Interim results

ADGORITHMS LTD

("Adgorithms" or the "Company" or the "Group")

Interim results for the six months ended 30 June 2016

Adgorithms Ltd (AIM: ADGO), a software company operating in the high growth online advertising market, announces interim results for the Group for the six months ended 30 June 2016.

Operational highlights:

· Results reflect a period in which the Group accelerated its strategy following material disruption across the ad tech industry during H2 2015

· Significant progress made on key strategic priorities in the period, namely:

o Established presence in U.S market with relocation of CEO and CTO to New York and recruitment of a 13 person sales and marketing team, including Chief Revenue Officer & Chief Marketing Officer

o Successful launch of Albert 2.0 with enhanced capabilities and new channels

o Indirect business continues to diversify with over 50 partners added during the period

Financial summary*:

· Revenues of $8.7m (H1 2015: $12.3m)

· Gross profit of $2.2m (H1: $4.2m)

· Adjusted EBITDA loss of $(2.7)m (adjusted EBITDA H1 2015: $2.6m)

· R&D expenses of $2.1m (H1 2015: $1.1m)

· Sales and marketing expenses of $1.5m (H1 2015: $0.3m)

· Strong cash balance at 30 June 2016 of $28.1m

* Excludes share based compensation expenses of $774K (COGS-$13K, R&D-$430K, S&M-$127K and G&A-$204K), $6,751K (COGS- 5K, R&D-$5,380K, S&M-$154K and G&A-$1,212K) in H1 2016 and in H1 2015, respectively, depreciation in the amount of $37K and $13K in H1 2016 and in H1 2015, respectively, IPO bonuses in H1 2015 in the amount of $1,220K and relocation expenses reimbursement in H1 2016 in the amount of $69K.

Or Shani, Chief Executive Officer of Adgorithms, commented:

"During this period we have worked hard to realign our business and focus on our core strategic priorities following the disruption witnessed throughout the online advertising market during the second half of 2015.

"We believe there is a significant market opportunity for Adgorithms with Albert at the heart of our business as the marketing industry continues to seek out data-driven solutions in an increasingly cluttered data world. The collection and aggregation of data from multiple sources is only useful if you are able to draw correlations, such as the conversion of a Facebook ad versus an email campaign, and ultimately improve your customer offering.

"Albert 2.0 offers a single end-to-end digital marketing solution - from media buying to execution, optimisation and analysis. Its AI capabilities enable Albert to offer proactive insights and recommendations from the information gathered. Real AI marketing systems, as opposed to automated programmatic software, thrive off experimentation - just like human marketers - and can run thousands of variables in micro-seconds thus enabling brands to drive revenue, reduce costs and make more informed investment decisions at a pace and scale not previously possible.

"We believe there is a huge market opportunity for Albert and look forward to reporting progress in due course."

This announcement contains inside information

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Operational Review

INTRODUCTION

Adgorithms is pleased to report half year results for the six months ended 30 June 2016. In the period, the Company delivered revenues of $8.7m, and adjusted gross profit of $2.2m.

Adjusted COGS amounted to $6.4m (74% of total revenues) for the six months ended 30 June 2016, down from $8.0m (65% of revenues) in the same period last year.

Adjusted operating expenses as a percentage of revenues were 56% in H1 2016 (H1 2015: 13%). Adgorithms has seen an increase in its sales and marketing expenses as we build our US team to make the most of the opportunity in that market and to accelerate market penetration. This team is now nearly fully staffed.

Adjusted EBITDA loss in the first six months of the year was $(2.6)m (adjusted EBITDA H1 2015: $2.6m), due to downward margin pressure caused by disruption to both supply and demand on advertising exchanges, and the investment to support the launch and promotion of the SaaS platform.

Cash and cash equivalents decreased by $3.0m to $28.1m as at 30 June 2016, compared to $31.1m at 31 December 2015 and $34.7m at 30 June 2015. Net cash of $2.8m deployed in operating activities mainly related to increase in headcount during H1 2016 in order to support extension and implementation of the Company's SaaS platform.

Unaudited adjusted financial summary is outlined below (US thousand dollars):

The Group remains focused on further developing its Artificial Intelligence ('AI') marketing solution, Albert, which automates the process of media planning and buying, execution, optimisation and analysis to maximise the return on investment (ROI) for brands.

MARKET SUMMARY

Since listing on AIM in June 2015, there has been a dramatic shift in the online advertising market, in terms of both the industry's trading environment and also in terms of brands' engagement with the increasingly diverse and growing number of recognised channels across digital media.

In H2 2015, a number of advertising exchanges sought to reduce the amount of fraudulent inventory on their platforms, with dramatic action driving down transaction volumes significantly. Whilst transaction volumes have stabilised since then, the volumes have not recovered to the levels seen previously and we anticipate these suppressed volumes to continue for some time and continue to be unpredictable.

In parallel to the disruption to the traditional ad exchange based markets, more and more brand advertisers are recalling their online media budgets for evaluation, underpinned by an increase in demand for transparency and accountability of media spend. This is expected to benefit Adgorithms as it continues to market its SaaS solution to enable brands to reclaim control of their media spend.

BUSINESS SUMMARY

SaaS channel

The SaaS version of Albert, allows brands the autonomy of using the software to run campaigns in house with greater efficiency and transparency. Not only does it allow one individual to oversee the running of multiple campaigns, but also enables brands to deliver a greater ROI, eliminate costs and execute at a pace and scale not previously possible. The Company intends to continue to focus its efforts on its SaaS solution given the much greater value that this can create for the brand customer as well as the long term value of such customers to Adgorithms.

We are very pleased to announce we continue to see increased traction with Albert as a SaaS solution in accordance with the Company's 2016 SaaS deployment plan. Adgorithms has a dedicated team of account managers who are the liaison point for customers and responsible for the on-boarding process and provision of required training to allow our customers to autonomously run their campaigns in house.

Typically, brands using Albert are reporting significant improvement in conversions or return on investment, compared to other platforms.

SaaS currently represents a very small but growing proportion of overall revenues and is expected to become increasingly meaningful over time.

Indirect channel

Albert also transacts on undervalued inventory on advertising exchanges. Adgorithms acquires this inventory when it is under-priced relative to the economic value Albert prescribes to it, and then aggregates the purchased impressions and sells them to advertisers or media agencies seeking advertising space. This channel currently represents the vast majority of the Company's revenue.

As anticipated, the indirect channel remains unpredictable and challenging. Throughout the first half of the ​year the Company saw several major changes in client, ​supply and demand ​volumes. Some of these were due to large mergers and consolidations, whilst some were due to change in business strategy by certain platforms. The Company believes the environment will remain volatile during the second half of the year. By way of example, the Company's largest demand partner has recently decided to update many of its internal processes and controls in dealing with its partners, potentially due to its recent acquisition. This decision has impacted many of its partners, including​ Adgorithms, and this may continue in coming months. ​ However, in a bid to minimize the impact of ​such disruptions,​ ​the Company​ has been working to diversify its partnerships and customer base in the indirect segment and to this end has engaged with over 50 ​new ​supply and demand ​partners in the period.

Launch of Albert 2.0

Adgorithms recently announced the launch of Albert 2.0, an expanded version of the original software, offering more channels and capabilities for ads and emails than the previous iteration. Albert 2.0 builds on the capabilities of the first generation software, adding video ads, search ads on Google and Bing, social ads on Facebook, Instagram, Twitter, push notifications, SMS and email marketing.

The second generation software works in the same way as the previous version and is designed to learn, test and calibrate campaigns until Albert meets the established KPIs, with autonomous media buying, campaign execution (timing, channels), testing, optimisation and reports. Albert takes the parameters of the particular campaign, then tests and optimises thousands of variables in mini-campaigns, before executing full ad and email campaigns.

GROWTH STRATEGY

The Board is focused on the following priorities:

· To continue to market Albert as a SaaS solution by building a strong sales and marketing team to drive market penetration

· To increase its foothold in the U.S market with a significant number of case studies in an array of industries

· To continue developing the capabilities of Albert - our pioneering AI marketing platform

· To diversify the indirect revenue customer and supplier base

In order to further grow our market position, we will continue to invest in developing additional functions for Albert to ensure it will address even more channels and solutions for digital advertisers, with the launch of Albert 3.0 in due course. We continue to believe the US market is the most advanced market for our solution and to that end, we have bolstered our North American sales and marketing team, with 15 staff now on site in our New York office, including our Chief Executive Officer, Or Shani, our Chief Technology Officer, Tomer Naveh and our Chief Revenue Officer, Geoff Farris to drive the push into the US.

Through our SaaS offering and deploying Albert in-house with brands, we are working to develop a recurring revenue stream. Whilst revenues generated through SaaS sales are still very small, they have shown encouraging progress over the last 6 months.

OUTLOOK

We continued to see subdued trading conditions in the first half of 2016 in our indirect business, which is our primary generator of revenue. However, we have put in place a strategy to reduce our exposure to future risks with the diversification of our indirect business customer and supplier base, and to generate recurring revenues through our SaaS business, with a growing number of leading brands actively using Albert to optimise online campaigns. The advertising industry typically sees strong trading in the fourth quarter in the US and Europe driven by the holiday and shopping season and with the tendency of brands to use up the remainder of their advertising budget for the calendar year.

Whilst we do not anticipate revenues returning to previous levels in our indirect business, we are confident that through a diversified base, we will be able to mitigate some of the risks in this area and we believe we will have further success in the conversion of customers from trial to commercial agreement with Albert as a SaaS function. With our bolstered US sales and marketing team, we also believe we will continue to secure trials of Albert with additional customers and are confident that these trials will clearly show the benefits of using Albert against a manually driven online advertising campaign.

The Board remains positive about the medium term trading prospects of the Group.

Forward looking statement

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". By their nature, forward-looking statements involve risk and uncertainty since they relate to future events and circumstances. Actual results may, and often do, differ materially from any forward-looking statements. Any forward-looking statements in this announcement reflect Adgorithms' view with respect to future events as at the date of this announcement. Save as required by law or by the AIM Rules for Companies, Adgorithms undertakes no obligation to publicly revise any forward-looking statements in this announcement following any change in its expectations or to reflect events or circumstances after the date of this announcement.

The accompanying notes are an integral part of the interim consolidated financial statements.

The accompanying notes are an integral part of the interim consolidated financial statements.

The accompanying notes are an integral part of the interim consolidated financial statements.

The accompanying notes are an integral part of the interim consolidated financial statements.

*) Represents an amount lower than $ 1.

The accompanying notes are an integral part of the interim consolidated financial statements.

*) Represents an amount lower than $ 1.

The accompanying notes are an integral part of the interim consolidated financial statements.

The accompanying notes are an integral part of the interim consolidated financial statements.

The accompanying notes are an integral part of the interim consolidated financial statements.

U.S. dollars in thousands, except dividend, share and per share data

NOTE 1:- GENERAL

a. Company description:

Adgorithms Ltd. ("the Company") was incorporated under the laws of Israel and commenced operations in September 2010. The Company's registered address is 20 Lincoln Street, Tel-Aviv, Israel.

The Company is engaged in the field of solutions for online advertising including the use of Artificial Intelligence ("AI") technology. The Company develops and deploys algorithmic solutions aiming to maximize return on income ("ROI") for the brand advertiser. The Company operates across the channels of video, display, social, search and e-mail marketing on the platforms of desktop and mobile.

In June 2015 the Company completed an Initial Public Offering ("IPO") and was admitted to trading on AIM and issued 16,541,353 Ordinary shares at a price of 1.33 GBP per share, for a total consideration of $34,017 before underwriting and issuance expenses. Total net proceeds from the issuance amounted to $30,326.

b. In March 2014, the Company established a wholly-owned subsidiary in the United States, Adgorithms Inc. ("the Subsidiary"). The Subsidiary, which commenced operating in September 2015, is engaged in the distribution of the Company's products and service solutions in the United States market, and provides the Company with advisory and management services.

c. The interim consolidated financial statements were approved for issuance by the Board of Directors on 18 September 2016.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

The accounting policies applied in the interim consolidated financial statements have been applied consistently with those followed in the annual consolidated financial statements for all periods presented.

a. Revenues:

In addition to its direct and in-direct revenues, the Company is also generating SaaS ("Software as a Service") revenue which is accounted for as part of direct revenue. Revenues from SaaS are being recognized ratably over the term of the service period and are reported on a net basis based on the Company's evaluation of the accounting guidance for principal-agent considerations.

b. Unaudited interim financial information

The accompanying unaudited interim consolidated financial statements have been prepared in a condensed format in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS as adopted by the EU") for interim financial information. Accordingly, they do not include all the information and footnotes required by IFRS as adopted by the EU for complete financial statements, and therefore, they should be read in conjunction with the annual consolidated financial statements as of 31 December 2015. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended 30 June 2016 are not necessarily indicative of the results that may be expected for the year ended 31 December 2016.

NOTE 3:- COMMITMENTS

In September 2016, a statement of claim was filed against the Company, Adgorithms group CEO, Mr. Or Shani, and the Company's CFO, Mr. Ron Stern by a former service provider of the Company with the Magistrate Court of Tel-Aviv in Israel claiming, among others, that the Company, Mr. Shani and Mr. Stern are liable for certain fees due to such service provider (the "Claim"). No provision in respect of the Claim was included in the financial statements as of 30 June 2016, as the Company's current position is that all allegations are groundless and the probability that any allegations brought against the Company, Mr. Shani and Mr. Stern will result in a material cost to the Company are very low. However, due to the early stages of the proceedings, the Company cannot predict with certainty as to the final outcome of the Claim.

NOTE 4:- EQUITY

Share-based payments:

In October 2013, the Board of Directors of the Company adopted the Company's 2013 Share Option Plan ("Plan"). The Plan provides for the grant of options to purchase Ordinary shares of the Company to employees, officers, directors, consultants and advisors of the Company.

The share-based payment transactions that the Company granted to its employees are described below.

In June 2016 the CEO and founder, Mr. Or Shani, waived his rights with respect to all of his existing options over 2,012,999 Ordinary shares.

As a result of the aforementioned waiver, the Company recorded in its consolidated statement of comprehensive income an expense amounting to $146.

Option issued to employees:

Options granted under the Plan expire 10 years from the vesting commencing date. The options generally vest over three years (1/3 at each year). As of 30 June 2016, circa 22% of the outstanding options will vest subject to continuation of employment with or rendering service to the Company or Affiliate and in accordance with the vesting schedule based upon the achievement of non-market performance goals (the "Goals"). These options are expensed based on the accelerated attribution method over the requisite service period, based on the probability of achieving such​ Goals. If the Goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be​reversed.

The following table lists the number of share options, the weighted average exercise prices of share options and movement in options during the period:

The weighted average fair value of options granted for the six months ended 30 June 2016 is $ 0.13.

The Company's outstanding options to non-employees as of 30 June 2016 were as follows:

The cost of share based payments recognized in profit or loss for services received from employees and consultants is shown in the following table:

NOTE 5:- REPORTABLE SEGMENTS

In the six-month period ended 30 June 2016, the Company's largest customer represented 49% of the Company's revenues and the second largest customer represented 11% of the Company's revenues. The Company's two leading customers are global advertising exchanges.

Revenues from the direct channel in the first half of 2016 were $501, as compared to $1,114 in the first half of 2015.