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RNS Number : 7435J
Frontier Smart Technologies Grp Ltd
21 August 2019
Frontier Smart Technologies Group Ltd
('Frontier' or the 'Company')
Board Transition, Refinancing and Strategy
The Boards of Frontier Smart Technologies Group Limited
("Frontier" or "Company") and Science Group plc ("Science Group")
are pleased to announce agreement on the Board transition, a
refinancing of Frontier and the future strategy of the Company.
Following the resignations of Martin Harriman, non-executive
director, on 30 July 2019, and Paul Taylor, non-executive director,
and Hossein Yassaie, non-executive chairman, on 14 August 2019, and
following the agreements set out below, Science Group has now
withdrawn the EGM requisition issued to Frontier, dated 29 July
2019.
The Frontier announcement released on 7 August 2019 provided an
update on Frontier's cash position, its bank relationship and its
plans to return the Company to profitability at a Trading EBITDA
level. At 30 June 2019, the Company's gross cash position of $3.6
million was in line with the earlier guidance provided. This cash
position benefited from working capital movements, particularly
extended supplier payments, which may not be sustainable in the
long term. The Company's working capital has since partially
realigned, and as at 31 July 2019 the Company's gross cash balance
was $2.1 million with net debt of $3.9 million.
The Frontier Board also confirms that, whilst it expects that
the covenant testing associated with the Clydesdale Bank credit
facility ("Bank Facility") will be met at the next test date in
September 2019 it is probable that this will not be the case at
December 2019. As announced on 7 August 2019, the Company is in
ongoing discussions with Clydesdale Bank in relation to future
covenant testing. The Bank Facility terms also include positive,
negative and financial covenants along with other provisions which
could potentially trigger an "exit event" requiring repayment of
the loan with an exit fee.
As outlined in its trading update of 9 May 2019 and repeated in
its 7 August 2019 announcement, the Frontier Board recognises the
necessity to substantially reduce the cost base of the Company, and
has in place a plan for cost mitigation and potential restructuring
(the "Mitigation Plan"). The key aspects of the Mitigation Plan
developed and approved by the Frontier Board have now been agreed
with Science Group and, importantly, do not compromise the
potential commercial benefits to be gained through a collaboration
and/or combination of the two businesses. This process will incur
significant costs in the current financial year but will provide a
structure aligned with the future strategy and profitability
objectives of the Company.
In order to address the concerns set out in Science Group's
subsequent announcement on 7 August 2019 and to enable the Science
Group proposed director appointments to proceed, Science Group and
Frontier intend to enter into a subscription agreement (the
"Subscription Agreement") whereby Science Group will subscribe
GBP1.0 million for 4.0 million new ordinary shares in the capital
of the Company (the "Subscription Shares"), to be issued under
share authorities granted to the Frontier Board at the 2019 Annual
General Meeting (the "Investment"). It is anticipated that the
Investment will be made in the coming days. Following the
Investment, (assuming no other acquisitions of Frontier shares)
Science Group's shareholding in Frontier will be 23,447,431 shares,
representing approximately 52% of the voting share capital.
Furthermore, the Company is finalising the terms of an
arrangement with Science Group under which, in the event that
repayment of the Bank Facility is called, or the newly constituted
Frontier Board considers it appropriate to repay or prepay the Bank
Facility for any reason, Science Group will make available to
Frontier a replacement credit facility (the "Standby
Facility").
The Standby Facility will expire on 30 April 2022 and will be on
broadly the same terms and conditions as the Clydesdale facility,
save that, reflecting the current circumstances of Frontier:
(i) the Standby Facility is structured as a term loan rather
than revolving credit facility;
(ii) the interest rate on drawn amounts will be 12% above 3 month LIBOR;
(iii) for the purposes of the Standby Facility, Science Group
has agreed that the first covenant test date will be March 2020;
and
(iv) to the extent that the Standby Facility is drawn, the drawn
amount will be convertible, at Science Group's sole discretion,
into new Frontier shares at 25 pence per share at any time on or
after 1 January 2020. (While shareholder approval for the issue of
Frontier shares upon conversion may or may not be required, any
such approval would be by ordinary resolution at a General Meeting
and the Science Group shareholding in excess of 50% would ensure
such resolution was approved.)
Science Group has agreed not to charge Frontier any commitment
or undrawn facility fees. If fully drawn and the conversion
exercised, it is estimated that Science Group's shareholding on a
diluted basis will increase to approximately 69% (assuming no other
acquisitions of Frontier shares). If not drawn, either fully or in
part, by 30 April 2021, the Standby Facility will be withdrawn. The
Company expects to enter into the Standby Facility in the coming
days.
The Frontier Directors, being Anthony Sethill and Jonathan Apps,
consider, having consulted with the Company's nominated adviser,
N+1 Singer, that the proposed terms of the Investment and the
Standby Facility are fair and reasonable insofar as Shareholders
are concerned.
As a result of the above, following entry into the Subscription
Agreement and the Standby Facility; admission to trading on AIM of
the Subscription Shares; and the release of Frontier's Interim
Results expected on 30 August 2019, Martyn Ratcliffe will be
appointed Chairman and Sarah Cole will be appointed a director of
Frontier.
Share Trading Facility
Following completion of the Investment by Science Group and the
increase in its shareholding to approximately 52% of the voting
share capital, Frontier anticipates that future share trading
liquidity will be limited.
Science Group has therefore agreed to provide liquidity for a
limited period of time to enable Frontier shareholders to sell
their shares at 25 pence per share. This facility will commence
upon completion of the Investment and is not currently anticipated
that to extend beyond 6 September 2019.
This facility will be provided in the market through Panmure
Gordon on behalf of Science Group. Science Group may terminate
Frontier share purchases at any time at its sole discretion.
Future Strategy
In parallel to the corporate matters, Science Group and Frontier
have also been reviewing the future direction and strategy of
Frontier. The business will be structured as: Audio Technologies ;
IoT Solutions and Cloud Services.
The Audio Technologies business will comprise the DAB, Smart
Radio and Smart Audio operations. The operating model and client
base for the manufacture of these product-based operations are
consistent. Virtually all Frontier revenue, profit and cash flow
are currently derived from this business activity. While monthly
production demand has material volatility and there is typically a
significant seasonality, the business has a strong market position
and should be managed accordingly.
Currently the Audio Technologies business includes a Cloud
Services infrastructure to provide firmware updates and upgrades to
the installed base. Previously, this has been treated as an
overhead cost but in future it will be an independent business
line, although, at present, the only revenue is derived via the
Audio Technologies business. However, to support IoT device
deployments, an IoT Service infrastructure is required although the
Frontier infrastructure should ideally be enhanced to enable
bi-directional data transfer to support IoT applications across a
far wider range of market/industry sectors. As a result, increased
investment in this capability is anticipated.
The IoT market is still in its infancy but is rapidly
developing. While the capabilities of Frontier are highly regarded,
the Company's current strategy, which involves incurring the
substantial up-front product development costs and then
subsequently trying to develop a market, is inherently high-risk
and not financially viable for a company of Frontier's scale. While
Frontier had started to evolve its business model, this will now be
accelerated to rebalance the risk profile of Frontier developments.
In future, it is anticipated that Frontier will invest around
GBP1.0 million per annum in developing IoT technology and producing
IoT concepts/prototypes based around the Frontier Smart IoT
technology/SDK which will then be marketed to potential clients
with a view to finalising product developments on a funded basis.
This hybrid model should result in increased services revenues but
still develop a royalty stream related to the technology licensing.
Science Group's subsidiary, Sagentia, has a diverse client base
across multiple industry sectors and significant experience in
smart device product development, which may provide opportunities
for collaboration in voice-based, app-based and remotely-managed
IoT devices.
Summary
It is intended that the Science Group Investment and Standby
Facility will provide the necessary financial stability to
Frontier. The risks associated with the December bank covenant test
have thereby been addressed and suppliers can have confidence in
the future of the Company.
Furthermore, while the requirement to restructure the business
is unfortunate, the strategy is now clear and is considered by
Frontier and Science Group to provide a sustainable long-term
model. Subject to completion of the restructuring, it is
anticipated that Frontier will be profitable at a Trading EBITDA
level in 2020.
Now that the financial position of Frontier has been clarified
and the refinancing terms agreed, along with Frontier's future
strategy, the Science Group Board appointments are anticipated to
be completed shortly after the release of Frontier's Interim
Results.
For Further Enquiries:
Frontier Smart Technologies Group Limited +44 (0) 20 7391 0630
Anthony Sethill, Chief Executive Officer
Jonathan Apps, Chief Financial Officer
N+1 Singer (Nominated Adviser and Broker) +44 (0) 20 7496 3000
Sandy Fraser / Lauren Kettle / Ben
Farrow
Market Abuse Regulation
The information contained within this announcement is considered
by the Company to constitute inside information as stipulated under
the Market Abuse Regulation (EU) No. 596/2014 ("MAR"). Upon the
publication of this announcement via a Regulatory Information
Service, this inside information will be considered to be in the
public domain.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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