Interim Results

Overview

Kromek is pleased to report another period of strong operational progress as it continued to invest in the business in preparation for the expected ramp up in sales. Kromek is benefitting from management's long term strategic decision to align itself with some of the largest global OEMs in its target three markets offering the largest growth opportunities: CT and SPECT in medical imaging and advanced portable networked nuclear detection. The Group continued to establish its position as a key supplier of CZT detection systems both to commercial and government customers globally, winning multiple contracts across all three of its target segments. 

In the first half of 2015/16 revenue remained unchanged from the previous interim period at £3.2m (H1 2014/15: £3.2m). However, underlying revenue grew 26%, more than offsetting the absence of a £0.6m contribution (during the equivalent period last year) from a top four OEM in the CT market, made as part of a two year exclusivity arrangement. Gross margin was in line with management expectations at 53% (H1 2014/15: 70%) reflecting the absence of the payment for exclusivity, as well as impact of changing revenue mix. 

The underlying sales growth was driven by the Nuclear Detection and the Medical Imaging divisions. In Nuclear Detection, Kromek benefitted from the acceleration and successful delivery of the first high volume production order from the US defense agency, DARPA, for its networked radiation detectors. In Medical Imaging, the Group secured multiple new contracts and continued to progress its contract with a top four global OEM in the CT market.

In addition, Kromek saw the benefits of its continued investment in the business, strengthening its sales channels, its manufacturing capabilities, and doubling the Group's production capacity. The efficiencies achieved in the manufacturing and engineering processes resulted in significant yield improvements and, consequently, a reduction in the cost of production of detector materials and products, in particular the D3 and SPECT platforms. Tight control was maintained over the cost base with administration expenses (including operating expenses) growing by only 3.9% despite the continuing planned investment in sales & marketing and targeted product development.

Operational Review

Medical Imaging

In the Medical Imaging sector, Kromek continued to make excellent progress in the first half securing a number of new contracts, totalling approximately $5.8m, from existing and new customers. This among other contracts includes repeat and new orders for the supply of its CZT detectors in the SPECT and the BMD market.  Another was for the delivery of Kromek's ASIC, based on unique intellectual property, to a global player in the medical imaging market. The Group expects to deliver both contracts over the next 36 months. Additionally, the Group gained eight other contracts from UK based and international companies and organisations to be delivered over the next 6 to 36 months.

The Group continued to work with a top four global OEM in the CT market for developing and supplying CZT-based multispectral (colour) detectors for producing high resolution colour X-Ray images by CT scanners. During the period Kromek launched eVance™, a new family of CZT SPECT Cameras that OEMs can configure into virtually any SPECT imaging system. This enables OEMs to integrate turn-key CZT cameras into almost all nuclear medical imaging systems being sold today, for the diagnosis of disease based on the detection of radiation emitting from within the body. The Group has continued to receive significant traction for this product from multiple new customers.

Nuclear Detection

In Nuclear Detection the Group took a significant step forward by securing multiple new contracts from new global OEMs and accelerating its programme with DARPA.

During the period Kromek successfully delivered on its first high volume production order from DARPA for 1,000 of its networked D3S radiation detectors. The expanded contract announced in April 2015 increased the total contracted revenues awarded under this programme to $4.35m to date representing an approximate quadrupling of the contract value since it commenced in August 2014, reflecting the strength of the Group's offer and scalable nature of its projects. Following the successful delivery, DARPA issued a Sole Source Notice announcing its intention to appoint Kromek as sole source supplier under the DARPA SIGMA program. The program with DARPA is to develop an advanced personal detection system for gamma and neutron radiation that can be combined with other such systems to form large networks that can provide information on radiation signatures over an extended area.

As well as accelerating its DARPA program, Kromek secured two new global OEMs as customers in the period, with orders worth a combined $452,000. Kromek will provide the US-based clients with a portfolio of patented nuclear detectors to enhance their radiation detection capabilities for security applications. The majority of the orders for both new contracts are expected to be completed and delivered in the current fiscal year. 

Post period, the Group entered into two agreements with CANBERRA Industries, Inc., a worldwide provider of nuclear measurement solutions headquartered in the US, for product distribution and R&D collaboration.

Under the distribution agreement, CANBERRA will be the exclusive global distributor for four product families from Kromek's nuclear portfolio (excluding a limited number of territories where Kromek has pre-existing distributor networks). As an established provider and market leader in nuclear instrumentation, CANBERRA has a wide range of products, strong customer relationships and extensive channels to market that Kromek expects to leverage.

Kromek also entered into a three-year, collaborative R&D program with CANBERRA. The program, which is expected to be worth at least $900k over the life of the contract, will see the two organisations work closely together on new product development and customisation of existing products by utilising Kromek's expertise and IP.

Security Screening

In security screening Kromek continued to benefit from its broadening customer base following its multiple contract wins in 2014/2015. Kromek's bottle scanners are installed in 46 airports and is globally in 10 countries in Asia, Europe and Australia. In addition the Group continues to work with global security groups for the supply of OEM components for a baggage screening product for aviation security.  Kromek is also now developing a service revenue from the current installed base.

R&D and Doubling of Manufacturing Capacity

During the period Kromek saw the benefits of the investment in its manufacturing capacity during the year to 30 April 2015 when it successfully replicated in the UK the manufacturing processes that had previously been utilised in the US.  This effectively enabled a doubling of the Group's then production capacity and during the period the new manufacturing processes have been running smoothly with improvements in efficiency and yield.  This development has enabled the Group to rapidly scale up manufacturing in more than one site with the further benefit of significantly reducing the supply chain risk for its customers.

Kromek continued to invest in R&D to maintain its position as a leader in the provision of CZT-based radiation detection solutions with regards to both technology and cost and to ensure it could deliver on accelerated customer programs such as the DARPA SIGMA program. During the period, the Group was awarded 32 new patents and filed 9 new patent applications, with an additional nine patents being granted post-period.

Financial Review

In the first half of 2015/16 revenue remained unchanged from the previous interim period at £3.2m (H1 2014/15: £3.2m). However, underlying revenue grew 26% despite the lack of the £0.6m exclusivity contribution from a top four OEM in the CT market during the equivalent period last year for exclusivity.

Gross margin, was in line with management expectations at 53% (H1 2014/15: 70%) reflecting the absence of the £0.6m payment for exclusivity as noted above, as well as the impact of increased product sales. 

Distribution costs and Administrative expenses (including Operating Expenses) increased 3.9% at £4.7m (H1 2014/15: £4.5m) due to the full six month period effect of the expansion of the sales and marketing expenses, plus expansion of the Group's manufacturing capacity as it seeks to maximise its market opportunity.  Due to phasing of expenditure and cost rationalisations, the Group expects to see a reduction of costs during the second half.

Adjusted EBITDA was a loss of £2.2m (H1 2014/15: £1.6m loss). Loss before tax was £3.0m compared with a loss of £2.3m in the same period of the previous year.

Adjusted EBITDA is calculated as per the following table: