INTERIM REPORT FOR THE PERIOD 1 JULY 2009 TO 30 SEPTEMBER 2009
(NGM:C2ST B)
• Net sales for the third quarter amounted to SEK 5.5 million (SEK 0.0 million).
• The net loss for the third quarter amounted to SEK -9.9 million (SEK -4.7 million).
• C2SAT’s warrant programme was 94.9% subscribed, providing the Company with approximately SEK 44.9 million before issue expenses in the third quarter.
• Several major distribution, installation, and service agreements have been signed with Norsat and Orange, among others. Orange for the first time gives C2SAT a partner with the capacity to globally offer solutions that include C2SAT’s products and therefore represents an important commercial breakthrough for C2SAT.
• The subsidiary C2SAT Asia Pacific (Pte.) Ltd has been established.
• A production agreement has been signed with Fong´s Advance Technology (Pte.) Ltd to establish local production of C2SAT’s antennas in Singapore.
• Gestrike Invest AB has decided not to exercise its convertible rights valued at SEK 14 million.
• Nine (9) antenna systems were delivered and recognised in revenue during the third quarter.
• The Company did not sign any new orders during the third quarter. Order bookings after the conclusion of the period include two (2) C-band antennas for PT AJN Solusindo.
• The Board of Directors intends to shortly call an Extraordinary General Meeting to decide on a warrant programme for management and employees.
(For table see attached file.)
Statement from the CEO
Changes continue at C2SAT. During the third quarter the focus was on the further expansion of our network of distributors and service and installation partners, which is absolute essential to ensure future sales opportunities, as well as on ensuring C2SAT’s ability to meet growing requirements from global distributors. These efforts have resulted in the addition of a number of new distributors and service partners. Together with ongoing measures in Southeast Asia, including the establishment of a new subsidiary and local production, this provides the foundation for our future sales organisation.
The distribution agreement signed in October with Norsat International Inc, which had been evaluating C2SAT’s antennas for some time, is positive for the Company. Norsat has global distribution capacity among both commercial and military customers, and is now investing in the maritime area by establishing a business area focused on maritime communications solutions.
The distribution agreement signed in November with Orange Business Services is not only positive, but also can be considered a crucial commercial breakthrough for C2SAT. Orange is France Telecom’s most important brand. Orange Business Services is one of the world's leading providers of telecom services to multinationals. A majority of the world's largest companies in shipping and the oil and offshore industries are already customers of Orange, which is now expanding its range of services in the maritime market with the new Orange Maritime Satellite Service, based in part on C2SAT’s VSAT technology. This is a major benefit for Orange’s corporate customers with maritime communication needs, since Orange commands a unique market position thanks to its ability to combine maritime and land-based networks.
With Orange as a distribution partner, sales opportunities for C2SAT’s products will increase many times over. In the near future the co-operation will produce dividends in the form of increased order volumes and sales. For the first time since it established operations, C2SAT has a global partner with the capacity to complement its operations and offer a solution that includes C2SAT’s products.
Global distributors such as Orange and Norsat place new and more extensive demands on C2SAT’s organisation, product quality, availability of resources, production capacity, and delivery scheduling and capacity. This autumn C2SAT therefore devoted considerable resources to ensure that it can live up to these requirements. Order bookings for the third quarter suffered as a result, since the resources at the disposal of the sales department were chiefly devoted to this work, which was a conscientious decision by the Company.
Efforts to assure product quality and compatibility have required a great deal of energy and resources from the organisation and will continue to do so going forward. In addition to making its products fully compatible with major operators’ protocols and interfaces, C2SAT’s development work is focused on making them compatible with the standards and requirements the industry demands, primarily in terms of verification, certification and standardisation. This will facilitate high-volume production based on the increased requirements from C2SAT’s partners.
Also, intensive work is under way to enhance C2SAT’s products with expanded global functionality, as well as to broaden C2SAT’s product range in the Ku- and C-bands.
To ensure delivery capacity in terms of both volume and lead times, C2SAT has decided, alongside its planned production under license in China, to establish local production in Singapore together with Fong’s Engineering, and to expand existing production in Söderhamn primarily through new recruitments.
During the period C2SAT invested capital resources to increase the number of finished antennas in order to satisfy orders from distributors on short notice. C2SAT now for the first time has the ability to deliver products with short lead times, in line with market expectations.
By year-end C2SAT will be able to produce antennas in Söderhamn, Singapore and China. Establishing working production facilities is necessary in order to satisfy anticipated future sales growth in a way that is credible to the market.
Positive results and cash flow require not only increased volumes, but also higher gross profits and reduced costs. The work now under way therefore includes a review of C2SAT’s product range. Together with the production unit in Singapore, a process has been launched to significantly reduce production costs and increase the profitability of the products sold.
A new management group has been established to meet the challenges C2SAT faces and thereby build support for the objectives that were earlier announced. The management team consists as of 21 October of CEO Fredrik Nygren, CFO Lars Davås, CTO and Product Manager Erik Dalin, Head of Sales Ulf Sundqvist, and Norbert Henschel, CEO of C2SAT Asia Pacific (Pte) Ltd.
During the report period two antennas were delivered to PT AJN Solusindo. The antennas are part of a larger project managed by Telekomcell in Indonesia. Orders for further antennas, and the pace of these orders, from AJN will depend in large part on Telecomcell’s priorities within the framework of the project.
During the quarter C2SAT also delivered seven C-band antennas to Shanghai Xinguo IT. The Ku-band antennas that were previously in China and reported as an asset on C2SAT’s balance sheet since the co-operation was established with CETC23 have been redesigned and upgraded to C-band. Old assets have thereby been realised. Since only the upgrade of the antennas can be recognised in revenue, the delivery did not contribute positively to results for the period, but C2SAT has realised liquid assets that would otherwise be tied up in inventory. As a result, operating expenses during the quarter were exceptionally high in relation to sales.
C2SAT currently has receivables from Maritime Communications Pty Ltd, its former distributor in Southeast Asia. C2SAT has initiated a process to recover this amount and is investigating possible conflicts of interest in connection with the signing of the agreements with Maritime.
An initial delivery of equipment to Thales is expected during the fourth quarter following a period of extensive testing and acceptance procedures. The requirements that Thales placed on the equipment have been and will be very important to our internal quality work, standardisation work and certification of C2SAT’s products today and in the future.
In the past three years C2SAT has participated in an antenna procurement in India as part of which its antennas have been evaluated several times and been found to meet high technical performance requirements. Commercially, and given the risks that the project entails, C2SAT was not able to commit to the requirements that the customer placed on the Company, however.
The capital contributions received during the year have been necessary to implement the above-mentioned changes. C2SAT can now focus on expanding operations, gaining the necessary market share and eventually becoming profitable and cash flow positive.
C2SAT is expected to further invest in its organisation to meet growing requirements from customers, not least in connection with the new co-operation with Orange, as well as in verification and product development. At the last Annual General Meeting the Board of Directors resolved to prepare a proposal for an incentive programme by the next AGM. Against the backdrop of current recruitment needs, primarily of senior personnel in sales, project management and development, the Board plans to shortly call an Extraordinary General Meeting to decide on a warrant programme for management and employees.
The objectives announced by the Company remain unchanged. The agreement with Orange is one of the key puzzle pieces needed to reach our sales goals. C2SAT’s other challenges are to improve production efficiency, increase product profitability, more efficiently utilise capital and reduce overhead.
Established objectives, including quarterly sales growth of 50%, will naturally be more challenging as sales grow each quarter. To date the Company has succeeded in meeting these objectives, but major challenges are still ahead of us.
Stockholm, 16 November 2009
Fredrik Nygren, CEO
Contacts
Fredrik Nygren, CEO +46-8-748 01 40 fredrik.nygren@C2SAT.se
Lars Davås, CFO +46-8-748 01 40 lars.davas@C2SAT.se
(For full report see attached file.)