Full year results

30 November 2012

2ergo Group plc

Full year results

2ergo Group plc (AIM: RGO, "2ergo" or "the Group"), the owner and international provider of innovative, proprietary contactless mobile technology solutions, has published its full year results for the 12 months ended 31 August 2012.

Highlights

·; Development and commercial launch of podifi™

·; Launch of TikTap™, the local commerce contactless coupon redemption proposition based on podifi™ technology

·; Validation of podifi™ and TikTap™ across all routes to market

·; Partnerships providing access to over 400,000 EPOS installations in the UK

·; Completion of comprehensive business restructure and management changes - business refocused away from mainstream mobile solutions

·; Disposal of non-core regional businesses for over $3.0 million

·; Operating loss from continuing operations £16.4 million following non-cash impairment charge of £12.3 million (2011: Loss £3.7 million)

·; EBITDA loss from continuing operations(1) £2.5 million (2011: Loss £2.5 million)

·; Post year end, raised £2.7 million net of expenses to invest in roll-out of podifi™ and TikTap™

(1) Figures stated before interest, tax, depreciation, amortisation and non-cash impairment of assets

Neale Graham, Chief Executive of 2ergo, commented:

"The new management team have transformed the Group during the year. We are now well advanced in our move away from an increasingly commoditised, difficult to scale mobile solutions operation to a ground-breaking, contactless mobile technologies business.

"The contactless mobile market is expanding rapidly and we are confident that with podifi™ we have a unique and compelling market proposition that "closes the loop" on mobile couponing, loyalty and payments mechanisms - one that puts us ahead in the market.

"Although only recently launched, we are extremely encouraged with the progress made to date with both podifi™ and TikTap™ and the overwhelmingly positive reaction received from both businesses and industry experts. We are now entering an extremely exciting period in our development."

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About 2ergo Group plc

2ergo Group plc, the owner and international provider of innovative, proprietary contactless mobile technology podifi™, delivers coupons and vouchers, loyalty, proximity and payment solutions to organisations of all sizes in order to assist them to develop and execute their mobile strategy.

Headquartered in the UK, 2ergo has been a pioneer of enabling innovative mobile business solutions since 1999, supplying clients such as Aviva, Ladbrokes, PizzaExpress, Rightmove, O2, Orange, Talk Mobile, Transport for London, Phones4U, Procter & Gamble and Visit England, who have all benefited from 2ergo's end-to-end mobile solutions to increase sales, mobilise business processes, reduce costs and enhance customer relationships.

For more information visit www.2ergo.com

Strategic overview

2ergo has been transformed over the last 18 months following management changes and a comprehensive strategic review. The Group has moved its focus away from providing mainstream mobile solutions, which were increasingly difficult to scale, and also disposed of its development company in India and its US and Australian businesses, thereby significantly reducing its cost base.

2ergo is now structured around one technology and three scalable routes to market in the UK:

·; podifi™: the Group's contactless mobile technology aimed at large retailers and enterprises;

·; TikTap™: a local commerce contactless coupon redemption technology, which is based on the podifi™ platform, but is aimed at SMEs, local commerce and hospitality outlets; and

·; Customer insight services: which will provide major brands with data and customer insights derived from consumer and retail activity across the podifi™ and TikTap™ platforms.

Operational review

Significant change has been carried out to align the business's resources and clients with its strategic objectives. Relationships with clients not in line with the Board's strategy have been terminated, internal departments have been restructured and sub-scale, non-core regional businesses sold.

The Group is now clearly focused on maximising returns from its innovative, proprietary and scalable contactless mobile technology solutions.

podifi™

During the year, the Group has focused on and launched podifi™, its contactless mobile technology platform. The podifi™ core technology is built upon more than 12 years' experience in delivering customer acquisition technology for clients, including Orange Wednesdays, which is believed to be one of the world's most successful mobile loyalty programmes.

The podifi™ platform has been developed to be a simple self-service web tool which empowers merchants to create, launch and manage mobile coupon based offers, deals or loyalty programmes within minutes. podifi™ gives large retailers and enterprises complete control over their campaigns, whilst also providing extensive analytics of all of their customers' transactions over the podifi™ platform.

Until podifi™, a key challenge that has prevented the mass adoption of mobile couponing, mobile loyalty and mobile payments within the retail sector, has been the redemption of the offer at the cash till or point of sale.

Significantly, podifi™ makes use of standard technology already used in smartphones, and requires no additional handset chip nor any additional staff training. podifi™ pods placed discreetly at the point of sale can transact contactless mobile payments and act as redemption points to redeem mobile coupons or loyalty cards in real time, by simply plugging the pod into the retailer's EPOS system.

To facilitate the roll-out of podifi™, the Group has been working closely with leading EPOS manufacturers, distributors and resellers, and has built strategic partnerships with a number of these organisations. Collectively they represent a significant portion of the UK market, accounting for over 400,000 EPOS installations in the UK.  Partnering with leading EPOS manufacturers and distributors is a key element of the Group's roll-out strategy; such groups are being incentivised to distribute podifi™ through their extensive sales networks via revenue sharing agreements.

podifi™ can be easily incorporated into any mobile "app" or mobile website within hours and is compatible with all currently available smartphones.

In addition, podifi™ incorporates proximity technology, allowing the delivery of personalised in-store communications and the issue of location-relevant offers and promotions. For example, pods placed at the entrance to the store can be used for consumer check-in services, whilst pods positioned on shelves in specific aisles can deliver offers specific to the products in that part of the store. The same location sensitive technology also allows customers to be tracked around the store, thereby creating in-store heat-maps, which provide valuable insight into customer behaviour.

2ergo is initially focusing on selling podifi™ directly to larger brands which are seeking to introduce contactless mobile coupon issuance and redemption, store check-in, customer loyalty and mobile wallet solutions.

This will be achieved in one of two ways: first, an off-the-shelf, white-label iOS/Android mobile application or a dedicated website, which can be customised with the client branding. This service can be implemented and launched within hours of receiving client instructions. Alternatively, 2ergo will provide clients with a Software Development Toolkit which will allow the clients to rapidly integrate podifi™ into their existing app or service. Both solutions utilise the same underlying podifi™ technology and are also configurable by means of an online management control panel.

podifi™ is a scalable opportunity from which 2ergo will receive revenues from setup fees, monthly licence fees and transactional fees.

TikTap™

TikTap™ is the Group's consumer facing local commerce contactless coupon redemption platform developed specifically to help retailers, hospitality outlets and SMEs to generate a mobile brand presence and attract customers to their store. It comprises a specially developed "TikTap" app (available on both iOS and Android platforms) and associated in-store "pods" (based on the podifi™ technology) attached to each participating outlet's cash till. These pods enable the customer to redeem offers simply by tapping their smartphone over the pod at point of sale.

Launched during the final quarter of the year, TikTap™ is being rolled out in phases in partnership with local government, retailers, business forums and city centre management groups. In addition, the TikTap™ technology has been integrated into "TubeMap", the official licensed Transport for London tube map application.

With over 5 million downloads and 100,000 daily users, TubeMap is the most downloaded and used cross-platform tube map smartphone application. This rich application provides travel alerts, live departure boards and station information, helping users find stations and plan journeys as well as providing Oyster card balances. Following the integration with TikTap™, TubeMap users can also now take advantage of easy-to-redeem money off vouchers and coupons, thereby creating a significantly enhanced user experience.

As with podifi™, 2ergo will accrue a one-off fee for each installed TikTap™ pod and further recurring revenues from monthly licence fees per pod, as well as transaction fees.

Customer insight

Both podifi™ and TikTap™ provide valuable consumer and enterprise data analytic insights through consumer and retail activity across the platforms. This provides the Group with additional opportunities to monetise such insight through brand advertising, the provision of consumer and business data and renting access to the pod network, with an agreement already signed with a leading global information services provider.

Financial review

The income statement reflects the disposal of the Group's international operations and the discontinuation of certain UK legacy business lines, such as offering subscription billing services to clients. These items are shown under 'Discontinued Operations'.

Headline numbers for continuing operations are:

The retained revenue for the year was £8.4 million (2011: £10.1 million). The podifi™ and TikTap™ propositions were only launched commercially during the last quarter of 2012, and had little opportunity to impact the revenues for the year.

2011 revenue also included build fees for smartphone applications and other difficult to scale commoditised solutions which have not been pursued in 2012, as a result of the Group's decision to focus on more scalable activities.

Gross profit from continuing operations was £2.8 million (2011: £3.8 million) reflecting a gross margin of 34%. The Board is confident that the Group will significantly increase future margins under the new operating model.

The strategic review included a detailed appraisal of costs. As a result, overheads for continuing operations fell by £1.0 million to £5.3 million (2011: £6.3 million). In addition, an overhead saving of approximately £250,000 per month was achieved through the disposal of the Group's non-core overseas businesses during the year.

The loss from continuing operations before interest, depreciation, amortisation and impairment charges was £2.5 million (2011: loss £2.5 million).

The review also included an analysis of the Group's assets. This has resulted in a one-off, non-cash impairment charge of £12.3 million within continuing operations in the year. Approximately £10.3 million of this charge was in respect of the impairment of Secure Connect, the Group's secure mobile communication protocol. The Board believes that this technology will form an element of the security solution for podifi™'s contactless mobile payment and wallet capability. However, due to the early stage of development of mobile wallets globally, it is difficult to forecast accurately the payback period for the Secure Connect technology. Therefore, in accordance with IAS 36, the Group has recognised a non-cash impairment charge of £10.3 million within continuing operations, as the book value of the Secure Connect technology and associated goodwill was written down to £nil. The remaining £2.0 million impairment charge relates to technologies for non-core business, which were written down to reflect the Group's new operating model.

Before the impairment charge, the pre-tax loss from continuing activities was £3.9 million (2011: loss £3.8 million). The Group's reported pre-tax loss after the impairment charge was £16.2 million (2011: loss £3.8 million).

The Group has £10.5 million of unused tax losses carried forward, in respect of which no deferred tax asset has been recognised as the timing of the utilisation of these losses is uncertain.

As a result of the Group's refocus and the disposal of the regional businesses, as expected a one-off pre-tax loss in respect of Discontinued Operations of £5.7 million was incurred during the year. This arose as follows:

Following the above impairments and disposals, net assets of the Group at 31 August 2012 were £3.1 million (2011: £23.7 million). As at 31 August 2012, cash balances were £0.5 million (2011: £2.2 million).

On 1 October 2012, the Group completed the placing of 28,453,540 new ordinary shares with both new and existing shareholders. Strong aftermarket demand from investors resulted in the number of shares being offered increasing from 22,000,000 and leading to aggregate proceeds of £2.7 million (net of issue costs) being raised to provide additional working capital and the capital resources required to undertake the necessary investment in the roll out of the podifi™and TikTap™ contactless mobile technology platforms.

These proceeds are already enabling the Group to accelerate the roll out of its network of pods in strategic locations with key clients. The Board continues to closely monitor the Group's cost base and cash balances, as uncertainty surrounding the timing of the uptake of the podifi™ technology through the various routes to market renders any forecasting of sales performance in the short and medium term difficult.

Recent developments and outlook

The Group is seeing good demand for its podifi™ technology with the level and nature of enquiries and opportunities from new and existing clients gaining momentum. 2ergo has now established a firm foothold within a growing and specialist section of the mobile market with its podifi™ technology validated by leading companies from the mobile network, retail and hospitality sectors.

The sales pipeline is strong and growing across all areas of the business, including retailers, hospitality venues, local government and town centre groups. Furthermore, the Group has continued to sign up new partnership agreements with EPOS resellers and distributors. Twenty-five EPOS resellers have now signed up, who are collectively responsible for over 400,000 EPOS terminal installations across the UK.

Overall, the Group is operating in line with the Board's expectations and it anticipates revenue growth and a return to profitability in 2013.  

Consolidated income statement

for the year ended 31 August 2012

Consolidated statement of comprehensive income

for the year ended 31 August 2012

Consolidated statement of financial position

as at 31 August 2012

* In accordance with International Financial Reporting Standards each line of the consolidated statement of financial position as at 31 August 2011 includes the assets and liabilities of the discontinued operations as well as those of the continuing operations. The figures as at 31 August 2012 reflect continuing operations only.

Consolidated statement of changes in equity

for the year ended 31 August 2012

Consolidated statement of cash flows

for the year ended 31 August 2012

Notes to the consolidated preliminary financial statements

1 Basis of preparation

The financial information set out herein does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information for the year ended 31 August 2012 has been extracted from the statutory accounts of 2ergo Group plc for that year which, if adopted by the members at the Annual General Meeting, will be filed with the Registrar of Companies. The financial information for the year ended 31 August 2011 has been extracted from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditor reported on those accounts; its report was unqualified and did not contain a statement under either section 498 (2) or section 498 (3) of the Companies Act 2006.

The preliminary financial information has been prepared in accordance with the accounting policies set out in the Group's statutory accounts for the year ended 31 August 2011.

2 Segmental analysis

During the year, the Group disposed of its interests in the Americas (other than in relation to the Microsoft Innovation Outreach Programme), Australia and India and has also discontinued certain of its UK legacy business lines, such as offering subscription services to its clients. Accordingly these operations have now been classed as discontinued operations. The Group is now organised into one principal operating division for management purposes with revenue being derived from 3 routes to market, being podifi™, TikTap™ and Customer Insight Services. As a result of these changes the Group has only one operating segment and segmental information is not required to be disclosed separately. The Group will continue to monitor the appropriateness of its operating segments as the forecast growth arising from the podifi™ technology is realised.

3 Loss per share

The calculation of basic and diluted loss per share from continuing operations is based on the result attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue during the year. The weighted average number of shares for the purpose of calculating the basic and diluted measures is the same. This is because the outstanding share options would have the effect of reducing the loss per ordinary share and therefore would be anti-dilutive. Basic and diluted loss per share from continuing operations is calculated as follows:

Basic and diluted loss per share from continuing and discontinued operations is calculated as follows:

4 Business Disposals

On 24 February 2012, the Group disposed of 2ergo Americas Inc, which represented its non-core North and Latin American operations, and its Indian operations. On 27 February 2012, the Group disposed of its Australian operations. In addition, the Group also discontinued certain of its UK legacy business lines during the year, such as offering subscription billing services to its clients. In accordance with IFRS 5 the results of these units are classified as discontinued operations in this financial information.

The results of the discontinued operations up until the point of disposal, which have been disclosed separately in the consolidated income statement, as required by IFRS 5, are as follows:

The net assets and liabilities at disposal and the loss on disposal were as follows:

5 Impairment of assets

A one-off, non-cash impairment of £12.3 million is included within continuing operations in the year. £10.3 million of this charge was in respect of the impairment of Secure Connect, the Group's secure mobile communication protocol, which the Board believes will form an element of podifi™'s contactless mobile payment and wallet capability. Due to the early stage of development of mobile wallets globally it is difficult to forecast accurately the payback period for the Secure Connect technology. Therefore in accordance with IAS 36, the Group recognised a non-cash impairment charge of £10.3 million within continuing operations. The remaining £2.0 million impairment charge related to technologies for non-core business which were written down to reflect the Group's forward operating model. In addition, assets relating to the discontinued operations with a value of £3.5 million were also impaired in the year.

6 Report and Accounts

A copy of the Annual Report and Accounts will be sent to all shareholders with notice of the Annual General Meeting.