Spectra7 Announces Financial Results for the Year Ended December 31, 2015
Company Prepares for Entry into New High-Growth Market Segments with New Products and Expanded Management Team
March 24, 2016 Toronto, ON and Palo Alto, CA – (TSX:SEV) Spectra7 Microsystems Inc. (“Spectra7” or the “Company”), today announced its audited financial results for the year ended December 31, 2015. A copy of the audited consolidated financial statements for the year ended December 31, 2015 prepared in accordance with International Financial Reporting Standards and the corresponding management’s discussion and analysis will be available under the Company’s profile on www.sedar.com. All amounts are in US dollars unless otherwise noted.
- Revenue of approximately $4.2 million for the year ended December 31, 2015, as the Company transitions to new products. Revenue was down 24% from the previous year’s revenue of approximately $5.6 million.
- The Company continued to maintain strong gross margins(1) of 60% despite product line transitions during the year ended December 31, 2015. Gross margins for the year ending December 31, 2014 were 75%.
- Revenue for the fourth quarter of 2015 was approximately $1.6 million and gross margins for the quarter were 46%.
- The Company continues to see strong bookings in its new segments and in January 2016 announced continued significant bookings progress with the majority of the growth driven by demand for the Company’s new VR/AR products.
- The Company raised net proceeds of $6.4 million in connection with a private placement of special warrants in May 2015 and received $6.5 million from related warrant exercises during the year.
- On July 23, 2015, the Company’s common shares commenced trading on the facilities of the Toronto Stock Exchange and were voluntarily delisted from the TSX Venture Exchange.
- On December 7, 2015, the Company announced the appointments of Mr. David Mier to the position of Chief Financial Officer and Ms. Cynthia Cole to the position of Vice President, General Counsel and Corporate Development.
- The Company continued to announce new products and enter new markets and, for the 2015 year and through January 2016, the Company announced six new products in two new high growth markets segments - wearable computing and data centers.
“The Company has developed a strong product offering backed up by customer orders in markets that we anticipate to grow significantly in 2016 and beyond”, said Tony Stelliga, CEO of Spectra7. “Our continued bookings strength demonstrates the market acceptance of our technology that allows ultra-light, ultra-thin interconnects.”
Revenue for the year ended December 31, 2015 decreased by $1.3 million to $4.2 million, representing a decrease of 24% from the previous year. The reduction was due to the decline in revenue from a legacy contractual license and royalty agreement for the Company’s legacy intellectual property and from lower demand for the Company’s Home Theater™/consumer interconnects. New products started to ramp production, but not at a pace sufficient to offset this decline. The Company expects significant revenue growth in 2016 as it anticipates rising demand for the Company’s embedded products in the consumer Augmented Reality (“AR”), Virtual Reality (“VR”) and media interconnect markets will begin to materialize into higher volume orders.
Gross margin as a percentage of revenue for the year ended December 31, 2015 had decreased 15% from the same period the previous year. Gross margins are lower due to pre-production ramp costs for new products which are typically higher during supply chain and volume ramp up. Decreases in license and royalty revenue also impacted gross margin negatively. The Company expects pre-production costs to decrease.
Research and development expenses have increased year over year by 16%. The increase in research and development expenses for the year ended December 31, 2015 can be attributed to the Company’s growing number of product lines. The Company introduced three new product groups in 2015 and in October 2015 started a new design center location for its new data center group in Little Rock, Arkansas.
The Company increased its sales and marketing efforts during the year ended December 31, 2015 in support of its portfolio of products and in anticipation of the growth in demand in the consumer VR and AR markets in 2016. The Company significantly expanded its selling and marketing team during 2015 which resulted in an increase of 108% for the year ended December 31, 2015 as compared to the prior year.
On May 4, 2015, the Company raised gross proceeds of $7.2 million (CDN $8.7 million) ($6.4 million net of transaction costs) through the issuance of 12,494,765 special warrants (“Special Warrants”) pursuant to a bought deal private placement (the “Special Warrant Offering”). Each Special Warrant was exercisable for no additional consideration into one unit of the Company (a "Unit"), with each Unit consisting of one common share and one-half of one common share purchase warrant (each whole warrant, a "Warrant"). Each Warrant entitles the holder thereof to purchase one common share at an exercise price of CDN $0.90 at any time up to May 4, 2017, subject to acceleration in certain circumstances. All Special Warrants were deemed exercised on June 5, 2015 following the Company obtaining a receipt for a final short form prospectus qualifying the distribution of the common shares and Warrants underlying the Special Warrants on June 4, 2015.
For a complete discussion of expenses please refer to the financial statements and management‘s discussion and analysis for the year ended December 31, 2015.
Operating expenses are incurred by the Company in its pursuit of developing products and growing revenue. Most operating expenses are incurred in cash. Other expenses relate to financing costs and accounting and reporting requirements many of which are non-cash. Operating expenses for the three months ended September 30, 2015 were $3.896 million, an increase of $1.599 million or 70% compared to the same period the previous year. This increase was due mainly to higher consumable materials such as experimental wafers for new products increasing expenses by $0.493 million, and non-production tape-outs for four new products, the VR7050, the V7400RX and 7400TX and the VR8050, for a cost of $0.639 million. Other expense increases of $0.467 million included higher employee costs due to higher headcount, listing costs and depreciation.
Operating expenses for the nine months ended September 30, 2015 were $9.579 million, representing an increase of $1.593 million or 20% compared to the same period the previous year. This increase was due mainly to the tape-outs for four new products for a cost of $0.639 million and other research and development consumable materials such as experimental wafers for new products and contracted technical services related to the development of new products, increasing expenses by $0.885 million. Other increases of $0.456 million were due to other expenses including employee costs due to higher headcount, listing costs and depreciation. These increases were offset by lower contractor, travel, legal, audit and advertising/promotion expenses totaling $0.388 million.
Other expenses for the three and nine months ended September 30, 2015 were $0.963 million and $3.083 million, respectively, an increase of $0.028 and $0.287 million compared to the same periods the previous year. A large portion of the increase was due to currency exchange devaluation of the Canadian dollar in 2015 and higher share-based compensation.
Product and Customer Development
On March 5, 2015, the Company announced the industry's first active chipset family for ultra-thin implementations of USB 3.1 consumer interconnects - the TC7108, TC7216 and the TC7050. Applications for this interconnect implemented with the new Type-C connector include ultra-thin laptops, tablets, mobile devices, solid state disks and wearable computing devices. The resulting ultra-thin cable enabled by this new Spectra7 technology allows the cable to transfer data at supercomputer speeds with a plug shell or over-mold and cable strain relief dimension that is thinner than the mobile device itself - a critical dimension when implementing Type-C in tablets and smart phones.
On June 4, 2015, the Company announced AR-Connect™, a new AR interconnect product line powered by the Company's patented wearable network signal processing technology. The Company believes its patented AR-Connect™ is the industry's first integrated cable, connector and embedded chipset product line for AR vision systems and wearable computing devices. AR-Connect™ enables AR glasses to connect to a smart phone, proprietary processing device or a desktop GPU/laptop processing unit, with a single unified and ultra-thin link.
In October 2015, the Company announced its entry into the rapidly expanding data center market with new high speed active interconnects based on the Company’s technology. In January 2016, the Company announced the establishment of the first of a new class of data center interconnects – the GaugeChanger™. The product line is comprised of the GC2502 - an embedded analog signal processing chip, and GaugeChanger™ – a proprietary ultra-thin copper transmission link. These cables combine a high data rate of fiber with the low cost and low power consumption of copper, providing data centers with the best of both worlds. GaugeChanger™ supports the emerging 802.xxx QXFP standard on NRZ or Multilevel signaling for the majority of interconnect reaches in today’s high-density data centers.
ABOUT SPECTRA7 MICROSYSTEMS INC.
Spectra7 Microsystems Inc. is a high performance consumer connectivity company delivering unprecedented bandwidth, speed and resolution to enable disruptive industrial design for leading consumer electronics manufacturers in virtual reality, augmented reality, wearable computing, data centers and ultra-HD 4K/8K displays. Spectra7 is based in Palo Alto, California with design centers in Markham, Ontario, Little Rock, Arkansas and Cork, Ireland.
Certain statements contained in this press release constitute “forward-looking statements”. All statements other than statements of historical fact contained in this press release, including, without limitation, those regarding the Company’s future financial position and results of operations, strategy, proposed acquisitions, plans, objectives, goals and targets, and any statements preceded by, followed by or that include the words “believe”, “expect”, “aim”, “intend”, “plan”, “continue”, “will”, “may”, “would”, “anticipate”, “estimate”, “forecast”, “predict”, “project”, “seek”, “should” or similar expressions or the negative thereof, are forward-looking statements. These statements are not historical facts but instead represent only the Company’s expectations, estimates and projections regarding future events. These statements are not guarantees of future performance and involve assumptions, risks and uncertainties that are difficult to predict. Therefore, actual results may differ materially from what is expressed, implied or forecasted in such forward-looking statements. Additional factors that could cause actual results, performance or achievements to differ materially include, but are not limited to the risk factors discussed in the Company’s annual MD&A for the year ended December 31, 2015. Management provides forward-looking statements because it believes they provide useful information to investors when considering their investment objectives and cautions investors not to place undue reliance on forward-looking information. Consequently, all of the forward-looking statements made in this press release are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. These forward-looking statements are made as of the date of this press release and the Company assumes no obligation to update or revise them to reflect subsequent information, events or circumstances or otherwise, except as required by law.
For more information, please contact:
Spectra7 Microsystems Inc.
Chief Financial Officer
(1) Additional GAAP Measure – Gross margin is presented in this press release consistent with information presented in the Company’s financial statements. Gross margin has been calculated by deducting manufacturing cost of sales, and provision for inventory write-downs from revenue. Management of the Company believes that providing this information allows investors to better understand the Company’s historical and future financial performance.