726,759 receivables Cash and cash 15 9,515 94,488 41,749 414,603 equivalents 263,417 681,551 1,155,843 2,990,570 Total assets 457,729 819,424 2,008,465 3,595,540 LIABILITIES Current liabilities Trade and other payables 19/23 86,220 60,603 378,325 265,917 86,220 60,603 378,325 265,917 Net current assets 177,197 620,948 777,518 2,724,653 Total liabilities 86,220 60,603 378,325 265,917 Net assets 371,509 758,821 1,630,140 3,329,623 EQUITY Share capital 16 713,614 587,369 3,131,260 2,577,310 Share premium 16 472,255 347,001 2,072,201 1,522,602 Fair value reserve 12 (425) (575) (1,863) (2,521) Share option reserve 16 12,337 2,339 54,133 10,264 Deficit 17 (826,272) (177,313) (3,625,591) (778,032) Total equity 371,509 758,821 1,630,140 3,329,623 Secure Design KK COMPANY BALANCE SHEETS AS AT 31 DECEMBER 2007 AND 2006 NOTES 2007 2006 2007 2006 JPY'000 JPY'000 STG STG (£) (£) ASSETS Non-current assets Property, plant and 8 9,683 18,006 42,490 79,010 equipment Investment securities 12 32,682 32,532 143,407 142,748 Investments in equity 13 60,250 - 264,370 - accounted investee Goodwill 10 12,500 14,400 54,848 63,186 Intangible assets 11 77,518 47,959 340,143 210,437 Other non-current 9 4,858 24,976 21,316 109,589 assets 197,491 137,873 866,574 604,970 Current assets Inventories 14 117,469 193,535 515,440 849,208 Trade and other 15/23 136,433 393,528 598,654 1,726,759 receivables Cash and cash 15 9,515 94,488 41,749 414,603 equivalents 263,417 681,551 1,155,843 2,990,570 Total assets 460,908 819,424 2,008,465 3,595,540 LIABILITIES Current liabilities Trade and other 19/23 86,220 60,603 378,325 265,917 payables 86,220 60,603 378,325 265,917 Net current assets 177,197 620,948 777,518 2,724,653 Total liabilities 86,220 60,603 378,325 265,917 Net assets 374,688 758,821 1,630,140 3,329,623 EQUITY Share capital 16 713,614 587,369 3,131,260 2,577,310 Share premium 16 472,255 347,001 2,072,201 1,522,602 Fair value reserve 12 (425) (575) (1,863) (2,521) Share option reserve 16 12,337 2,339 54,133 10,264 Deficit 17 (823,093) (177,313) (3,611,633) (778,032) Total equity 374,688 758,821 1,644,098 3,329,623 Secure Design KK CONSOLIDATED CASH FLOW STATEMENTS FOR the yearS ended 31 December 2007 and 2006 NOTES Year Year Year Year Ended Ended 31/12/07 Ended 31/12/06 31/12/07 Ended 31/12/06 JPY'000 JPY'000 STG STG (£) (£) OPERATING ACTIVITIES Cash used in 20 (251,331) (701,679) (1,102,815) (3,078,890) operations Interest paid, net (623) (154) (2,732) (678) NET CASH USED IN (251,954) (701,833) (1,105,547) (3,079,568) OPERATING ACTIVITIES INVESTING ACTIVITIES Purchases of (1,101) (16,102) (4,831) (70,655) property, plant and equipment Expenditure on (12,888) (2,972) (56,552) (13,041) product development Purchase of (40,500) - (177,710) - intangible assets Purchase of - (99,083) - (434,764) investment securities Acquisition of (60,250) - (264,370) - associate company Proceeds from sales - 141,506 - 620,915 of investment securities Increase of (35,000) (30,000) (153,576) (131,637) short-term lending Decrease of 65,000 - 285,213 - short-term lending NET CASH USED IN (84,739) (6,651) (371,826) (29,182) INVESTING ACTIVITIES FINANCING ACTIVITIES Proceeds from 24,135 - 105,903 - short-term borrowings Repayments of (24,135) - (105,903) - short-term borrowings Proceeds on issue 251,499 775,652 1,103,549 3,403,474 of new shares, net of issuance cost NET CASH FROM FINANCING ACTIVITIES 251,499 775,652 1,103,549 3,403,474 NET INCREASE (DECREASE) IN CASH AND CASH (85,194) 67,168 (373,824) 294,724 EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 94,488 27,320 414,604 119,879 EFFECT OF EXCHANGE RATE FLUCTUATIONS ON CASH HELD 221 - 969 - CASH AND CASH EQUIVALENTS 15 9,515 94,488 41,749 414,603 AT END OF YEAR Secure Design KK CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR the yearS ended 31 DECEMBER 2007 and 2006 Attributable to equity holder of the company JPY'000 Fair Share Share Share value option Total STG capital premium reserve reserve Deficit equity (£) Balance as at 128,980 - - - (15,289) 113,691 498,863 1 January 2006 Share issued 457,369 387,369 - - - 844,738 3,706,617 Share issuance - (39,348) - - - (39,348) (172,655) costs Reclassification - of share issuance costs 1,020 (1,020) - - - - Fair value - - (575) - - (575) (2,521) adjustments of available-for-sale investments Share option costs charged to income for the year - - - 2,339 - 2,339 10,264 Net loss for the - - - - (162,024) (162,024) (710,945) year Balance as at 1 January 2007 587,369 347,001 (575) 2,339 (177,313) 758,821 3,329,623 Share issued (Note 126,245 126,245 - - - 252,490 1,107,898 16) Share issuance - (991) - - - (991) (4,350) costs Fair value adjustments of available-for-sale investments (Note 12) - - 150 - - 150 658 Share option costs charged to income for the year (Note - - - 9,998 - 9,998 43,869 16) Net loss for the - - - - (648,959) (648,959) (2,847,558) year (Note 17) Balance as at 713,614 472,255 (425) 12,337 (826,272) 371,509 1,630,140 31 December 2007 Secure Design KK Secure Design KK SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") from the first accounting period. The designation "IFRSs" also includes all valid Internal Accounting Standards (IASs). All interpretations of the International Financial Reporting Interpretations Committee (IFRIC) mandatory for the financial year 2007 are also applied. Sterling pound amounts included herein are given solely for convenience and are stated, as matter of arithmetical computation only, at the rate of JPY227.90=£1, the approximate exchange rate at 31 December 2007. The translation should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into Sterling pound. The principal accounting policies adopted are set out below. The Company was incorporated as of 22 November 2005 in Japan. The Company's domicile as well as the registered office address has been changed to ICST Blg 3 fl, 1-9-2 Horidome-cho Nihonbashi, Chuo-ku, Tokyo 103-0012, Japan as at 17 December 2007. The legal form of the Company is a limited liability corporation called "Kabushiki-kaisha". The Company designs and manufactures to offer a range of fingerprint authentication technologies and products to companies and individuals that wish to establish high levels of security in various applications using biometrics. The business activity also includes R&D and sales of fingerprint systems and components. Going-concern These consolidated financial statements have been prepared by management on the basis of generally accepted accounting principles applicable to a "going concern", which assumes the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. The Company posted net loss of JPY648 million in the year ended 31 December 2007, mainly due to poor sales results of JPY269 million and losses from uncollectible receivables of JPY250 million. These consolidated financial statements do not reflect adjustments that would be necessary if the going concern assumption was not appropriate because management believes that it can successfully raise sufficient funds later this year to execute its business plan to 31 December 2009. If the going concern assumption were not appropriate for the consolidated financial statements, then adjustments would be necessary to the carrying values of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. Basis of consolidation Equity method The Company acquired 40% of shares of Beyond LSI, Ltd. at December 2007 and categorised it as associate company. Associates are those entities in which the Company has significant influence, but not control, over the financial and operating policies. Associates are accounted for using the equity method (equity accounted investees). The consolidated financial statements include the Company's share of the income and expenses of equity accounted investees, after adjustments to align the accounting policies with those of the Company, from the date that significant control commences until the date that significant influence ceases. When the Company's share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the investee. Goodwill Goodwill arising on business transfer represents the excess of the cost of acquisition over the fair value of the identifiable assets and liabilities of a transferor at the date of acquisition. In respect of equity method investee, the carrying amount of goodwill is included in the carrying amount of the investment. Goodwill is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed. Company has only single cash generating unit for the purpose of impairment testing. Revenue recognition Revenue arises from sales of goods. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and consumption taxes. Sales of goods are recognised when goods are delivered and title has passed. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. There was no asset under finance lease as of the balance sheet date. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Foreign currencies The Company's functional and presentational currency is Japanese Yen ("JPY"). Transactions in currencies other than Japanese Yen are recorded at the rates of exchange prevailing on the dates of the transactions. At the balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains and losses arising on retranslation are included in the income statement for the year. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated by using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost or valuation of assets, other than land and properties under construction, over their estimated useful lives, using the straight-line method, on the following basis: Leasehold improvement 5%-17% Machinery 25%-50% Fixtures and equipment 17%-50% The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is included in the income statement for the year. Other non-current assets Other non-current assets consist of lease deposit for office premise and long-term prepaid expenses, which are stated at historical cost minus unrefunded amounts. Development costs Development costs are capitalised and measured initially at purchase cost and amortised on a straight-line basis over their estimated useful lives. (3 years) An internally-generated intangible asset arising from the Company's biometric technology business development is recognised only if all of the following conditions are met: * an asset is created that can be identified (such as software and new processes); * it is probable that the asset created will generate future economic benefits; and * the development cost of the asset can be measured reliably. Internally-generated intangible assets are amortised on a straight-line basis over their useful lives. Expenditure on research activities is recognised as an expense in the period in which it is incurred. Patents, exclusive sales rights and trademarks Patents and trademarks are measured initially at purchase cost and amortised on a straight-line basis over their estimated useful lives. (8 to10 years) Exclusive sales rights are not amortised since there is substantially no period for termination in the agreement. Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is already carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials, transportation and any other incidental costs incurred for purchase. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing, selling and distribution. Financial instruments Financial assets and financial liabilities are recognised on the Company's balance sheet when the Company has become a party to the contractual provisions of the instrument. Trade receivables Trade receivables are recognised at fair value and subsequently measured at amortised cost using the effective interest method. Investments securities Investments are recognised and derecognised on a trade date where a purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at cost, including transaction costs. Investment securities classified as available-for-sale are remeasured to fair value. Gains and losses arising from the changes in the fair values of available-for-sale investments are recognised directly in the fair value reserve in equity, until the investment is sold or otherwise disposed of or until it is determined to be impaired. The fair value of an available-for-sale investment is its quoted bid price at the balance sheet date. Other investment securities are remeasured also to fair value. When, in individual cases, these values are not available or cannot be determined reliably, other investment securities are measured at cost. In accordance with IAS 39, assessments are made regularly as to whether there is any objective evidence that investments securities may be impaired. Impairment losses identified after carrying out an impairment test are recognised as an expense. Trade payables Trade payables are recognised at fair value and subsequently measured at amortised cost using the effective interest method. Equity instruments Ordinary shares are classified as equity instruments and are recorded at the fair value, net of direct issue costs. Equity instruments are not subsequently measured. In accordance with IAS39 (Financial Instruments: Recognition and Measurement), assessments are made regularly as to whether there is any objective evidence that a financial asset or group of assets may be impaired. Impairment losses identified after carrying out an impairment test are recognised as an expense. Gains and losses on available-for-sale investments are recognised directly in equity until the financial asset is disposed of or is determined to be impaired, at which time the cumulative loss previously recognised in equity is included in loss for the year. Share-based payments The Company operates an equity-settled share-based payments scheme. Equity-settled share-based payments are measured at fair value of the share option granted at the date of grant. The fair value determined at the grant date is expensed on a straight-line basis over the vesting period with a corresponding increase in equity, based on the Company's estimate of shares that will eventually vest. Fair value is measured by use of a Black-Scholes model, taking into account the terms and conditions upon which the options were granted. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Critical accounting estimates and assumptions The Company makes estimates and assumptions concerning the future. The resulting accounting estimates and assumptions will, by definition, seldom equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. The Company is subject to income taxes at city and national level within Japan. Significant judgement is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Secure Design KK NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR the years ended 31 December 2007 and 2006 1 PRESENTATION OF FINANCIAL STATEMENTS The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards. These consolidated financial statements are presented in Japanese Yen since that is the currency in which the majority of the Company's transactions are denominated. 2 REVENUE An analysis of the Company's revenue JPY'000 is as follows: Year ended 31/12/07 Year ended 31/12/06 Continuing operations - sale of goods: 269,755 522,214 Total revenue 269,755 522,214 3 BUSINESS AND GEOGRAPHICAL SEGMENTS Business segments For management reporting purposes, the Company is currently organised as a single operating division, that is, biometric technology. This division is the basis for segment information. Principal activity is to be engaged in research and development and sales of biometric technology products including biometric certification and authentication services, physical access systems, fingerprint image sensors and relating software. Due to the single segment, the segment information is not reported here. Geographical segments The Company's operations are located only in Japan and there was no exportation from Japan. 4 LOSS FROM OPERATIONS Loss from operations has been arrived at after charging: JPY'000 Year ended Year ended 31/12/07 31/12/06 Staff costs (see below numbers of staff) Salaries and wages 145,550 135,180 Share option expense 9,998 2,339 Social security costs 12,992 11,911 168,540 149,430 Depreciation 8,414 8,047 Amortisation 1,900 600 - impairment (note 1, 23,894 19,768 described below) - regular 25,794 20,368 Auditors' remuneration - audit for annual report 6,500 10,000 - due diligence audit for - 42,894 Admission - 1,000 - other 6,500 53,894 Advisory fees (note 2, 40,702 185,102 described below) Purchased goods 57,173 79,411 Subcontractors fees 120,930 47,786 Travel expenses 17,173 40,920 Operating lease expenses 41,671 27,857 (note 22) Advertising and public 40,252 71,688 relation expenses Allowance for doubtful 250,113 - receivables Others 165,245 51,984 Total 942,507 735,887 (note 1) Certain goodwill in the year ended 31/12/07 and 31/12/06 have been impaired since they will not be valuable in the Company's operation. (note 2) Fees for nominated advisor, lawyers, consultants and translators are included. NUMBER OF STAFF The average monthly number of employees including executive directors for the year for each of the Company's principal functions was as follows: Number Year ended Year ended 31/12/07 31/12/06 Engineers 3 9 Head office and administration 5 8 8 17 5 FINANCE COSTS JPY'000 Year ended Year ended 31/12/07 31/12/06 Interest on borrowings, net of 623 53 interest earned 623 53 6 FINANCE INCOME JPY'000 Year ended Year ended 31/12/07 31/12/06 Foreign exchange gain, net 259 - Profit on disposal of - 45,792 available-for-sale investments 259 45,792 7 EARNINGS PER SHARE The calculation of the basic and diluted earnings per share is based on the following data: Earnings JPY'000 Year ended Year ended 31/12/07 31/12/06 Earnings for the purposes of basic (648,959) (162,024) earnings per share (net loss for the year attributable to equity holders) Effect of dilutive potential ordinary - - shares Earnings for the purposes of diluted (648,959) (162,024) earnings per share Number of shares Year ended Year ended 31/12/07 31/12/06 Weighted average number of ordinary 33,147,161 26,344,726 shares for the purposes of basic earnings per share Effect of dilutive potential ordinary 2,218,124 1,808,333 shares: - share option Weighted average number of ordinary 35,365,285 28,153,059 shares for the purposes of diluted earnings per share The denominator for the purposes of calculating both basic and diluted earnings per share has been adjusted to reflect the capitalisation issue in June 2006 that the Company allocated 999 shares per share for no consideration to each of the shareholders. 8 PROPERTY, PLANT AND EQUIPMENT JPY'000 Leasehold Plant & Fixtures & Total Improvement Machinery Equipment COST OR VALUATION At 1 January 2006 - 171 7,234 7,405 Additions 9,362 - 10,086 19,448 Disposal (527) - - (527) At 1 January 2007 8,835 171 17,320 26,326 Additions 1,487 - 614 2,101 Disposal (6,565) - - (6,565) At 31 December 3,757 171 17,934 21,862 2007 ACCUMULATED DEPRECIATION At 1 January 2006 - 4 289 293 Charge for the 3,161 45 4,841 8,047 year Disposal (20) - - (20) At 1 January 2007 3,141 49 5,130 8,320 Charge for the 1,722 44 6,647 8,413 year Deductions (4,554) - - (4,554) At 31 December 309 93 11,777 12,179 2007 NET BOOK VALUE At 31 December 3,448 78 6,157 9,683 2007 At 31 December 5,694 122 12,190 18,006 2006 9 OTHER NON-CURRENT ASSETS JPY'000 2007 2006 Lease deposit for office premises Beginning balance 24,725 24,725 Addition 4,673 - Disposal (24,725) - Ending balance 4,673 24,725 Long-term prepaid expense Beginning balance 250 1,195 Addition 246 - Amortisation (311) (945) Ending balance 185 250 Total 4,858 24,975 10 GOODWILL JPY'000 COST At 1 January 2006 15,000 Additions - Deductions - impairment (note, described below) (600) At 1 January 2007 14,400 Additions - Deductions (1,900) - impairment (note, described below) At 31 December 2007 12,500 (note) A part of goodwill representing a certain customer relation has been impaired since the Company has lost it. 11 INTANGIBLE ASSETS JPY'000 Development Patents & Exclusive Total costs trademarks sales right COST At 1 January 2006 52,833 9,818 3,429 66,080 Additions 2,972 - - 2,972 At 1 January 2007 55,805 9,818 3,429 69,052 Additions 12,888 40,500 - 53,388 At 31 December 2007 68,693 50,318 3,429 122,440 AMORTISATION At 1 January 2006 2,171 99 - 2,270 Charge for the year 17,638 1,185 - 18,823 At 1 January 2007 19,809 1,284 - 21,093 Charge for the year 20,113 3,716 - 23,829 At 31 December 2007 39,922 5,000 - 44,922 CARRYING AMOUNT At 31 December 2007 28,771 45,318 3,429 77,518 At 31 December 2006 35,996 8,534 3,429 47,959 12 INVESTMENT SECURITIES Available-for-sale investments JPY'000 At 1 January 2006 - Acquired 99,083 Disposed (95,714) Decrease in fair value (575) At 1 January 2007 2,794 Increase in fair value 150 At 31 December 2007 2,944 Other investment securities JPY'000 At 1 January 2006 - Acquired 29,738 At 1 January 2007 29,738 At 31 December 2007 29,738 Total investment securities at 31 32,682 December 2007 Available-for-sale investments represent shares in Fingerprint Cards AB (Sweden), which is one of the related parties of the Company. (see Note 23) The Company directly owns 0.07% of Fingerprint Cards AB as of 31 December 2007 and 2006, respectively. Losses arising from the revaluation to the fair values are recognised directly in the fair value reserve in equity amounting to JPY425 thousand for the year ended 31 December 2007 and JPY575 thousand for the year ended 31 December 2006, respectively. Other investment securities represent shares in Secure Generation Ltd. (Japan, non-listed), which the Company acquired through the issue of 86,700 new ordinary shares. The Company owns 6.5% of Secure Generation Ltd. at the balance sheet date. 13 EQUITY ACCOUNTED INVESTEE The Company's share of loss in its equity accounted investee for the year was JPY 3,180 thousand (2006: nil). During the year the Company acquired 40 % shares in Beyond LSI Ltd. Based on an evaluation of the extent of control on the investee, it is not consolidated by the Company. Summary financial information for equity accounted investees, not adjusted for the percentage ownership held by the Company: 2007 Owner- Current Non- Total Current Non- Total ship Assets current assets liabilities current liabilities asset liabilities (Unit: JPY'000) Beyond LSI 40% 19,885 30,971 50,856 72,319 167,901 240,220 Ltd. Revenues Expenses Loss 13,297 46,038 32,741 14 INVENTORIES JPY'000 2007 2006 Raw Materials (note 1, described below) 84,883 40,607 Finished goods (note 2, described below) 32,586 152,928 117,469 193,535 (note 1) As of 31/12/06, raw materials have been written down to their net realisable value by JPY1,850. (note 2) As of 31/12/06, finished goods have been written down to their net realisable value by JPY3,045. 15 OTHER FINANCIAL ASSETS Trade and other receivables comprise following JPY'000 items. 2007 2006 Trade accounts receivable 123,761 269,180 Prepaid expenses 1,414 13,955 Advances to employees 1,512 737 Advances to related party (Note 23) - 79,000 Short-term lending to related party (Note 23) - 30,000 Other receivables 5,112 14 Consumption tax recoverable 4,634 642 Total 136,433 393,528 The average credit period taken on sale of goods is 75 days. At 31 December 2007, trade receivables are shown as fair values after deduction of the likely uncollectible value amounting to JPY250,113 thousand (2006: nil). The directors consider that the carrying amount of trade and other receivables approximates their fair value. Cash and cash equivalents comprise cash and short-term deposits held by the Company treasury function. The carrying amount of these assets approximates to their fair value. Credit risk - The Company's principal financial assets are bank balances and cash, investment securities, and trade and other receivables, which represent the Company's maximum exposure to credit risk in relation to financial assets. The Company's credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are measured at amortised cost using the effective interest method. The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The Company has a concentration of credit risk, with exposure spread over only several counterparties and customers. Financial risk - The Company has no significant interest risk. The Company is exposed to transactions in currencies other than Japanese Yen. The balances under foreign currencies as at 31 December 2007 and 2006 were bank deposits of JPY 236 thousand (SEK 13,420.19) and JPY 16,567 thousand (SEK 990,129.98), and investment securities of JPY 2,944 thousand (SEK 165,240) and JPY 2,794 thousand (SEK 165,240), and payables of JPY 2,598 thousand (STG 11,402.17) and JPY 2,969 thousand (STG 12,817.70). There were no formal risk management policies in place other than management monitoring the level of transactions denominated in foreign currencies. 16 SHARE CAPITAL 2007 2007 2006 2006 Number JPY'000 Number JPY'000 Ordinary shares with no nominal value Authorised: 125,600,000 N/A 125,600,000 N/A Issued and fully paid: 6,330,000 96,120 68,400 442,500 Issued for no consideration - - 31,368,600 - Issued and acquired investment securities - - 86,700 14,869 Issued and acquired equity accounted investee 1,585,526 30,125 Balance at the year 39,452,226 713,614 31,536,700 587,369 end On 23 March 2006, the Company issued and allocated to Taketoshi Kashiwabara 7,000 shares by a resolution of the shareholders meeting. After such issuance, the aggregate number of issued shares was 20,000. The total paid amount of JPY 70,000 thousand was allocated to share capital. On 24 April 2006, the Company issued 4,000 shares and allocated them to the management of the Company and certain employees by a resolution in writing of the shareholders meeting. After such issuance, the aggregate number of issued shares was 24,000. 50% of the total paid amount of JPY 80,000 thousand was allocated to share capital and the rest was allocated to share premium. On 9 May 2006, the Company issued 1,000 shares and allocated them to Mr. Hirokichi Matsumura by a resolution in writing of the shareholders meeting. After such issuance, the aggregate number of issued shares was 25,000. 50% of the total paid amount of JPY 20,000 thousand was allocated to share capital and the rest was allocated to share premium. On 23 May 2006, the Company issued 950 shares and allocated them to some individuals outside the Company by a resolution in writing of the shareholders meeting. After such issuance, the aggregate number of issued shares was 25,950. 50% of the total paid amount of JPY 95,000 thousand was allocated to share capital and the rest was allocated to share premium. On 5 June 2006, the Company issued 5,450 shares and allocated them to some institutional investors ands individuals outside the Company by a resolution in writing of the shareholders meeting. After such issuance, the aggregate number of issued shares was 31,400. 50% of the total paid amount of JPY 545,000 thousand was allocated to share capital and the rest was allocated to share premium. On 13 June 2006, the Company amended the articles of incorporation and increased the number of authorised shares from 1,000,000 to 125,600,000 by a resolution in writing of the shareholders meeting. On the same day, the Company allocated 999 shares per share for no consideration to each of the shareholders as at 13 June 2006 by a Board resolution. After such amendment and allocation, the aggregate number of issued shares was 31,400,000 Shares. On 14 July 2006 at the date of Admission to AIM, the Company issued 50,000 shares and allocated them to Charles Stanley & Co. Limited by a resolution in writing of the shareholders meeting. After such issuance, the aggregate number of issued shares was 31,450,000. 50% of the total paid amount of JPY 5,000 thousand was allocated to share capital and the rest was allocated to share premium. On 15 December 2006, the Company issued 86,700 shares and allocated to the shareholders of Secure Generation Ltd (Japan) by a Board resolution. After such issuance, the aggregate number of issued shares was 31,536,700. For consideration of such issuance of shares, the Company acquired 510 shares in Secure Generation Ltd. (Japan). 50% of the total consideration value of JPY 29,738 thousand was allocated to share capital and the rest was allocated to share premium. On 30 October 2007, the Company issued 5,080,000 shares and allocated them to some institutional investors and individuals outside the Company by a resolution in writing of the shareholders meeting. After such issuance, the aggregate number of issued shares was 36,616,700. 50% of the total paid amount of JPY 142,240 thousand was allocated to share capital and the rest was allocated to share premium. On 26 November 2007, the Company issued 1,250,000 shares and allocated them to some institutional investors and individuals outside the Company by a resolution in writing of the shareholders meeting. After such issuance, the aggregate number of issued shares was 37,866,700. 50% of the total paid amount of JPY 50,000 thousand was allocated to share capital and the rest was allocated to share premium. On 28 December 2007, the Company issued 1,585,526 shares and allocated to the shareholders of Beyond LSI Ltd (Japan) by a Board resolution. After such issuance, the aggregate number of issued shares was 39,452,226. For consideration of such issuance of shares, the Company acquired 40% of total shares of Beyond LSI Ltd (Japan). 50% of the total consideration value of JPY 60,250 thousand was allocated to share capital and the rest was allocated to share premium. The Company has one class of ordinary shares, which carry no right to fixed income. The ordinary shares rank equally for voting and rights to dividends. EQUITY-SETTLED SHARE-BASED COMPENSATION The shareholder's meeting authorised the share option plan as at 31 January 2006. 2,000 options in total equivalent to the 1,000 shares per option were granted to all directors, employees and Company's consultants for no consideration. The options can be exercised commencing from January 31, 2008 to January 30, 2016 at JPY 10 per share. Of 2,000 options, 1,820 options were actually allotted to the eligible persons. This plan was authorised by the shareholders' meeting on the same date. In addition, shareholder's meeting authorised the share option plan as at 29 June 2007. 1,500 options in total equivalent to the 750 shares per option were granted to all directors, employees and Company's consultants for no consideration. The options can be exercised commencing from June 30, 2009 to June 29, 2010 at JPY 107 per share. Of 1,500 options, 1,460 options were actually allotted to the eligible persons. This plan was authorised by the shareholders' meeting on the same date. Share-based compensation was measured at fair value of the share option granted at the date of grant. The fair value determined at the grant date was expensed on a straight-line basis over the vesting period, based on the Company's estimate of shares that will eventually vest. Fair value was measured by use of the Black-Scholes model, taking into account the terms and conditions upon which the options were granted. Details of share options granted during the year ended 31 December 2006, and the assumptions used in the Black-Scholes model are as follows: Number of Number of shares Options Number of share options granted as of 1 January 2006 0 0 Number of share options granted as of 31 January 2006 1,820 1,820,000 Forfeited during the year (460) (460,000) Outstanding at the end of year 1,360 1,360,000 Fair value of share at measurement date 10 JPY/share Equity-settled share-based payment fair 3.14 JPY/share value Exercise price 10 JPY/share Weighted average exercise price 10 JPY/share Expected volatility 23.26 % p.a. Option life 120 Month Expected dividends nil Risk-free interest rate 0.8 % The expected volatility is based on historical volatility of similar listed entities since the Company was not listed when the options were granted. The options are granted under a service condition. There are no market conditions associated with the option granted. Details of share options granted during the year ended 31 December 2007 and the assumptions used in the Black-Scholes model are as follows: Number of Number of Options shares Number of share options granted as of 29 June 2007 1,460 1,460,000 Forfeited during the year (300) (300,000) Outstanding at the end of year 1,160 1,160,000 Fair value of share at measurement date 53.8 JPY/share Equity-settled share-based payment fair 31.0313 JPY/share value Exercise price 107 JPY/share Weighted average exercise price 107 JPY/share Expected volatility 128.6 % p.a. Option life 30 Month Expected dividends nil Risk-free interest rate 1.0 % The options are granted under a service condition. There are no market conditions associated with the option granted. +--+------+------------------------------------------------------------------+ | |17 |DEFICIT | +--+------+-----------------------------------------------+------------------+ | | | | JPY'000| +--+------+-----------------------------------------------+------------------+ | | |Balance at 1 January 2006 | (15,289)| +--+------+-----------------------------------------------+------------------+ | | |Net loss for the year | (162,024)| +--+------+-----------------------------------------------+------------------+ | | |Balance at 1 January 2007 | (177,313)| +--+------+-----------------------------------------------+------------------+ | | |Net loss for the year | (648,959)| +--+------+-----------------------------------------------+------------------+ | | |Balance at 31 December 2007 | (826,272)| +--+------+-----------------------------------------------+------------------+ | | | | | +--+------+-----------------------------------------------+------------------+ +--+-----+-------------------------------------------------------------+ | |18 |DEFERRED TAX | +--+-----+-------------------------------------------------------------+ At the balance sheet date, the Company has unused tax losses of JPY523,924 thousand available to offset against future profits. No deferred tax asset has been recognised in respect of such unused tax losses due to the unpredictability of future profit streams. The unrecognised tax losses of JPY8,742 thousand, JPY137,271 thousand and JPY377,911 thousand will expire in 2013, 2014 and 2015, respectively. Details of deferred tax assets and liabilities are as follows: JPY'000 2007 2006 Tax loss carry forward 183,444 58,027 Allowance for doubtful receivables 101,796 - Liabilities for expenses disallowed until paid 8,855 8,176 Differences in depreciation and amortisation 5,814 4,403 for tax purposes Equity-settled share-based transactions 5,021 951 Loss of share of equity method investee 1,294 - Others 1,973 1,710 Deferred tax assets total 308,197 73,267 Share issuance costs 9,499 4,623 Deferred tax liabilities total 9,499 4,623 Net of deferred tax assets and liabilities 298,698 68,644 Valuation allowance (298,698) (68,644) Deferred tax assets on balance sheet - - Tax reconciliation: Reported loss before taxation (648,959) (162,024) Tax rate at 40.7% (264,126) (65,888) Impact of non-deductible expenses 31,372 3,461 Impact of prior year's reported loss before (65,944) (6,217) taxation Valuation allowance 298,698 68,644 Tax charge for the period - - 19 OTHER FINANCIAL LIABILITIES Trade and other payables comprise the following items. JPY'000 2007 2006 Trade accounts payable 7,457 26,182 Accrued expenses 14,551 22,776 Withholding income tax for employees 3,440 2,730 Deferred revenue 3,150 6,548 Miscellaneous tax payable 3,011 2,366 Due to employees and directors (Note 23) 4890 Other payables (Note 23) 49,721 - Total 86,220 60,602 The average credit period taken for trade purchases is 45 days. The directors consider that the carrying amount of trade payables and other payables approximates to their fair value. +--+----+------------------------------------------------------------------+ | |20 |RECONCILIATION OF LOSS FROM OPERATIONS TO NET CASH USED IN | | | |OPERATING ACTIVITIES | +--+----+--------------------------------------------+---------------------+ | | | | JPY'000 | | | | | | +--+----+--------------------------------------------+----------+----------+ | | | | 2007| 2006| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Loss from operations | (648,959)| (162,024)| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Adjustments for: | | | | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Depreciation of property, plant & equipment | 8,414| 8,047| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Amortisation of intangible assets and | 23,894| 19,768| | | |long-term prepaid expense | | | | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Loss on impairment of goodwill | 1,900| 600| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Loss on disposal of property, plant & | 2,010| 507| | | |equipment | | | | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Finance costs, net | 677| 154| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Share option expense | 9,998| 2,339| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Foreign exchange gain on cash held | (221)| -| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Share of loss on equity method investee | 3,180| -| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Gain on sale of investment securities | -| (45,792)| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Operating cash flows before movements in | (599,107)| (176,401)| | | |working capital | | | | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Decrease/(increase) in inventories | 76,066| (177,594)| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Decrease/(increase) in receivables | 247,147| (395,509)| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Increase in payables | 24,617| 17,825| | | | | | | +--+----+--------------------------------------------+----------+----------+ | | |Cash used in operations | (251,277)| (731,679)| | | | | | | +--+----+--------------------------------------------+----------+----------+ 21 CONTINGENT LIABILITIES No major contingent liabilities are existent as of the date of issuance of the auditor's report 22 OPERATING LEASE The Company leases 1 office premise and 1 warehouse. The lease contracts can be cancelled by 6 months' advance notice. And the Company owns other operating lease contract with non-cancellable term. The total lease expenses for the years ended 31 December 2007 and 2006 amounted to JPY 27,866 thousand and JPY 15,971 thousand, respectively. Future minimum lease payments including other operating lease contract for the year ended 31 December 2007 and 2006 amounted to JPY 13,805 thousand and JPY11,886 thousand, respectively. 23 RELATED PARTY TRANSACTIONS Transactions between the Company and its related parties are disclosed below. 2007 Mr. Kashiwabara Mr. Kiyomoto Mr. Cho Mr. Evans (Director) (Director) (Director) (Director) (Unit: JPY'000) Sales of - - - - goods in the year Purchase of - - - - goods or services in the year Consulting - - - - fee charged to income Patent - - - - acquired License fee - - - - Amounts owed - - - - by related parties at year end Amounts owed 2,500 6,506 1,600 380 to related parties at year end 2007 Mr. Fuji Digital Techno-imagia I-O Network Finger- Takahashi Imaging Print Cards (Ex- AB director) (Unit: JPY'000) Sales of goods - - 2,124 - - in the year Purchase of - - - - 26,363 goods or services in the year Consulting fee - 79,000 - - - charged to income Patent acquired - - - 40,500 - License fee - - - 3,000 - Amounts owed by - - - - - related parties at year end Amounts owed to 8,575 - - 20,400 - related parties at year end 2006 Mr. Kashiwabara Mr. Kiyomoto Mr. Mr. (Director) (Director) Cho Evans (Director) (Director) (Unit: JPY'000) Sales of - - - - goods in the year Purchase of - - - - goods or services in the year Short-term 48,500 - - - borrowing made from related parties in the year Short-term - - - - lending made to related parties in the year Transfer of - - - - shares Advance - - - - payments made to related parties in the year Amounts owed - - - - by related parties at year end Amounts owed - - - - to related parties at year end 2006 Mr. Fuji Techno-imagia I-O Network Finger- Takahashi Digital (Director) Imaging Print Cards AB (Unit: JPY'000) Sales of goods - - 12,085 - - in the year Purchase of - - 808 6,000 54,083 goods or services in the year Short-term - 12,000 - - - borrowing made from related parties in the year Short-term - 30,000 - - - lending made to related parties in the year Transfer of - - 99,082 - - shares Advance - 79,000 - - - payments made to related parties in the year Amounts owed by - 109,000 485 - - related parties at year end Amounts owed to - - - - - related parties at year end Technoimagia is one of the related parties of the Company because Mr. Taketoshi Kashiwabara owns the Company at 66.6% (71.5% in 2006) and also owns Technoimagia at 37.5% (37.5% in 2006) directly and indirectly through his controlling company, Fuji Digital Imaging. Other related parties include: * Fuji Digital Imaging: Mr Taketoshi Kashiwabara owns 20.1% (20.1% in 2006) but substantially controls Fuji Digital Imaging * Fingerprint Cards AB (Sweden): Technoimagia owns 23.3% (27.6% in 2006) through Technoimagia Sweden AB * I-O Network: The representative director is Mr. Shoichi Kiyomoto who is a representative director of the Company and owns 66.6% of I-O Network * Sales of goods to related parties were made at the Company's usual list prices. * Purchases were made at market price discounted to reflect the quantity of goods purchased or service rendered. * All short-term borrowings/lending bear interests, which are subject to the loan rate offered by Japanese banks. * Transfer of shares represents that the Company acquired shares of Fingerprint Cards AB from Technoimagia at fair value in the market. * The amounts outstanding as at 31 December 2006 were unsecured and settled in cash except for advance payments made to Fuji Digital Imaging, which was settled by the fees charged for provision of sales promotion services. No guarantees have been given or received. * No provisions have been made for doubtful debts in respect of the amounts owed by related parties. * Amounts owed to directors/ex-directors at 2007 year end mainly consist of unpaid directors remuneration. Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the Company, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. JPY'000 2007 2006 Short-term employee benefits 56,160 48,857 Share-based payment 5,987 1,285 Total remuneration to directors 62,147 50,142 There were no directors' transactions except for remuneration and short-term borrowing by the Company (see above). 24 SUBSEQUENT EVENTS Issuance of new shares through a third-party allotment: Subsequent to 31 December 2007, it has resolved, at the meeting of its board of directors held at 15 February 2008, to issue 4,000,000 shares through a third-party allotment. Mr. Kashiwabara, director accepted 1,500,000 shares issued and funded at 5 March 2008. The amount of fund raised through this issuance of shares was JPY 30,000,000. If this issuance of new shares was made at 1 January 2007, the basic loss per share would have been JPY 18.73 and the diluted loss per share would have been JPY17.60. This information is provided by RNS The company news service from the London Stock Exchange END FR EAEDXFLAPEFE
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