Full Year Results, December 2005

Posted: 25/04/2006

Preliminary Results for the year ended 31 December 2005

Chairman’s statement

In the year to 31 December 2005, the sixth year of our development, the company recorded sales of £59,705 compared to £76,788 in the previous year. Administrative expenses were £874,637 (2004: £787,563) and the loss for the year was £725,379 (2004: loss of £614,127).

At the year end the balance sheet showed £957,369 of net current assets (2004: £1.68 million) and liquid resources of £876,919 (2004: £1.61 million).

The lower sales level is a reflection of the change in our business model from the licensing of individual copies of our compression software to organisations putting video onto websites, to the delivery of logging and editing solutions to television post production teams.

The increase in administrative expenses was almost entirely due to the recruitment of new staff.

The balance sheet reflects the continuing tight control which is exercised over all costs in the company.

In the annual report for the year ended 31 December 2004 the board outlined a revised strategy for the company and indicated key market sectors upon which Forbidden would concentrate:

1. Professional post production
2. Consumer (i.e. in-home) editing and publishing
3. Intruder and fire security

To date these sectors have proven to be an appropriate selection. Mobile phone applications which we previously identified separately are now an integral part of each of our sector offerings. All three of these sectors are developed from the same core platform; FORscene. All gain from improvements in our dynamic R & D activities and our ability to enhance our products to meet our partners and customers individual needs.

The pace of commercialisation in each sector has varied through the past year as we have flexed our resource allocations to reflect the urgency and immediacy of each opportunity; however, the chosen strategic sectors remain our focus going forward.

As predicted, 2005 saw significant growth of the key technologies and their market penetration in the UK which are critical to the expansion of our business. Computers provided much increased storage capacity, broadband connections accelerated at a remarkable rate to a level today in excess of 10 million homes and the typical broadband speed on new computers has gone from 512Kbps to around 2Mbps. Broadband costs have come down from an average of £20+ per month to the latest launch of free broadband 8Mb connection from Carphone Warehouse. Picture quality on mobile phones has increased significantly. The latest models can now capture video at near VHS quality.

All of these developments increase the potential sales revenues of the companys products, since they are the pre-requisite conditions upon which our research and development efforts have been based.

The continuing development and refinement of FORscene has been our top priority over the past six months. It has absorbed a high proportion of our R & D effort as interest and involvement of major broadcasters and partners has increased month by month throughout the various pilots that have been taking place. Individual customer needs have been identified and satisfied.

FORscene is a truly revolutionary product in the post production process of programme creation and is described as disruptive technology by experts in the industry. In December 2005, Forbidden won the Royal Television Society award for the best technology innovation in the post production process. The award ceremony was videoed on one of the new generation mobile phones, uploaded over the air into FORscene, edited and published for web and mobile delivery.

FORscene provides very high value by saving both significant time and money and simplifying life for loggers, editors, producers and directors. More detail is provided in the Chief Executives Review in the next pages.

Post production costs can represent 25% or more of total programme costs, and, as the hours shot increase for productions (partly driven by lower costs of digital footage), so the attraction of significant savings offered by FORscene increases. This is a world-wide market and is worth hundreds of millions of pounds a year.

Another example of the power of the FORscene platform is its use by the British Army to publish frequent videos recording an expedition to Mount Everest. The videos can be downloaded onto mobile phones of interested parties and potential army recruits as part of an Army recruitment drive.

FORscene will also be used by IBC TV News at the International Broadcasting Convention in Amsterdam in September, providing a most appropriate exposure of our mobile capability.

Clesh is the consumer version of FORscene. You can sign up for Clesh at our website at http://info.clesh.com.

The consumer use of video clips is soaring following the introduction of internet video sites such as Google Video and YouTube, where consumers contribute and share their video content.

A site such as YouTube in the USA has grown in 12 months to have 40 million video clips per day viewed by its members, demonstrating the explosive potential of the web as the primary medium for communication.

Clesh was introduced to the UK market in early 2006 through a promotion with Tiscali, the internet and broadband company. Consumers now have access to a free, basic account through the Clesh.com website.

Forbidden believes that Clesh has the three key constituents to be able to take its place in this explosion:

1. Simplicity and accessibility: go to the web page and Clesh is there
2. It is cross-platform: it can be used on PC, mobile or video iPod
3. The content is generated by the user and consumer: the more videos that people put into the system the more there is to view

During the next year the strategic imperative for Clesh is to build our customer base by attracting large groups of consumers to share their videos across the globe.

In the latter stages of the year, management took the decision to focus resources on the immediate opportunity for FORscene in the broadcast market rather than an intruder and fire security product. However, the company intends to use the FORscene platform to develop a competitive product in this large market, albeit at a somewhat later date than was anticipated previously.

During 2005 the board welcomed Phil Madden as Finance Director following the retirement of Douglas Blaikie. One sales person resigned to relocate abroad and two new employees joined the company.

Our thanks are owed to the dedication, enthusiasm and skill of our team in all capacities and it continues to be a pleasure to see such good product and service output, consistently achieved.

In the interim report for 2005 I indicated that the company had high confidence in significant sales expansion in 2006. This continues to be our view and orders in the first quarter are significantly ahead of the first six months of the previous year. If our expectations of the outcome of the various pilots and projects with broadcasters are realised, our shareholders should begin to see significant change in the profile of the business.

Chief Executive’s Review

In last years review, I outlined some of the technical and market expectations which have been fulfilled since the Forbidden Technologies flotation. Forbidden has applied its technology in an increasingly focussed way as part of its plan to create the video platform for the internet – FORscene.

The internet is becoming a major force in video creation and distribution. Consider the features to expect in an internet video platform:

• internet based accessed through a web browser
• no installation can run on any / every computer
• no configuration easy to get up and running
• low cost or free
• simple to learn
• cross platform editing PC, Mac, Linux
• cross platform publishing Desktop, Mobile phone, video iPod
• wide in scope:
  • reviewing
  • logging
  • editing
  • web publishing
  • mobile / iPod publishing
  • hosting
• available in volume

The year has seen a further expansion of FORscenes web and mobile publishing capability and a major acceleration in the internet video editing tool. It will come as no surprise that Forbiddens FORscene meets all the criteria above for an internet video platform.

To appreciate the focus of Forbiddens market entry strategy, it helps to understand the workflow in the professional video market.

Video post production processes vary widely between productions. Video is shot using video cameras, and is generally stored on tape. Some or all of the following steps may then be carried out:

• ingest transfer of video into the system
• review look through source material and note what is there
• log add transcript / enable shots to be found simply during editing
• shot selection select shots / speech which might be useful
• shot ordering construct the story
• rough cut order the shots; trim to about the right length
• possibly re-ingest tape for the offline
• offline make the programme, often at relatively low video quality
• possible re-ingest tape for the online
• online finish the programme at top video quality for broadcast

The strategy has been to introduce FORscene into the relatively simple early stages of this process: ingest, review and log. As customers discover the benefits of our intuitive web based solution, it is simple to move up the value chain by just staying on the FORscene escalator a bit longer. In the few short months since its first broadcast use, FORscene has already moved up to shot selection, shot ordering and rough cut.

Clesh is the consumer interface into the power of FORscene, with simplicity of use as the key priority. It allows consumers to experience the functionality and features of FORscene to edit and share their own video and mobile phone footage on the Internet, through a home PC. The Internet is so cheap that we can make our consumer version available for free. You can sign up for Clesh on our website at http://info.clesh.com/.

As we upgrade the Clesh video library to allow users to submit their own content, Clesh will be an increasingly attractive one-stop shop for internet video. Higher volume users will be able to purchase packages with extra features, extra storage, extra views and extra editing time, depending on requirements.

Underlying all Forbiddens work is its technological strength.

Forbiddens video compression technology has provided a unique codec designed for web-based editing. Control of the codec has led to improvements all the way through from storyboard editing to web publishing.

Forbiddens Java player gives almost universal reach to Windows and Mac PCs. The web player, which does not require installation, security updates or machine configuration, will play automatically on standard machines. Forbidden upgrades its Java player to meet the evolving needs of the market.

These days, high end mobile phones have internet access. Mobile publishing is a key component of Forbiddens armoury.

FORscene is robust, automatically tuning itself to work well on a wide range of computer speeds and internet connection speeds.

These technical solutions are not easily copied by third parties as the expertise required is so specialised and has taken a long time to accumulate.

FORscene has been recognised in the recent Royal Television Society technology award, awarded by the unanimous decision of the judges.

FORscene is the perfect product for this potentially vast and exciting market.

This years Shareholder Offer is £1,000 worth of free credits. The form is at the back of the Annual Report and Accounts.

Forbidden Technologies plc expects to adopt IFRS in the financial statements for the year ended 31 December 2007. The board has begun considering the differences between UK accounting standards and IFRS, and have identified accounting for development costs as an area which could impact on the companys financial statements going forward.