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Precise Biometrics Interim / Quarterly Report 2011

Jul 19, 2011

3189_ir_2011-07-19_3891b7ca-0b6c-423d-ae35-87e84a4e456a.pdf

Interim / Quarterly Report

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STRONG MOMENTUM IN ALL BUSINESS AREAS

Precise Biometrics AB (publ), Corporate Identity No. 556545-6596 Interim Report for the period January – June 2011

  • The group's net sales for the interim period amounted to SEK 9.4 million (26.4) and for the second quarter SEK 5.9 million (7.1).
  • The group's income for the interim period amounted to SEK ‐18.6 million (‐5.1) and for the second quarter SEK ‐8.9 million (‐4.7).
  • Earnings per share for the interim period amounted to SEK ‐0.13 (‐0.04) and for the second quarter SEK ‐0.06 (‐0.04).
  • Available cash at the end of the interim period amounted to SEK 49.6 million (34.8). Available cash includes SEK 48.6 million from the share issue (after related costs).

Important events during the quarter

  • Precise Biometrics' rights issue, with preferential rights for Precise Biometrics' shareholders, was oversubscribed. The rights issue was subscribed to 118.9% and is carried out as a part of the company's strategic plan – Plan 2015.
  • The company was top ranked in the MINEX II test, the most important US government test for standardized Match‐on‐Card. Since new directives states that all US federal government agencies must implement PIV (Personal Identification Verification) and as PIV will include Match‐on‐Card, Precise Biometrics will be very well positioned on the US federal government market.
  • Precise Biometrics launched a new software product, Precise BioMatch™ Embedded, which enables hardware companies to quickly integrate fingerprint verification in their products.

For further information

Thomas Marschall, President and CEO, Precise Biometrics AB Tel. +46 (0)46 31 11 10 or +46 (0)734 35 11 10 E-mail [email protected]

Patrik Norberg, CFO, Precise Biometrics AB Tel. +46 46 31 11 47 or +46 734 35 11 47 E-mail [email protected]

Precise Biometrics is a market-leading provider of solutions for fingerprint recognition to prove people's identities. With top-of-the-line expertise in fingerprint verification, Precise Biometrics offers fast, accurate and secure authentication of a person.

Its core product, Precise Match-on-Card™, adds value to ID, SIM, enterprise and bank cards as well as systems for access control to buildings, computers and networks. Precise Biometrics serves business and government organizations throughout the world and its technology is licensed to close to 100 million users.

For more information, please visit www.precisebiometrics.com

Strong momentum in all business areas Interview with the President & CEO, Thomas Marschall

How would you sum up the first half of this year?

Precise Biometrics has made several important advances during this period. What stands out most are the very strong results for our Match‐ on‐Card technology in the US government agency test, MINEX II. This achievement enables great sales opportunities in the US and global market. We have also introduced our Plan 2015, a strategic platform for the development of the company up to 2015. The oversubscription of our new issue of shares in May was also important, and enables us to take strong initiatives to achieve the objectives in our ambitious business plan.

Nevertheless, I can also confirm that sales and profits remained unsatisfactory and did not reach up to our expectations. This was mainly

a result of time lags in the US following a significant delay in the adoption of the US budget to April. Even though the budget has now been approved there is still some uncertainty concerning the allocation of funds to different areas, which has delayed expected orders from US government agencies. We have no reason not to believe that security remains a top priority for the US administration, as their strong focus remains on Cyber Security and aims to reinforce protection from cyber attacks. This continues to give Precise Biometrics a strong growth potential in the US.

How is the market developing?

Three months after the publication of the positive results from MINEX II we are seeing major international interest in our world‐leading Match‐on‐Card technology. It has not only been coming from public ID programs, we are also encountering much greater interest from several of the leading companies in the markets for smart cards and chips. We are expecting to specify and publish new partnerships with several of these players in the coming six months.

We are also expecting increased sales to the US in the business area IAM as government agencies recover from the delays in the budget process.

What does the successful issue of the new shares actually mean?

Our new issue of shares was oversubscribed, which demonstrates that our future plans according to our strategic plan, Plan 2015, have achieved great support from our shareholders. The new issue of capital enables strong initiatives in all the business areas – IAM, Access Solutions and Mobile – and is one of the prerequisites for us to achieve the objectives in Plan 2015. The main implication is the ability to carry through greater and necessary investments in sales and marketing and in the product development of biometric solutions for Smartphones and TabletPCs.

We have recruited new staff within the framework of our new organization and Plan 2015, where the main emphasis has been on sales and marketing in the US, but we will also be looking for additional recruits.

Page 3 of 15 Lund, July 19, 2011

Our investments in Mobile are proceeding according to plan and we expect to be able to launch new products and solutions for the Smartphone market at the end of the year.

What can you say about your future development?

As I have said before, I am expecting 2011 to be the most successful year ever for Precise Biometrics. There are three main reasons for my confidence in this.

Right from the very start, Precise Biometrics has been involved in creating a strong base for our Match‐on‐Card technology in the international market. We are now facing what is a manifest interest in the technology as a standard component from several of the major players in the smart card market, not least after the top result in the US government agency test MINEX ll.

It is important to reach profitability and with our current level of investments we are expecting the business area IAM to reach profitability in 2011 It is also possible that Access Solutions will reach profitability this year.

We have been working for a long time on the development of our technology to enable it to meet the new demands in other major markets over and above the market for national ID cards. With our business area Mobile we have now identified the mobile market as a major and well‐developed area that offers significant potential for our biometric solutions. We are initially focusing on the Apple platform, including solutions for iPhone and iPad, but our goal is to supply products and solutions for all the larger Smartphone platforms in the market.

These are all important milestones that we have been moving towards for a long time, and now that more pieces of Precise Biometrics' future business model and platform are starting to fall into place I'm still confident that this year will be a very successful year for Precise Biometrics.

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Lund, July 19, 2011

Sales and result

Interim period; January to June 2011

Sales for the interim period amounted to SEK 9.4 million (26.4). The gross profit was SEK 6.2 million (16.4). The gross margin amounted to 66% compared to 62 % during the same period the previous year. The group's net loss for the interim period amounted to SEK ‐18.6 million (‐5.1). Operating expenses (see Key Figures for definition) for the interim period amounted to SEK 24.8 million (21.4). Losses per share (average number of shares) for the interim period amounted to SEK ‐0.13 (‐0.04).

Second quarter; April to June 2011

Sales for the second quarter were SEK 5.9 million (7.1). The gross margin amounted to 60% (69%). The Group's net loss for the second quarter amounted to SEK ‐8.9 million (‐4.7). Operating costs (see Key Figures for definition) amounted to SEK 12.4 million (9.6). Losses per share (average number of shares) for the second quarter amounted to SEK ‐0.06 (‐0.04).

Financing and liquidity

Equity amounted as of June 30, 2011 to SEK 61.5 million (39.8) and equity/share to SEK 0.33 (0.29).

Precise Biometrics AB completed, during the quarter, a share issue with preferential rights which has supplied the Company with SEK 48.6 million after issue costs. The share issue is carried out as a part of the Company's business plan – Plan 2015 – which mainly includes further investments in sales, marketing and product development targeted towards biometrics solutions for the SmartPhone and Tablet PC markets. The guaranteed share issue was subscribed to 118.9%.

Cash flow from current operations amounted to SEK ‐7.8 million (0.2). Available cash at the end of the interim period amounted to SEK 49.6 million (34.8).

Market and sales

The main part of Precise Biometrics' sales during the first six months of 2011 consisted of a mix of fingerprint readers and licenses to existing customers in the business areas IAM and Access Solutions.

The company continues to build up and reinforce its organization, following the new organizational structure that came into force in January 2011 to support Plan 2015. Main focus lies on recruiting marketing and sales competence in our largest market ‐ the US. Some important recruitments have already been done during the first half of this year.

Sales during the second quarter consisted of both licenses and sales of hardware. Within the business area IAM the main part of sales consisted of sales of fingerprint readers to customers in the Middle East. Sales to the US have, however, been limited during the year. This is a direct consequence of the failure of expected orders from US government agencies to materialize because of the delayed US budget process. This in turn resulted in delays in the allocation of budgeted funds.

Within the business area Access Solutions the main part of sales consisted of follow‐up orders from the largest customer in this area – Scandinavia's largest budget gym chain.

Significant investments have been made according to Plan 2015 in the business area Mobile. The focus here is on product development for the Smartphone and TabletPCs markets, initially the Apple platform.

Reinforcements in the sales and marketing organization, along with targeted investments in all three business areas, follow the strategic platform the company has established for its development up to year 2015 – Plan 2015.

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Lund, July 19, 2011

Parent company

Parent company sales for the interim period amounted to SEK 6.4 million (22.5). Operating loss before tax for the interim period amounted to SEK ‐21.3 million (‐3.1).

At the end of the interim period 20 persons were employed in the parent company.

Available cash at the end of the second quarter amounted to SEK 49.1 million (32.3). Available cash includes SEK 48.6 million from the share issue (after related costs).

Organization and staff

The parent company of Precise Biometrics has its head office in Lund, Sweden. The organization also consists of the subsidiaries Precise Biometrics Inc. in Washington DC, USA, and Precise Biometrics Solutions AB with office in Karlstad. The organization also includes the dormant company Precise Biometrics Services AB.

As of June 30, 2011 the group had 32 (33) employees, 29 in Sweden and 3 in the US. Of these employees, 23 (23) were men and 9 (10) were women.

Investments in tangible fixed assets

During the interim period, the group invested SEK 0.06 million (0.04) in tangible fixed assets.

In the second quarter the group invested SEK 0.04 million (0) in tangible fixed assets.

Capitalization and depreciation of development work

Development work costs of SEK 4.5 million (1.5) were capitalized during the interim period with main impact from new investments within the Mobile segment. Depreciation of capitalized costs for development work amounted to SEK 0.5 million (0.8) during the interim period.

During the second quarter development costs of SEK 2.8 million (0.9) were capitalized. Depreciation of capitalized development costs amounted to SEK 0.3 million (0.4) during the quarter.

Patents

The patents portfolio has been successively improved since 2001 and at the end of the second quarter in 2011 included 82 registered patents and 26 applications for patents in 19 different product families. Precise Biometrics has 11 different patent families just for the Match‐on‐Card technology.

Annual General Meeting

Qrecise Biometrics' Annual General Meeting was held on April 27 2011 at the company's headquarters in Lund.

The General Meeting approved the Board of Directors decision, in regards to the new issue of shares with preferred rights for the existing shareholders, to increase the company's registered share capital by a maximum of SEK 21,593,728 through issuance of a maximum of 53,984,320 new shares.

The General Meeting approved The Board of Directors proposal for amendments of the articles of association in regards to the company's share capital limits and minimum and maximum number of shares.

Page 6 of 15 Lund, July 19, 2011

The meeting also resolved to adopt the board of directors' recommendation to implement an incentive scheme for all employees in the group through the issue of a maximum of 7.1 million warrants with the right to subscribe to an equivalent number of shares in the Company in the period from January 1 to June 30, 2014. The price of the new issue will be SEK 2.90.

In accordance with the recommendations of the board of directors, the General Meeting resolved to authorize a new issue to a maximum of SEK 5.4 million, or 13.5 million shares. The purpose of the authorization was to enable the company to effect payment of company acquisitions by the company's own shares and/or convertibles.

Marc Chatel, Torbjörn Clementz, Eva Maria Matell, Lisa Thorsted and Lena Widin Klasén were re‐ elected as members of the board and Lisa Thorsted was re‐elected as chairman of the Board.

For more details regarding the above resolutions taken at the General Meeting see Precise Biometrics website under Corporate Governance.

Shares

The company's share is listed on the Small Cap list of the Nasdaq OMX Nordic.

The total number of registered shares at the end of the quarter was 188,945,120. During the interim period the average turnover per day was SEK 1,838 thousand and the list price ranged from SEK 1.03 to 2.48. During the second quarter the average turnover per day was SEK 2,338 thousand and the list price ranged from SEK 1.03 to 2.09.

The main shareholders as of June 30, 2011

Name Percentage of share capital No. of shares
Avanza Pension Försäkring 7.2% 13,538,043
Swedbank Robur fonder 4.5% 8,442,304
Nordnet Pensionsförsäkring 1.7% 3,203,421
HJ Byggkonsulter AB 1.7% 3,198,249
Source: SIS Ägarservice

Risk factors

Precise Biometrics is exposed to both commercial and financial risks, which to a large extent lie outside the reach and influence of the company. For a full account of identified risks, please refer to the Annual Report for 2010, which was submitted April 4, 2011. No further essential risks or uncertainties have arisen after the submission of the Annual Report.

Page 7 of 15 Lund, July 19, 2011

Future report dates

Interim Report Q3 October 25, 2011 Year‐end Report February 3, 2012

Accounting principles

This interim report has been prepared in accordance with IAS 34, Interim reporting and the Swedish Company Accounts Act.

New IFRS, additions to IAS and IFRIC interpretations taking effect January 1, 2010, will not have a material effect on the financial statements.

For information on the applied accounting principles please refer to the Annual Report for 2010.

This quarterly report has not been subjected to review by the Company's auditors.

Lund, July 18, 2011

The Board of Directors and the President certify that the interim report gives a true and fair overview of the parent companyʹs and groupʹs operations, their financial position and results of operations, and describes significant risks and uncertainties facing the parent company and other companies in the group.

The board of directors

Lisa Thorsted, chairman

Marc Chatel Lena Widin Klasén Eva Maria Matell Torbjörn Clementz

Thomas Marschall, President and CEO

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Lund, July 19, 2011

Income statement, Group

(Figures in thousands SEK) Q2 Q2 Q1-Q2 Q1-Q2 Full year
2011 2010 2011 2010 2010
Net sales 5,889 7,149 9,443 26,429 44,944
Cost of goods sold -2,409 -2,238 -3,225 -10,005 -17,425
Gross profit/loss 3,480 4,911 6,218 16,424 27,519
Selling expenses -5,223 -5,050 -8,809 -9,236 -18,293
Administrative expenses -3,144 -2,266 -6,277 -5,267 -10,012
R&D costs -3,846 -3,995 -8,226 -8,665 -12,526
Other operating income and changes in value -170 1,668 -1,515 1,780 -1,185
-12,383 -9,643 -24,827 -21,388 -42,016
Operating result -8,903 -4,732 -18,609 -4,964 -14,497
Financial costs 50 -16 27 -114 -135
Result after financial items -8,853 -4,748 -18,582 -5,078 -14,632
Tax - - - - -16
Result for the period -8,853 -4,748 -18,582 -5,078 -14,648
Result attributable to:
Owners of the parent -8,853 -4,748 -18,582 -5,078 -14,648
Results per share, SEK -0.06 -0.04 -0.13 -0.04 -0.11

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Lund, July 19, 2011

Comprehensive income, Group (according to IAS 1)

(Figures in thousands SEK)
Q1 Q1 Q1-Q2 Q1-Q2 Full year
2011 2010 2011 2010 2010
Change in accumulated exchange rate differences
Reverse of accumulated exchange rate differences in
8 -584 226 -580 334
disposed subsidiary - - - - 150
Comprehensive income for the period, net of tax 8 -584 226 -580 484
Profit/loss for the period -8,853 -4,748 -18,582 -5,078 -14,648
Total comprehensive income for the period -8,845 -5,332 -18,356 -5,658 -14,164
Total comprehensive income attributable to:
Owners of the parent -8,845 -5,332 -18,356 -5,658 -14,164

Balance Sheet, Group

(Figures in thousands SEK)
6/30/2011 6/30/2010 12/31/2010
Assets
Intangible fixed assets 10,665 4,562 6,664
Tangible fixed assets 583 701 704
Inventories 9,250 4,578 8,402
Accounts receivable - trade 6,479 6,909 4,968
Other current receivables 4,045 4,699 2,809
Cash and bank balances 49,555 34,780 24,544
Total assets 80,577 56,229 48,091
Equity and liabilities
Equity 61,482 39,750 31,244
Current liabilities 19,095 16,479 16,847
Total equity and liabilities 80,577 56,229 48,091
Pledged assets 26,400 26,400 26,400
Contingent liabilities - - -

Cash Flow Statement, Group

(Figures in thousands SEK)

Q1 Q1 Q1-Q2 Q1-Q2 Full year
2011 2010 2011 2010 2010
Cash flow from operating activities
before changes in working capital -8,696 -5,026 -18,059 -5,076 -12,919
Cash flow from changes in working capital 852 5,177 -955 528 2,781
Cash flow from operating activities -7,844 151 -19,014 -4,548 -10,138
Cash flow from investing activities -2,809 -868 -4,569 -1,556 -4,710
Cash flow from financing activities 48,594 - 48,594 - -1,492
Cash flow for the period 37,941 -717 25,011 -6,104 -16,340
Liquid funds at the beginning of the period 11,614 35,497 24,544 40,884 40,884
Liquid funds at the end of the period 49,555 34,780 49,555 34,780 24,544

Key Figures, Group

6/30/2011 6/30/2010 12/31/2010
Working capital (thousands SEK) 50,234 34,487 23,876
Liquid ratio 315% 281% 192%
Equity/assets ratio 76% 71% 65%
Return on average equity - - neg
Capital employed (thousands SEK) 62,600 41,149 32,494
Return on capital employed - - neg
Profit/loss per share (SEK) -0.06 -0.04 -0.11
EBITDA (thousands SEK) -17,921 -4,001 -12,485
Equity per share (SEK) 0.33 0.29 0.23
Number of shares 188,945,120 134,960,800 134,960,800
Number of employees at the end of the period 32 33 34
Average number of employees during the period 33 34 34

Definitions - Key Figures

Working capital: Current assets less current liabilities

Liquid ratio: Current assets less inventories divided by current liabilities

Equity/assets ratio: Equity as of the balance sheet date divided by total assets as of the balance sheet date

Return on equity: Profit/loss for the period divided by average equity

Capital employed: Balance sheet total minus non-interest-bearing liabilities and provisions

Return on capital employed: Profit/loss after financial items plus financial expenses divided by the average capital employed Profit/loss per share: Profit/loss after tax divided by the average number of shares. The options are not included in the calculation due to calculation of potential shares would result in an improvement in loss per share which is not permitted according to IAS 33

EBITDA: Profit/loss before net financial items, depreciations, write-downs and tax

Equity per share: Equity at the end of the period divided by the number of shares at the end of the period Quarterly earnings ratios are not disclosed

Operating costs (as described in Sales and result): Operating costs excluding costs for products sold, participations in associated companies and goodwill write-down, but including depreciation and write-downs and after capitalization of costs for development work

Changes in equity, Group

(Figures in thousands SEK)

Capital
stock
Other paid in
capital
Reserves Balanced profit/
year's profit
Total
equity
Opening balance as at January 1, 2010 53,984 537,214 155 -545,945 45,408
Comprehensive income for the period - - -580 -5,078 -5,658
Closing balance as at June 30, 2010 53,984 537,214 -425 -551,023 39,750
Opening balance as at January 1, 2011 53,984 537,214 639 -560,593 31,244
Comprehensive income for the period - - 226 -18,582 -18,356
Transactions with the shareholders
New share issue1) 21,594 27,000 - - 48,594
Closing balance as at June 30, 2011 75,578 564,214 865 -579,175 61,482

1) New share issue totaling 53 984 320 new shares at a rate of SEK 1.00 with deductions for issue costs SEK 5,391 thousand.

Turnover and profitability by segments Q2 20111) (Figures in thousands SEK)

IAM ACCESS SOLUTIONS MOBILE
2011 2010 2011 2010 2011 2010
Net sales 4,780 6,415 1,110 734 - -
Expenses2) -7,917 -13,347 -1,561 -562 -7,571 -
Result -3,137 -6,932 -451 172 -7,571 -
TOTAL
2011 2010
Net sales 5,890 7,149
Expenses2) -17,049 -13,909
Result -11,159 -6,760

Turnover and profitability by segments Q1-Q2 20111)

(Figures in thousands SEK)

IAM ACCESS SOLUTIONS MOBILE
2011 2010 2011 2010 2011 2010
Net sales 6,634 24,510 2,809 1,919 0 -
Expenses2) -13,609 -31,555 -3,319 -2,137 -13,461 -
Result -6,975 -7,045 -510 -218 -13,461 -
TOTAL
2011 2010
Net sales 9,443 26,429
Expenses2) -30,389 -33,692
Result -20,946 -7,263

1) From January 2011 a new sales organization came into effect. The 2010 figures are restated accordingly. 2) The above expenses in the segments include Cost of goods sold as well as direct and share of indirect operation expenses.

Direct operation expenses also include capitalized development work allocated per segment.

Income statement, Parent company

(Figures in thousands SEK)

Q1-Q2 Q1-Q2 Full year
2011 2010 2010
Net sales 6,414 22,544 38,825
Cost of goods sold -7,468 -11,891 -21,957
Gross profit/loss -1,054 10,653 16,868
Selling expenses -6,457 -7,353 -14,409
Administrative expenses -5,822 -4,820 -9,012
R&D costs -4,755 -5,776 -7,232
Other operating income and changes in value -3,478 4,020 -2,831
-20,512 -13,929 -33,484
Operating result -21,566 -3,276 -16,616
Financial costs1) 264 136 349
Result after financial items -21,302 -3,140 -16,267
Tax - - -
Result for the period -21,302 -3,140 -16,267

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Lund, July 19, 2011

Balance Sheet, Parent company

(Figures in thousands SEK)
6/30/2011 6/30/2010 12/31/2010
Assets
Intangible fixed assets 10,564 4,430 6,548
Tangible fixed assets 306 355 381
Participations in group companies 1,058 1,058 1,058
Inventories 9,250 4,578 8,402
Accounts receivable - trade 2,431 1,742 2,810
Other current receivables 30,498 41,857 33,403
Cash and bank balances 49,050 32,331 21,129
Total assets 103,157 86,351 73,731
Equity and liabilities
Equity 90,378 76,623 63,086
Other provisions 107 203 162
Current liabilities 12,672 9,525 10,483
Total equity and liabilities 103,157 86,351 73,731
Pledged assets 24,000 24,000 24,000
Contingent liabilities 2,000 2,000 2,000

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Lund, July 19, 2011

Telephone conference

On the occasion of today's Interim Report we have the pleasure to invite investors and journalists to the following informative meeting during the day

  • The conference starts at 11:00 (CET)
  • To participate, please call +46 (0)8 50559877

An operator will note your name and connect you to the conference. She/he will also provide you with information about what to do if you have any questions.

The presentation will be held in English but afterwards there will be an opportunity to ask questions in Swedish.

Participating on behalf of Precise Biometrics

  • Thomas Marschall, President and CEO
  • Patrik Norberg, CFO

A recording from the conference will be available for three days after the telephone meeting. To listen to the conference afterwards dial +46 (0)8 506 269 49. When asked to state a reference number please dial 260207 and finish with (#).

Please visit www.precisebiometrics.com/presentations where a presentation can be downloaded.

For further information

Thomas Marschall, President and CEO, Precise Biometrics Tel. +46 (0)46 31 11 10 or +46 (0)734 35 11 10 E-mail [email protected]

Patrik Norberg, CFO, Precise Biometrics AB Tel. +46 46 31 11 47 or +46 734 35 11 47 E-mail [email protected]

Precise Biometrics AB (Headquarters) Box 798 SE-220 07 Lund Tel.: +46 (0)46 31 11 00 Fax: +46 (0)46 31 11 01 E-mail: [email protected]

Precise Biometrics is a market-leading provider of solutions for fingerprint recognition to prove people's identities. With top-of the-line expertise in fingerprint verification, Precise Biometrics offers fast, accurate and secure authentication of a person.

Its core product, Precise Match-on-Card™, adds value to ID, SIM, enterprise and bank cards as well as systems for access control to buildings, computers and networks. Precise Biometrics serves business and government organizations throughout the world and its technology is licensed to close to 100 million users.

For more information, please visit www.precisebiometrics.com