Hemisphere GPS today reported financial results for the fourth quarter and year ended December 31, 2012. All currency amounts are expressed in U.S. dollars.
Corporate Restructuring & Divestiture
On September 5, 2012, Hemisphere GPS announced a corporate restructuring, appointing a new CEO with the objective to return Hemisphere GPS to profitability by focusing on three key priorities: (i) the core agricultural business, (ii) streamlining and simplifying the business, and (iii) adopting market driven innovation.
In pursuit of these objectives, all manufacturing activities have been outsourced and the Calgary office will be closed before the end of June 2013. Head office and key functions have been relocated to the Company's Hiawatha, Kansas location which has a lower cost environment and is centrally located in the U.S. corn-belt which represents the Company's largest market.
The Company exited its non-agriculture-related business, announcing on January 31, 2013 the sale of the business assets associated with its non-agriculture business assets to the Canadian subsidiary of Beijing UniStrong Science & Technology Co. Ltd. for cash of $14.96M million. As part of the transaction, UniStrong and Hemisphere GPS have formed a strategic alliance and a business relationship covering supply chain management, customer support, non-competition, and perpetual technology cross-licensing.
The Company plans to change its corporate name to "AgJunction Inc." subject to shareholder approval at its 2012 annual shareholders meeting, planned for May 15, 2013. Coinciding with the name change, the Company plans to change its ticker symbol from "HEM" to "AJX" shortly after the shareholders meeting, subject to shareholder approval of the name change and TSX approval.
Total restructuring costs recorded in 2012 were $7.4 million, with $6.2 million reported as restructuring costs and $1.2 million included in discontinued operations. The total cash cost of the restructuring recorded in 2012 was $4.0 million (incurred and accrued) and non-cash costs recorded were $3.4 million. All restructuring activities are expected to be completed prior to the end of June 2013. The Company has sufficient capital to complete the restructuring.
Subsequent to the end of 2012, in the first quarter of 2013, the Company netted cash inflow of approximately $14.3 million from the divestiture of the non-agriculture assets, net of transaction costs, and repaid its outstanding loan to Export Development Canada for approximately $1.1 million. At March 18, 2013 the Company held cash of approximately $13.4M.
"The restructuring is designed around the three principles previously announced," stated Hemisphere GPS CEO, Rick Heiniger. "The changes are expected to produce a profitable foundation on which to build growth. The bulk of the restructuring costs were incurred in 2012 with the balance being incurred through June 2013. It is our goal to complete the restructuring as quickly as possible to minimize cost and related distraction."
Fourth Quarter Financial Review
To increase clarity of results for continuing operations of the agriculture business after divesting the non-agriculture business, and in accordance with International Financial Reporting Standards, the Company has reported the divested components of its business as "discontinued operations" in a separate line item in both the current and prior comparative periods.
For the three months ended December 31, 2012, the Company's agricultural business reported revenues of $10.2 million, an increase of 12% from $9.1 million in the fourth quarter of 2011. Fourth quarter gross margin contribution was 40% or $4.0 million, a decrease compared to 48% and $4.3 million for the fourth quarter of 2011. The lower gross margin resulted primarily from select product price discounting initiated to accelerate conversion of inventory to cash which became a priority to support restructuring cash costs, and is not indicative of the typical gross margin of its agriculture business. Operating expenses, prior to restructuring costs, were $6.2 million compared to $5.9 million in the fourth quarter of 2011. For the fourth quarter of 2012, the Company reported restructuring costs of $5.7 million and an impairment in its goodwill of $21 million, resulting in a net loss from continuing operations of $29.2 million or ($0.45) per share (basic and diluted), compared to a loss from continuing operations of $1.6 million or $(0.03) per share in 2011.
After the loss from discontinued operations of $3.6 million in the fourth quarter of 2012 versus $1.0 million in 2011, the Company realized a net and comprehensive loss of $32.9 million or $(0.51) per share (basic and diluted) in 2012 compared to a loss of $2.5 million or $(0.04) per share (basic and diluted) in 2011.
2012 Year-End Financial Review
For the year ended December 31, 2012, revenues were $55.4 million representing an increase of 5% from $52.8 million in 2011. Sales to non-North American customers represented 29% of total revenues during 2012 (2011: 33%), while North American sales were 71% of total revenues in 2012 (2011: 67%).
"Management acknowledges that given the strength of the marketplace, our Agriculture business has underperformed for some time," said Mr. Heiniger. "The new senior management is now in place and will be making improvements through 2013 and beyond. Our business strategy is being assessed and redirected as necessary to deliver shareholder value which we believe is long overdue."
Gross margins were $24.5 million in the year, down by $0.9 million from gross margins of $25.4 million in 2011. Gross margins, as a percentage of revenue, were 44% in 2012 compared to 48% in 2011.
Operating expenses before acquisition and restructuring costs were $25.7 million in 2012, up by 14% or $3.2 million from $22.5 million in 2011, reflecting the acquisition of AgJunction on January 31, 2012.
The Company's investment in research and development for 2012 was $9.7 million compared to $8.2 million in 2011 representing an increase of $1.5 million or 18%. The increase was related to three major product and service introductions during 2012 including the new OutbackMAX, upgrades to eDriveX, and the launch of cloud services for agriculture - including related R&D staffing, overhead and amortization arising from the AgJunction acquisition.
Sales and marketing expenses were $10.5 million in 2012 versus $9.7 million in 2011, an 8% increase reflecting the AgJunction acquisition. The Company reported restructuring costs of $6.2 million in the year, comprised of severance costs, lease termination costs, advisory fees and inventory write-downs. The Company recognized an impairment in its goodwill of $21.0 million at December 31, 2012.
For 2012, the Company realized a loss from continuing operations of $29.0 million or ($0.44) per share (basic and diluted), compared to net income from continuing operations of $1.8 million or $0.03 per share (basic and diluted) in 2011.
The Company recorded a loss from Discontinued Operations of $5.6 million for the year ended December 31, 2012 and a loss of $3.3 million in the 2011 comparative period. These amounts represent the results of operations of the non-agriculture business assets that were sold on January 31, 2013, and the Calgary location.
Including the loss from Discontinued Operations, the Company realized a net and comprehensive loss of $34.6 million or $(0.52) per share (basic and diluted) in 2012 compared to a loss of $1.5 million or $(0.02) per share (basic and diluted) in 2011.
At December 31, 2012, the Company held cash of $2.6 million compared to $6.7 million on December 31, 2011. Working capital was approximately $17.2 million, and the Company had 66,404,215 common shares outstanding. In accordance with the terms of the January 2012 AgJunction purchase agreement, cash of $0.5 million and 2,723,705 common shares will be paid out during the 2013 with respect to the 2012 earn-out. The purchase agreement includes the potential for a similar earn-out for 2013.
Restructuring and Business Strategy
The divestiture of the non-agriculture business was as part of the Company's initiative to ensure profitable and sustainable growth. The divestiture eliminates redundancies, reduces costs and achieves operating efficiencies. The result is a streamlined business which can more effectively capitalize on the expanding market opportunities in agriculture.
The relocation of Company headquarters to Hiawatha, Kansas has placed key functions in the heartland of the North American agricultural industry. An abundant supply of agriculture trained and passionate talent, along with the pro-business climate in the State of Kansas, were two key factors for the site selection. On February 28, 2013, the Company announced the composition of its new leadership team centralized primarily in the Hiawatha office.
The Company is in the process of transitioning to market-responsive product development to drive greater innovation in, and higher returns from, the product development process.
Mr. Heiniger explained: "Our past investment in guidance and auto-steering technologies will provide returns to the company for years to come as they become ever more universal. AgJunction, post restructuring, represents a pure investment in Precision Agriculture. It's our plan to further innovate into the service backbone of the industry. Timing is important - and we believe the time is now. With a clean, strong balance sheet and new management physically positioned at the heart of our Ag focused business, we couldn't be more excited about the future."
A conference call and Web cast for shareholders, analysts and other members of the investment community has been scheduled for today, Wednesday March 20, 2013, at 11:00 a.m. Eastern Time to discuss the financial results and provide an update on operations.
To participate in the conference call, please dial 1-647-427-7450 or 1-888-231-8191 approximately 10 minutes before the conference call and provide passcode 19013016. The call will be webcasted live and then archived on the Company's web site at:
A recording of the call will be available through April 4. Please dial 1-416-849-0833 or 1-855-859-2056 and enter passcode 19013016 to listen to the rebroadcast.
Hemisphere GPS (to be renamed "AgJunction" following shareholder and TSX approval) provides innovative hardware and software applications for precision agriculture worldwide. The Company holds numerous patents and markets its products and services under leading brand names including Outback Guidance, Satloc, and AgJunction Cloud Services. AgJunction supports advanced farming practices and enables seamless data connectivity among growers and their agricultural service providers. The Company is headquartered in Hiawatha, Kansas, with facilities in Arizona, Pennsylvania, Manitoba and Queensland, Australia. Hemisphere GPS is doing business as AgJunction and is listed on the Toronto Stock Exchange (TSX) under the symbol "HEM" and is one of the TSX Cleantech designated companies. For more information, please go to www.corp.agjunction.com.
The above disclosure contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond Hemisphere GPS' control, including: the impact of general economic conditions, industry conditions, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to the announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Hemisphere GPS' actual results, performance or achievement could differ materially from those expressed in, or implied by these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceed, that Hemisphere GPS will derive therefrom.