SPACETALK LTD — Annual Report 2019

Aug 21, 2019

==> picture [538 x 88] intentionally omitted <==

ASX Announcement

MGM Wireless Limited (ASX:MWR)

22 August 2019

Technology company MGM Wireless Limited (ASX:MWR) (‘MGM’ or ‘the Company’) is pleased to release its financial statements for the year ended 30 June 2019. The results reflect the Company’s successful, ongoing transformation to becoming a significant Wearables business.

2019 FINANCIAL RESULTS SUMMARY

2019 Key results
Twelve months ended 30 June
$ million unless otherwise specified	2019	2018	Change
Total Revenue	7.14	2.74	161%
Wearables Revenue	4.64	449	933%
School Communication Business Revenue	2.19	2.23	(2%)
EBITDA	(0.27)	0.67	(140%)
Net Loss	(4.69)	(1.13)	315%
Dividend per share (cents)	0	0	0%
EBITDA margin*	(4%)	24%	(28%)
Net cash from operating activities	(0.53)	1.25	(143%)
Cash balance	1.64	2.65	(38%)
Net cash/(debt)	0.39	2.65	(85%)
Earnings per share (basic) cents	(38.80)	(11.71)	231%
**Contracted Schools & Early Learning Centres **	1318	1,372	(4%)
SPACETALK Smartwatches Units Sold	18,270	1,785	1023%

*Excluding non-cash options and share expenses.

1

Appendix 4E Preliminary final report Year ending 30 June 2019

FY19 HIGHLIGHTS

• The SPACETALK children’s all-in-one smartphone, watch and GPS device delivered sales and industry-wide acceptance well beyond expectations

• In SPACETALK’s first full year of sales, total revenue increased 161% as the company capitalised on strong demand, achieving strong sales momentum

• Wearables revenue growth delivered more than double school products revenue for the year, validating the company’s significant growth opportunity

• Secured a $2 million convertible note facility with institutional and sophisticated investors to fund orders for SPACETALK watches

• Commenced rollout of SPACETALK into JB Hi-Fi and Leading Edge Computers stores in Australia

• Launched distribution in New Zealand through mobile network operator and master SPACETALK distributor SPARK New Zealand’s store network

• Commenced UK and European expansion with UK launch and first sales in May 2019

• SPACETALK acclaimed as among the most secure children’s watch in cyber security audit by Interpol accredited global cyber expert

• Managed costs effectively despite high growth sales and continued investment in the wearables business to report EBITDA of ($0.27) million

• Recorded a Net Loss After Tax of $4.69 million due to amortising prior year investments and non-cash expenses from the issue of options and employee shares

• Strong growth momentum continuing with watershed UK sales agreements signed after balance date

Appendix 4E Preliminary final report Year ending 30 June 2019

Appendix 4E Preliminary Final Report Under Listing Rule 4.3A

MGM Wireless Limited

(ABN 93 091 351 530) Year Ending 30 June 2019

(Previous corresponding period – Year ending 30 June 2018)

==> picture [211 x 46] intentionally omitted <==

3

Appendix 4E Preliminary final report Year ending 30 June 2019

Appendix 4E Preliminary Final Report

MGM Wireless Limited

(ABN 93 091 351 530) Year Ending 30 June 2019

(Previous corresponding period – Year ending 30 June 2019)

Results for announcement to the market

		$
Revenue from ordinary activities	up 161%	to 7,142,148
Profit/(loss) from ordinary activities after tax attributable to	Down 315%	to (4,688,679)
members
Net Profit/(loss) for period attributable to members	Down 318%	to (4,686,214)
Dividends (distributions)	Amount	Franked amount
	per security	per security
Final dividend	Nil¢	Nil¢
Previous corresponding period	Nil¢	Nil¢
Record date for determining entitlements to dividends	Not applicable
Payment date	Not applicable
Net tangible asset backing	30 June 2019	30 June 2018
Net tangible asset backing per ordinary security	$0.28	$0.26
Control gained or lost over entities during the period
Name of entity	Not	applicable
Date of gaining or losing control	Not	applicable
Dividend or distribution reinvestment plan details
There is no conduit foreign income for this dividend.
Joint venture and associate details	Not	applicable
Foreign entities' accounting standards used	Not	applicable
Status of Audit

The statutory financial statements of the consolidated entity are in the process of being audited.

4

Appendix 4E Preliminary final report Year ending 30 June 2019

MGM Wireless Limited Commentary on Results For the Year Ended 30 June 2019

The directors of MGM Wireless Ltd are pleased to report the Company’s financial results for the 12 months to 30 June 2019.

Operational Highlights

• Following JB Hi-Fi’s successful online launch of SPACETALK we began supplying the group’s bricks and mortar stores. SPACETALK is now available in 196 JB Hi-Fi stores across Australia, including high-profile, high traffic store locations.

• We signed a preferred supplier agreement enabling 120 Leading Edge Computers stores to stock SPACETALK across Australia.

• We added our first international mobile network operator when New Zealand’s largest telecommunications provider SPARK signed a master supply agreement to sell SPACETALK in its 73 retail stores and online.

• We spent $850,000 on an Australian advertising campaign which commenced in November 2018 to support store sales, including high-profile billboard and out-of-home advertising in 71 leading shopping centres in Sydney, Melbourne and Brisbane and extensive digital and social media campaigns.

• We commenced plans to enter the high growth UK and European market in January, leading to the successful UK launch first online UK sales of SPACETALK in May 2019.

• In February, SPACETALK attended the Mobile World Congress 2019 in Barcelona, the world’s largest conference of its type attended by more than 110,000 delegates from around the world.

• Results of a cyber security audit of children’s smartwatch phones in the Australian market by Dr Matthew Sorell found SPACETALK was unique among children’s smartwatches in the Australian market as it met all current international privacy and security legislation.

Financial Highlights

• Wearable SPACETALK revenues increased from $0.44m to $4.6m in the first full year of sales, reflecting our product’s exceptional reliability, ease of use and high standards of data security.

• SPACETALK unit sales increased more than 1000% to 18,270 units (FY18: 1,785 units sold in nine months), with strong momentum continuing as consumer demand drives expansion in Australia, New Zealand and the UK.

• Sales in New Zealand commenced with Spark New Zealand selling SPACETALK with a recommended retail price of NZ $399. SPACETALK was also offered bundled with a SIM for under NZ$25 on a 24 month monthly plan, removing upfront cost as a potential barrier to purchase.

• Overall revenues increased 161% to $7.1m as SPACETALK sales exceeded revenue forecasts.

• The schools business continued to deliver stable, steady profit performance with good margins and strong positive cash flow.

• We secured a $2m convertible note facility to fund orders for SPACETALK watches from anticipated new and existing customers. At 30 June 2019, this facility was drawn to $1.25m.

• Cost of sales increased from $0.3m to $1.9m as the company continued to maintain tight control of operational expenditure.

• We recorded EBITDA of ($27k) after significant targeted advertising and marketing costs of $2 million and employee costs of $1.5 million as the company increased scale to take advantage of high demand for its products.

5

Appendix 4E Preliminary final report Year ending 30 June 2019

• We reported a net loss after tax of $4.69m which includes non-cash expenses of $3.4m option and share issue costs and $2.0m in amortisation and depreciation.

• Our cash balance at year end was $1.6m.

The company is operating in an emerging, fast growth market. SPACETALK is the world leader in the children’s wearable segment and its high standards of data security and privacy standards provide a competitive advantage.

We believe that SPACETALK is becoming a hot, must have mobile phone product among children aged 5 to 12 years of age and that a new children’s wearable and mobile category is emerging.

Gartner, the leading research and advisory company for the technology sector, predicts global spending on wearable devices will reach US$42 billion in 2019, supporting our view that children’s wearable mobile phone devices will continue to be a high growth sector during the next decade. The wearables sector is one of the highest growing consumer categories globally and smart watches are the most valuable segment, with more than 60% of market value.

In 21 months since the launch of SPACETALK, sales have exceeded all expectations. Wearable sales now provide nearly two-thirds of the Company’s revenue, and this proportion is anticipated to increase following the signing of exciting new sales agreements in the UK, which has 66 million people and more than three times the addressable market of Australia.

Management maintains prudent spending as the company builds scale, taking advantage of its exciting mass market expansion opportunity.

School Business

MGM Wireless is the largest provider of messaging communication solutions to Australian schools, with 1400 contracted schools. Schools communication service revenue of $2.2 million was flat compared to the previous year, reflecting the stability of the business.

The company continues to upgrade its products and services, ensuring the quality of its systems which are used by 1.6 million people across Australia daily.

The Company sees an ongoing positive future for its schools business.

UK agreements subsequent to balance date

Subsequent to balance date, we announced significant expansion of SPACETALK sales in New Zealand through 118 Noel Leeming, Harvey Norman and JB Hi-Fi retail stores in July 2019.

Most importantly, sales were boosted through a landmark agreement in August 2019 with Sky, Europe’s leading media, entertainment and telecommunications company which is part of the Comcast group. Sky, which has a UK subscriber base of 23 million people, began selling SPACETALK through Sky Mobile on a £10 per month plan.

Sky has already reported strong sales prior to beginning a marketing campaign which will soon target Sky’s 10 million subscribers that have children aged between five and 12. MGM Wireless receives full wholesale payment and recognises 100% of revenue when SPACETALK is sold to Sky.

We have also signed a retail sales agreement with the UK’s leading TV shopping retailer, QVC UK, which has a significant customer demographic of women aged between 30 and 55, SPACETALK’s target customer demographic. QVC UK will exclusively promote SPACETALK on its TV channels in 30 and 45 minute shows at its own expense, which provides a great opportunity to educate the UK market about SPACETALK.

The Sky agreement is potentially the most significant distribution agreement signed to date because of Sky’s brand awareness, its commitment to market SPACETALK prominently to its entire subscriber base and the attractiveness of the £10 per month offer. Forecasting group sales

6

Appendix 4E Preliminary final report Year ending 30 June 2019

is difficult and could, due to Sky’s large customer base, be subject to significant variability. That said, the company is targeting sales of approximately 90,000 units in FY20 e.g. four times the number sold in FY19. Initial orders have been placed with suppliers to meet this demand. Further, given the pipeline of other networks and bricks and mortar distributors already in discussion we believe growth will continue beyond FY20.

7

Appendix 4E Preliminary final report Year ending 30 June 2019

==> picture [448 x 558] intentionally omitted <==

8

Appendix 4E Preliminary final report Year ending 30 June 2019

==> picture [438 x 553] intentionally omitted <==

9

Appendix 4E Preliminary final report Year ending 30 June 2019

==> picture [448 x 388] intentionally omitted <==

10

Appendix 4E Preliminary final report Year ending 30 June 2019

==> picture [448 x 389] intentionally omitted <==

11

Appendix 4E Preliminary final report Year ending 30 June 2019

MGM Wireless Limited Notes to the Financial Statements for the Year Ended 30 June 2019

1. Significant Accounting Policies

Statement of Compliance

The Appendix 4E preliminary final report has been prepared in accordance with ASX listing rules and the recognition and measurement criteria of Accounting Standards and interpretations. Accounting Standards include Australian equivalents to International Financial Reporting Standards.

Basis of Preparation

The Appendix 4E has been prepared on the basis of historical cost. The accounting policies and methods of computation adopted in the preparation of the Appendix 4E are consistent with those adopted and disclosed in the Group’s 30 June 2018 annual financial report with the exception of the following:

• The Group adopted AASB 15 – Revenue from contracts with customers from 1 July 2018

• The Group adopted AASB 9 – Financial instruments from 1 July 2018

The accounting policies were disclosed in the Group’s 31 December 2018 half-year financial report

==> picture [448 x 256] intentionally omitted <==

12

Appendix 4E Preliminary final report Year ending 30 June 2019

==> picture [441 x 272] intentionally omitted <==

13

Appendix 4E Preliminary final report Year ending 30 June 2019

==> picture [448 x 499] intentionally omitted <==

14

Appendix 4E Preliminary final report Year ending 30 June 2019

==> picture [448 x 184] intentionally omitted <==

==> picture [448 x 151] intentionally omitted <==

==> picture [444 x 116] intentionally omitted <==

==> picture [448 x 221] intentionally omitted <==

15

Appendix 4E Preliminary final report Year ending 30 June 2019

==> picture [448 x 358] intentionally omitted <==

16

Appendix 4E Preliminary final report Year ending 30 June 2019

==> picture [406 x 430] intentionally omitted <==

==> picture [384 x 150] intentionally omitted <==

17

Appendix 4E Preliminary final report Year ending 30 June 2019

==> picture [448 x 271] intentionally omitted <==

18

Appendix 4E Preliminary final report Year ending 30 June 2019

==> picture [448 x 352] intentionally omitted <==

Nature and purpose of reserve

The option issue reserve is used to accumulate amounts received on the issue of options and records items recognised as expenses on valuation of incentive based share options.

The foreign currency translation reserve is used to record exchange rate differences arising from the translation of the financial statements of foreign subsidiaries and is recognised directly in the Statement of Profit or Loss and Other Comprehensive Income before accumulation in this reserve.

14. Subsequent Events

There has not been any matter or circumstance that has arisen since 30 June 2019, which has significantly affected, or may significantly affect, the operations of the Group, the result of those operations, or the state of affairs of the Group in subsequent financial years.

==> picture [128 x 53] intentionally omitted <==

Signed: Mark Fortunatow Director

19