Half year results

23 May 2012

2ergo Group plc

Half year results

2ergo Group plc (AIM: RGO, "2ergo" or "the Group"), the mobile solutions company, has published its results for the six months ended 29 February 2012.

Highlights

·; Development and commercial validation of podifi™ technology

·; Post period-end launch of TikTap™ the Group's local commerce contactless coupon redemption technology

·; Partnerships established with major EPOS providers endorsing podifi™ platform

·; Comprehensive strategic review undertaken

·; Focused business plan and management team in place

·; Disposal of non-core regional businesses for up to $3.8m

·; EBITDA loss from continuing operations(1) reduced to £0.9m (H2 2011: £1.9m)

(1) figures stated before impairment of non-core assets

Neale Graham, Chief Executive of 2ergo, commented:

"This has been a transformational period for the Group, paving the way for the launch of our very exciting podifi™ technology. We now go forward with an extremely focused business model which is already surpassing our predictions.

"We are pleased to see the significant experience gained from our work with Orange Wednesdays, the PizzaExpress PayPal partnership and 3M and Wendy's in the US manifesting itself in the launch of podifi™ our contactless couponing, loyalty and payment platform."

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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.

Market leading brands such as Aviva, Ladbrokes, PizzaExpress, Rightmove, O2, Orange, Talk Mobile, Transport for London, Phones4U, Procter & Gamble and Visit England have all benefited from 2ergo's end-to-end mobile solutions to increase sales, mobilise business processes, reduce costs and enhance customer relationships. podifi™ is the culmination of 12 years' experience in delivering customer acquisition technology for clients including Orange Wednesdays, reputed to be the world's most successful mobile loyalty programme.

Headquartered in the UK, 2ergo has been a pioneer of enabling innovative mobile business solutions since 1999. 2ergo is an exclusive Mobile Partner for Microsoft's Innovation Outreach Programme.

For more information visit www.2ergo.com

2ergo has been transformed over the last 12 months, following a comprehensive review and subsequent implementation of a new strategy across the Group.

In an industry going through a number of major and rapid changes (including regulatory, technological and evolving consumer demands) this comprehensive review encompassed all aspect of the Group's business including products, sales channels and routes to market, operational and technical delivery methods, geographical operations, as well as its management structure.

The Group is now structured around three operating units in the UK:

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

·; TikTap™, which is based on the podifi™ platform, but is aimed at SMEs, local commerceand hospitality outlets

·; Customer Insight Services, which will provide major brands with data and customer insights derived from consumer and retail activity across these retail platforms.

The Group also retained 2ergo Inc. in the US, which operates its strategic partnership with Microsoft's Innovation Outreach Programme. This business is performing well and is delivering important contract wins from, for example, Wendy's Restaurants and 3M.

Following the review, the Group has now withdrawn from providing mainstream mobile solutions, particularly as this business has become commoditised. In doing so, the Group has significantly cut its cost base by selling its development company in India and generating up to $3.8 million by the sale of its US and Australian businesses.

Operational Review

During the period the Group has continued to expand its relationships with key clients. Following the successful partnership with PizzaExpress, 2ergo has continued to develop the company's mobile strategy, as well as working with the broader Gondola Group.

The Group has further enhanced the RAC's mobile presence and partnered with Keep Me Safe in their ground-breaking personal safety app. In addition, 2ergo is proud to have been selected by a leading high street retailer to advise on and define its mobile strategy.

Also during the half year, the Group ran a number of successful loyalty and customer acquisition campaigns, including Wendy's in the US, which is a forerunner to the roll out of the podifi™ technology. Based on this success, the product development and operational focus over the last six months has been on further developing podifi™ the Group's contactless mobile couponing, loyalty and payment technology.

podifi™

podifi™ is the culmination of 12 years' experience in delivering customer acquisition technology for clients including Orange Wednesdays, reputed to be the world's most successful mobile loyalty programme.

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. Existing technologies have tended to be expensive, requiring a significant upfront investment in handset upgrades and cumbersome EPoS integration. By contrast, podifi™ is a simple "plug and play" mobile solution, which allows fast, contactless transactions to be executed simply by tapping any smartphone on a small, low-cost pod attached to the cash till.

The podifi™ mobile marketing platform empowers merchants to create, launch and manage mobile coupon based offers, deals or loyalty programmes within minutes. Based around small, low-cost pods, podifi™ offers retailers the ability to build intimate customer relationships by enabling fast, contactless transactions via any smartphone, simply by tapping the phone on the pod. This means that coupons and vouchers can be redeemed, mobile loyalty cards can be swiped and mobile payments transacted, without the need for physical vouchers to be printed and without the intervention of sales staff in store. podifi™ gives merchants complete control over their campaigns, whilst also providing extensive analytics of their customers' transactions.

Significantly, podifi™ makes use of standard technology already used in smartphones, and requires no additional handset chip or hardware (such as barcode readers or PIN machines) nor staff training. 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, without any upgrade required to the retailer EPOS system.

podifi™ can be easily incorporated into any mobile "app" or mobile website within hours and is compatible with all currently available smartphones. The technology has been designed to interact seamlessly with near field communications (NFC) handsets as or when they become available.

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 to create in-store heat-maps providing valuable insight into customer behaviour. Once partner negotiations are concluded, contactless payment services will be launched which utilise Secure Connect, the Group's secure communication protocol.

2ergo will initially focus on selling its podifi™ enterprise solution directly to larger retailers which are seeking to introduce contactless mobile coupon issuance and redemption, store check-in and customer loyalty solutions into their stores.

This will be achieved in one of two ways; firstly, an off the shelf, white-label iOS/Android mobile application or a dedicated website, which can be fully 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 pod technology and are also fully configurable by means of an online management control panel.

TikTap™

"TikTap" is a local commerce contactless coupon redemption technology developed specifically to help retailers, hospitality outlets and SME's 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 podifi™) 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. 

The TikTap™ pods are compatible with existing smartphones and plug seamlessly into the vast majority of existing electronic cash tills (including units up to 15 years old) by means of a simple cable, using either a USB or a Serial port. While simple in its installation, the pod recognises the presence of offers in the device which have been 'Tik'd' into the app's digital wallet. A simple 'Tap' over the pod validates and redeems the offer, instantly reducing the bill on the EPoS terminal by the promotional amount, creating a more reliable redemption experience for consumers and providing a full audit trail of redemptions for businesses.

As a result of the advanced analytics and reporting available through TikTap, participating merchants will be able to improve the relevance and success of their promotions by learning more about their customers and, in turn, will be able to deliver offers of greater relevance which will help to generate customer loyalty. Partners such as Local Authorities, Retail Groups and Town Managers will also be able to learn more about where visitors are coming into the area from, and in which outlets they are spending.

Both podifi™ and TikTap™ are scalable opportunities from which 2ergo will receive revenues from set up fees, monthly licence fees and transactional fees. Time to market for both TikTap™ and the off the shelf white-label podifi™ solution is fast, with relatively short sales cycles.

Customer Insight Services

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.

The brand advertising service is designed to be an online advertising portal, giving brands access to this consumer retail network, enabling them to offer promotions on a 'pay per redemption' model. Today only 1% of current advertising budgets are being used for mobile, yet 23% of consumers spend their time consuming media on mobiles. The brand advertising portal positions 2ergo in this high growth area. The network provides significant 'real time' consumer insight and transactional data of coupon redemptions at the point of purchase which is highly valuable to brands and industry. The Group also intends to offer partner transactions through the pods, such as mobile payments and gift vouchers.

2ergo Inc

2ergo Inc, based in North America, operates the Group's strategic partnership with Microsoft's Innovation Outreach Programme and is currently in advanced discussions with 3M and Wendy's to roll out podifi™ across Wendy's chain of outlets in the US following the completion of successful trials.

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 its clients. These items are shown under the 'Discontinued Operations' heading.

As the Group's strategic review commenced in the second half of 2011, a more meaningful comparator for H1 2012 is H2 2011.

Headline numbers for continuing operations for those periods are as follows:

(1) Before impairment of non-core assets

H1 2012 revenues of £4.8 million were up 35% on H2 2011 of £3.6 million. Gross profit from continuing operations increased from £1.6 million to £1.8 million, at a margin of 37%. The Board is confident that the business will significantly increase future margins under the new operating model.

The strategic review included a detailed appraisal of costs. As a result, overheads fell from £3.5 million in H2 2011 to £2.6 million in H1 2012, with the monthly cash cost base being cut by approximately £100,000. In addition, an overhead saving of approximately £250,000 per month was achieved through the disposal of the Group's non-core overseas businesses at the end of the half year.

The operating loss from continuing operations was cut to £1.7 million before impairment charges, compared to £2.7 million in the second half of 2011.

The review also included an analysis of the Group's assets. This has resulted in a one-off, non-cash impairment charge of £1.9 million within continuing operations as technologies which related to non-core business were written down to reflect the Group's forward operating model.

The Group's reported pre-tax loss from continuing activities (after the impairment charge) was £3.7 million. Before the impairment charge the pre-tax loss was £1.7 million (H1 2011: £1.1 million, H2 2011: £2.6 million). Loss per share from continuing operations was 10.31p (H1 2011: 2.65p).

As a result of the Group's refocus and the disposal of the regional businesses, a one-off loss in respect of Discontinued Operations of £5.2 million was incurred in the period. This arose as follows:

Following the above, net assets of the Group at the period end were £15.0 million (August 2011: £23.7 million) and are stated after the proceeds of $3.0 million in cash and up to $0.8 million in deferred consideration resulting from the sale of the international businesses. As at 29 February 2012 cash balances were £2.3 million.

Additional sales staff are currently being recruited to pursue the market opportunities for TikTap™ and podifi™. This will result in an increase in staff numbers and consequently costs. The Board continues to closely monitor the Group's cost base to ensure maximum efficiencies are achieved whilst delivering the new propositions.

The Board anticipates loss generation and, subsequently, cash utilisation to continue in H2 2012 as podifi™ and TikTap™ are launched commercially. Revenue growth and a return to profitability are expected for FY13, with monthly EBITDA profits forecast from the end of 2012.

Management has made positive and significant change during the period, enabling the Group to move forward with a clear focus and direction. 2ergo is now underpinned by unique and transformational market leading technologies and the Board looks forward to capitalising on the considerable opportunities now being developed for both the podifi™ enterprise solution and SME-focussed TikTap™.

Sales performance will be greatly enhanced through key partnerships which have been established with major EPoS providers. The Group now holds formal partnerships with Casio Electronics, YCR (UK distributor for Sam4S and Samsung EPOS), ICR Touch, Geller, Uniwell and Sharp Electronics, collectively representing a significant portion of the UK market, accounting for over 500,000 EPoS installations. This means that the podifi™ terminal (or pod) can now be plugged into any of those EPoS systems, providing immediate plug and play capabilities, with full back office integration and analytics for the management and redemption of coupons.

In addition, the Board is pleased that TikTap™ has already secured partnership agreements with Local Government, Retailers, Business Forums and Town and City Centre Management Groups to create a network of local couponing and loyalty programmes. This will become the first UK-wide network of independent retailers, bars and restaurants delivering sustainable mobile offers under a single brand.

TikTap™ will launch its first programmes in Preston, Southport and Skegness, closely followed by Salford and Blackpool, where the Group has garnered enthusiastic support from both national and local merchants and traders. Following the launch this month, visitors, residents and shoppers within these areas will benefit from redeeming highly targeted and valuable local offers and deals through an installed network of podifi™ pods in and around those towns and cities.

2ergo looks forward to announcing further City programmes during 2012 as part of its detailed roll out plan for TikTap™.

The Board is delighted with the progress made to date with both podifi™ and TikTap™ and the overwhelmingly positive reaction received from both businesses and industry experts and looks forward to the future with confidence.

Consolidated unaudited interim income statement

for the six months ended 29 February 2012

Consolidated unaudited interim statement of comprehensive income

for the six months ended 29 February 2012

Consolidated unaudited interim statement of financial position

as at 29 February 2012

* In accordance with International Financial Reporting Standards each line of the consolidated unaudited statement of financial position as at 28 February 2011 and 31 August 2011 includes the assets and liabilities of the discontinued operations as well as those of the continuing operations. The figures as at 29 February 2012 reflect continuing operations only.

Consolidated unaudited interim statement of changes in equity

for the six months ended 29 February 2012

Consolidated unaudited interim statement of cash flows

for the six months ended 29 February 2012

Notes to the consolidated unaudited interim financial statements

1. Basis of preparation

The interim financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) as described in the accounting policies set out in the financial statements for the year ended 31 August 2011 and AIM rules.

The comparative financial information for the period ended 28 February 2011 and the year ended 31 August 2011 has been extracted from the interim and annual financial statements of 2ergo Group plc. These interim results for the period ended 29 February 2012, which are not audited, do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006.

Full audited accounts of the Group in respect of the year ended 31 August 2011, which received an unqualified audit opinion and did not contain a statement under section 498(2) of the Companies Act 2006, have been delivered to the Registrar of Companies.

2. Segmental analysis

During the period the Group disposed of its interests in the Americas, Australia and India and also discontinued certain of its UK legacy business lines, such as offering subscription services to its clients. Accordingly these operations have now been reclassified as discontinued operations. As a result of this change in reportable segments, the prior period segmental information has been restated.

1 Earnings before interest, tax, depreciation, amortisation and impairment of assets

All revenues are from external customers.

3. Taxation

The tax credit accrued in these interim financial statements reflects an estimated tax rate of 4% on the loss before tax, impairment of assets and notional interest for the period (2011: 25%), which is the anticipated effective composite rate for the current financial year, reflecting research and development tax credits earned.

4. 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 period. 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 and discontinued operations is calculated as follows:

5. Discontinued activities

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 period, 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 interim 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:

* Total proceeds comprise cash of £1.9 million and deferred consideration of up to £0.5 million.

6. Impairment of assets

Following the strategic review undertaken by the Group, together with the focus on the development and realisation of value from its podifi™ contactless mobile loyalty technology, the Board consider that the value of certain assets of the Group may no longer be realisable through future cash flows. Accordingly non-core assets with a value of £1,956,000 were impaired in the period. In addition, assets relating to the discontinued operations with a value of £3,475,000 were also impaired in the period.