Paysafe Group PLC Reports H1 2017 Results

Paysafe delivers robust first-half results, as growth normalises

LONDON (8 August 2017) - Paysafe Group plc (LSE: PAYS, "Paysafe" or the "Group"), a leading global provider of payment solutions, announces its unaudited interim results for the six months ended 30 June 2017.

Financial highlights

- 12% organic constant currency revenue growth in H1 2017 (11% statutory revenue growth), representing a return to low double-digit growth compared with the exceptional performance seen in 2016

- 31.4% adjusted EBITDA margin in H1 2017, compared to 30.5% in H2 2016 and 29.6% in H1 2016, the increase driven by improved gross margins in the Payment Processing and Digital Wallets divisions

- Capitalised development cost was $16.9m, or 3.1% of sales, vs $13.0m (2.7% of sales) in H1 2016 and $14.5m (2.8% of sales) in H2 2016, driven by work on core platform development

- The adjusted tax rate was 12.3% in H1 2017, compared to 11.1% in H1 2016 and 12.7% in H2 2016 (statutory tax rate H1 17 17.2%, H1 16 13.4%, H2 16 17.1%). The adjusted rate is lower than anticipated driven by the short-term effect of a tax ruling on the transfer of intellectual property from the Isle of Man to the UK. Excluding this, the adjusted tax rate would have been approximately 14%

- Adjusted cash conversion remained strong at 77%/98% before/after payments working capital ("PWC") compared to 122%/97% in H2 2016

- Leverage ratio, expressed as net debt to LTM adjusted EBITDA7 was 0.8x, compared to 0.9x at 31 December 2016. The reduction in leverage would have been more pronounced but for the impact of the translation of euro denominated debt into dollar reporting currency, the share buyback programme, and unusually high cash tax paid as described in the operating review

- The largest customer represented 19% of H1 2017 group revenue, compared to 20% in H1 2016

Operational highlights

· On 21 July 2017 Paysafe announced the acquisition of Merchants' Choice Payment Solutions ("MCPS") for $470m in an all-cash deal

· Headcount increased by 9% to 2,299 from 2,116 at 31 December 2016, driven by Hyderabad, India (platform development) and Sofia, Bulgaria (operations, compliance, risk)

· The Prepaid division launched "paysafecard direct", a QR code-based e-commerce platform enabling consumers to complete online purchases with a cash payment

· Paysafe teamed up with Google to be one of the first payment service providers to launch in-app Android Pay capabilities to Paysafe merchants in Canada

· Spain's state-owned postal company Correos chose Paysafe as a recommended payment provider for businesses using Comandia, its e-commerce platform

· On 1 August 2017 Paysafe Group plc migrated its tax residence from the Isle of Man to the UK

Additional H1 2017 financial disclosure

In H1 2017, on a pro-forma basis assuming MCPS had been acquired for the period financed by $380m of debt, Paysafe Group revenue would have increased by $167m, adjusted EBITDA by $25m, adjusted EBIT by $18m, adjusted profit before tax by $9m, and adjusted profit after tax by $6m, representing approximately 5% of Paysafe adjusted profit after tax. MCPS consolidated revenue in H1 2017 increased 3% year-on-year. Paysafe continues to anticipate $7.5m per annum of cost synergies to be achieved by the end of 2018.

In light of the recommended offer for Paysafe by Blackstone and CVC and their entry into an agreement to sell the Asia Gateway business, Paysafe is publishing additional financial information on the Asia Gateway business. In H1 2017, the Asia Gateway revenue was $76m, up 20% year-on-year, adjusted EBITDA $30m, adjusted EBIT $29m and adjusted profit after tax $29m, representing approximately 23% of Paysafe adjusted profit after tax.

Outlook

Given the restrictions placed on forward-looking statements as a result of the recommended offer by Blackstone and CVC for Paysafe, it is not appropriate to provide the usual full-year 2017 guidance. For this reason, there will not be a conference call for analysts and investors. The usual finance slides on the H1 2017 results are available at https://www.paysafe.com/investors/results-presentations/ 

Commenting on the results, Paysafe Chairman Dennis Jones said:

"After exceptional trading in 2016, Paysafe Group has returned to a more sustainable level of low-double-digit revenue growth in the first half of 2017. This reflects our increasingly diversified set of businesses as the management team continues to build a stable and robust global payments platform. To that end, we were pleased to announce the acquisition of US-based MCPS in July, which strengthens our processing business, increases Paysafe Group's scale in North American acquiring and helps us to continue re-balancing our portfolio away from online gambling."

About Paysafe

Paysafe is a leading global provider of end to end payment solutions. Our core purpose is to enable businesses and consumers to connect and transact seamlessly through our industry-leading capabilities in payment processing, digital wallets and online cash solutions. Delivered through an integrated platform, our solutions are geared towards mobile-initiated transactions, real-time analytics and the convergence between bricks-and-mortar and online payments. With over 20 years of online payment experience, a combined transactional volume of US$48 billion in 2016 and over 2,300 staff located in 12 global locations, Paysafe connects businesses and consumers across 200 payment types in over 40 currencies around the world. Paysafe Group plc shares trade on the London Stock Exchange under the symbol (PAYS.L). For more information, visit: www.paysafe.com.

Follow Paysafe on Twitter / LinkedIn / Google + / stories.paysafe.com 

This announcement contains inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014.

The person who arranged for the release of this announcement on behalf of Paysafe was Andrew Griffin, SVP Market Intelligence and Investor Relations at Paysafe.

For further information, contact:

Paysafe Group plc

Andrew Griffin, SVP Market Intelligence and Investor Relations

JJ Aiston, Investor Relations Manager

+44 (0) 20 3826 9854 / [email protected]

Brunswick Group LLP

Brian Buckley / Rowan Brown

+44 (0) 20 7404 5959 / [email protected]

Certain statements in this announcement are forward-looking statements, for example, statements including the words "anticipate", "expects", "believe" or other similar words. These forward-looking statements speak only as at the date of this announcement. These statements concern, or may affect, future matters and include matters that are opinions. Such statements are based on current expectations and beliefs and, by their nature, are subject to a number of known and unknown risks and uncertainties that could cause actual results and outcomes to differ materially from any expected future results or performance expressed or implied by the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements. The information and opinions expressed in this announcement are subject to change without notice and, except as required by law, neither Paysafe Group plc nor any other person assumes any responsibility or obligation to update publicly or review any of the forward-looking statements contained within this announcement, regardless of whether those statements are affected as a result of new information, future events or otherwise.

Please note that due to rounding, numbers presented throughout this document may not add up precisely to the totals provided. Percentage changes are calculated on unrounded figures.

[1] Organic constant currency year-on-year revenue growth is an alternative performance measure that the Group uses to communicate the revenue performance of the Group excluding the impact of acquisitions and currency movements. Further information on our alternative performance measures, including definitions, explanations and reconciliations, is included at the end of this results release.

2Adjusted EBITDA is an alternative performance defined as results of operating activities before depreciation and amortisation, share-based payment expense, fair value gains and losses on contingent and share consideration payable, foreign exchange gains and losses, and gains and losses on disposals of assets. It is also adjusted for exceptional items which are defined as items of income and expense of such size, nature or incidence that, in the view of management, should be disclosed to explain the performance of the Group. Adjusted EBIT is adjusted EBITDA less depreciation and amortisation, excluding amortisation of acquired intangible assets.

3Adjusted profit after tax is defined as reported profit after tax excluding share-based payment expense, fair value gains and losses on contingent and share consideration payable, foreign exchange gains and losses, losses on disposals of assets and exceptional items as explained within the Adjusted EBITDA footnote above. It also excludes amortisation of acquired intangibles, and the tax effect of the adjustments set out above. No adjustments are made to reported fully diluted weighted average number of shares to calculate adjusted fully diluted earnings per share (EPS).

4Adjusted cash conversion is an alternative performance measure the Group has adopted to demonstrate our ability to convert our EBIT growth into cash that can be reinvested in the business through investment, returned to shareholders, or used to support our strategic pillar of bold M&A.

5Reported net debt includes long-term debt, the current portion thereof, deferred financing fees, deferred cash consideration payable and contingent cash consideration payable, less cash and cash equivalents.

6Net debt and net debt to LTM adjusted EBITDA are alternative performance measures which management uses to give investors and stakeholders an indication of the debt capacity of the Group.

7LTM (last-12-months) adjusted EBITDA

Operating review

Group reported revenue and margin by division

* Prepaid H1 2016 organic constant currency growth rate excludes the estimated impact of discontinued Ukash territories and services in the prior period

** H1 2016 division gross profit and margin is re-presented for change in allocation of intercompany costs. See page 146 of the 2016 annual report for further details.

Group fee revenue - by geography

* Fee revenue excludes investment income

On an organic constant currency basis, H1 2017 revenue increased 12% year-on-year (H1 16: 20%). All divisions grew, with Payment Processing, driven by the Asia Gateway business, outperforming the overall group. Excluding the Asia Gateway revenue, organic constant currency growth was 10% in H1 2017 (H1 16: 21%).

This compares with our reported revenue growth of 11% year-on-year (H1 16: 118%). The strong reported growth in H1 2016 was driven by the consolidation of the Skrill acquisition from August 2015.

Investment income revenue of $4.4m in H1 2017 (H1 16: $3.4m) was derived from interest earned on cash held by the Group on behalf of merchants and consumers, reflecting improved cash management.

Reported gross profit for H1 2017 was $301.5m (H1 16: $260.6m), with gross margin of 56.0% (H1 16: 53.5%). The increase in reported gross margin largely reflects the increase at the Digital Wallets and Payment Processing divisions.

Group adjusted EBITDA

Adjusted EBITDA increased 17% to $169.2m (H1 16: $144.2m), reflecting the revenue growth and higher group gross margin. Operating expenses increased slightly as a percentage of sales. Adjusted EBITDA margin increased to 31.4% (H1 16: 29.6%) as a result.

This figure compares with our statutory operating profit, which grew 11% to $99.6m (H1 16: $89.7m), at a margin of 18% (H1 16: 18%).

A reconciliation of results from operating activities to adjusted EBITDA is shown below:

Operating expenses

Total operating expenses were $201.9m (H1 16: $170.9m). Information on components of operating expenses are set out below.

Adjusted EBITDA operating expenses

Adjusted EBITDA operating expenses were 25% of sales, in comparison to 24% of sales in H1 16. Salaries and employee expenses (excluding share-based payments) as a percentage of revenue were 14% (H1 16: 13%). Headcount increased by 9% to 2,299 from 2,116 at 31 December 2016, driven by Hyderabad, India (platform development) and Sofia, Bulgaria (operations, compliance, risk).

Share-based payments

Share-based payment expense fell to $4.4m in H1 2017 (H1 16: $5.5m), representing 6% of total employee expenses (H1 16: 8%). This expense related to the Group's LTIP and share options allocated to employees and management, and has been falling since FY 2015, following the full vesting of one--off new LTIP awards to support executive recruitment.

Foreign exchange

A foreign exchange loss of $7.0m was incurred (H1 16: $6.4m), largely relating to currency fluctuations on the cash balances held by the Group. As well as the Group's own cash and cash equivalents, balances in a number of currencies are held on deposit for consumers and merchants. These balances fluctuate and are not always offset by liabilities in the same currency, due to consumers and merchants not always choosing to deposit and withdraw funds in the same source currency. Unrealised foreign exchange gains and losses also arise on translation of cash held at reporting dates in entities with different functional currencies.

Depreciation and amortisation

Depreciation and amortisation was $43.4m (H1 16: $40.6m) which included amortisation of acquired intangible assets of $26.2m (H1 16: $25.7m). Amortisation of acquired intangible assets is excluded from our adjusted profit figures.

Other operating costs

Acquisition costs of $1.4m (H1 16: $1.0m) were incurred, largely due to the acquisition of Merchants' Choice Payments Solutions announced in July. Restructuring costs fell to $0.1m (H1 16: $4.9m).

An exceptional $12.8m non-cash net fair value loss was recognised on share consideration payable in relation to the Meritus acquisition (H1 16: $4.5m gain). This was due to the increase in value of the share consideration payable which is linked to the Paysafe share price.

Net finance costs

Net finance costs were $10.6m (H1 16: $15.2m). This included $7.6m (H1 16: $9.8m) of interest on long-term debt, as well as $2.6m (H1 16: $2.7m) of amortisation of deferred financing fees and $0.4m (H1 16: $2.6m) of net other finance costs. The net other finance cost includes fees on unused facilities and recognition of unrealised changes in the fair value of the outstanding interest rate swap.

Tax

The tax charge for H1 2017 was $15.3m (H1 16: $10.0m), comprising a current tax charge of $11.0m (H1 16: $15.0m) and a deferred tax charge of $4.4m (H1 16: credit of $(5.0)m). This gives a statutory tax rate of 17.2% (H1 16: 13.4%), a detailed reconciliation of which can be found in Note 16.

On an adjusted basis, the tax charge was approximately $17.5m (H1 16: $12.7m), with an adjusted tax rate of approximately 12.3% (H1 16: 11.1%).

During H1 2017, the Group's intellectual property was transferred from the Isle of Man to the UK. Going forward, the UK business will be the Group's intellectual property owner and profits associated with intellectual property ownership will arise in the UK where they will be taxed at the UK rate, compared to the zero-rate charged in the Isle of Man.

In the short term, in line with UK tax rules, amortisation of the intellectual property will offset UK profits and reduce the Group's adjusted effective tax rate. This reduction is caused because amortisation is charged on a reducing balance basis, in line with the Group's accounting policies, and in the early years will exceed the UK profits associated with the intellectual property ownership.

Excluding the impact of the intellectual property transfer, the adjusted effective tax rate would have been approximately 14%.

Cash taxes paid in the period of $32.2m are higher than the $11.0m current period tax charge. This is primarily due to the payment of all US taxes in relation to 2016, and the payment of $3.8m in UK taxes following the finalisation of the UK/Bulgaria advance pricing agreement. Going forward, the Group will pay all taxes in material jurisdictions via quarterly or monthly payments on account.

Statutory profit after tax and other comprehensive income

Statutory profit after tax was $73.7m (H1 16: $64.5m). Adjusted profit after tax was $124.0m (H1 16: $101.4m).

A gain of $45.6m (H1 16: gain of $7.5m) was recognised through other comprehensive income relating to translation differences on the results, assets and liabilities of non-US dollar denominated entities.

Earnings per share

Statutory basic earnings per share was $0.15 for H1 2017, compared to $0.13 in H1 2016. On a fully diluted basis, statutory earnings per share were $0.15 (H1 16: $0.13).

Adjusted fully diluted earnings per share were $0.25, 23% higher than the H1 2016 figure of $0.20.

A reconciliation of statutory profit after tax to adjusted fully diluted earnings per share is shown in the table below.

Cash flow and cash position

Group cash and cash equivalents were $272.2m at 30 June 2017 (31 December 2016: $231.2m).

Free cash flow was $96.4m for H1 2017 (H1 16: $73.1m).

Free cash flow as a percentage of operating profit was 97% (H1 16: 81%).

Adjusted Cash conversion, measured as adjusted free cash flow as a percentage of adjusted EBIT as defined in the appendix to this document, was 98% compared to 74% in H1 2016. The increase was driven by payments working capital ("PWC") movements described below. Before PWC, cash conversion was 77%, compared to 78% in H1 2016 and 122% in H2 2016. The reduction compared to H2 2016 reflects the reversal of timing differences that led to the high figure in that period.

A reconciliation outlining the components of the cash conversion measure is as follows. A full reconciliation from free cash flow to adjusted free cash flow and the definition of PWC can be found at the end of this results release.

During H1 2017, we paid cash consideration of $1.0m in total in relation to the acquisition of MeritCard. An amount of $0.7m was recorded as an exceptional gain in relation to financial performance targets that were not met.

Long-term debt

The Group's total long-term debt position (including the current portion of long-term debt) on the statement of financial position was $509.1m at 30 June 2017 (31 December 2016: $480.9m).

The debt facility includes a €280m Term A loan issued in 2015 which is repayable over five years. This loan bore interest of Euribor plus 3.0% until the end of May 2016 and Euribor plus 2.75% thereafter.

It also includes a €220m Term B loan, bearing interest at Euribor plus 4.0% until the end of May 2016 and Euribor plus 3.75% thereafter.

The lower level of interest followed the submission of compliance certificates, which showed that adjusted leverage at 31 December 2015 was below the 3.00:1 test set out under the agreements. The Term B loan is repayable at the discretion of the Group, without penalty, before the maturity date of 10 August 2022.

The increase in the total long-term debt position reflects the movement in foreign exchange rates. The euro-denominated long-term debt liability fell following a repayment on the Term A credit facility of $14.9m (€14m).

The Group also has a revolving credit facility available of $85.0m. Letters of guarantee to the value of $8.7m (31 Dec 16: $8.7m) are secured against this facility.

Covenants on the long-term debt include a net debt/adjusted EBITDA ratio and fixed charge cover. The Group was in full compliance with its debt covenants at 30 June 2017.

Net debt

Reported net debt at 30 June 2017 was $259.9m (31 December 2016: $279.8m). Net debt for the purposes of covenants approximates reported net debt. Reported net debt to LTM adjusted EBITDA was 0.8x times at 30 June 2017 (31 December 2016: 0.9x).

Net debt reduction was impacted in the half year by the appreciation in the euro compared to the US dollar, the share buyback, the payment of the 2016 staff bonus accrued for in the prior year, and the unusually high cash tax payment described above.

Goodwill

Goodwill largely relates to the acquisitions of Meritus and GMA in July 2014, Skrill in August 2015, FANS Entertainment Inc. in May 2015, Meritcard in February 2016 and Income Access in August 2016. The goodwill balance increased by $81.1m during the period mainly due to the impact of the strengthening of the Euro against the U.S. dollar.

Intangible assets and property, plant and equipment

The net book value of intangible assets at 30 June 2017 was $364.8m (31 December 2016: $364.3m). This balance largely relates to intangible assets recognised on the acquisition of the Skrill Group in 2015 and Meritus and GMA in 2014.

The Group capitalised $16.9m of development costs over the period (H1 16: $13.0m) excluding the impact of acquisitions. Capitalisation as a percentage of sales increased to 3.1% (H1 16: 2.7%). This reflects investment in core platform development.

Property, plant and equipment spend was $5.7m, 1.1% of revenue (H1 16: 1.6%).

Management having considered all available factors has determined that no impairment review is required in relation to acquired intangibles, capitalised development costs, other intangibles and property, plant and equipment.

Current assets

Prepaid expenses and other deposits were $16.2m at 30 June 2017 (31 December 2016: $13.8m). Trade and other receivables were $55.3m (31 Dec 2016: $43.1m). The increase reflected growth in the Payolution consumer credit business, a sales tax receivable timing difference, and the revenue growth of the business as a whole.

Acquisition-related liabilities

Total period end share consideration payable was $43.3m (31 December 2016: $32.3m) including $0.6m payable in relation to the FANS acquisition and $42.7m in relation to Meritus.

At 30 June 2017, contingent consideration payable was $2.4m, down from $6.1m at 31 December 2016. In addition, deferred consideration payable decreased to $6.2m from $10.2m at 31 December 2016.

Subsequent to the period end, Paysafe paid $3.3m in cash to certain vendors of FANS in return for those vendors giving up their rights to be issued 790,908 shares in a subsidiary of Paysafe (the "Earn-out Shares"). The Earn-out Shares would have been exchangeable, on a one-for-one basis, for ordinary shares of Paysafe if certain financial performance criteria had been achieved over three years. Following this cash payment, the total number of Consideration Shares which have yet to be exchanged on a one-for-one basis into ordinary shares is 189,850.

Payment working capital items

Payment working capital is defined at the end of this report. Cash held as reserves, settlement assets and restricted cash balances have decreased to $92.7m at 30 June 2017 from $132.3m at 31 December 2016. The reduction was driven by higher than usual prior-period cash held as reserves and settlement assets, driven by timing differences and funding for holiday season spending. Merchant processing liabilities decreased to $14.5m at 30 June 2017 from $18.5m at 31 December 2016.

As detailed in Note 7, restricted cash of $20.7m at 30 June 2017 (31 December 2016 $31.8m) is a net figure, comprising $1,158.0m of segregated account funds and liquid assets and $1,137.2m of payables to members and merchants (31 December 2016: $1,154.8m and $1,123.0m respectively).

Other liabilities

Trade and other payables decreased to $112.9m at 30 June 2017 from $123.9m at 31 December 2016, reflecting the reduction in accrued liabilities which included accrued interest payable, a non-compete payment accrual, and the 2016 staff incentive award accrual.

The income tax provision liability has decreased during H1 2017 from $34.4m at 31 December 2016 to $18.1m at 30 June 2017, due to the higher cash tax payment in the period.

Net deferred tax liabilities were $40.3m at 30 June 2017 compared to $35.9m at 31 December 2016.

Equity

Share capital and share premium decreased during the year due to the share buyback programme. At 30 June 2017 the Group had purchased 6,523,707 shares at a volume weighted average price per share of 381.9p. This includes 5,813,486 shares that were purchased in H1 2017. All purchased shares were cancelled.

Off-balance sheet arrangements

Other than as disclosed above, as at 30 June 2017 the Group had no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

Divisional Review

Payment Processing

*H1 2016 gross profit and margin is re-presented for change in allocation of intercompany costs. See page 146 of the 2016 annual report for further details.

The Payment Processing division's reported revenue was $264.4m in H1 2017 compared to $231.2m in H1 2016. This represents 49% of the Group's reported fee revenue (H1 16: 48%).

On an organic constant currency basis, revenue grew 16% year-on-year (H1 16: 28%). Growth was driven by the Asia Gateway and US-based processing businesses. The nascent Payolution consumer credit business, and European acquiring businesses also grew strongly. Excluding Major Merchant Asia Gateway revenue, Payment Processing revenue grew 11% on an organic constant currency basis, compared to 32% in H1 2016.

Reported revenue growth was 14% (H1 16: 34%), including the impact of the Meritcard business acquired in H1 2016.

Volume for Payment Processing increased to $12.4bn (H1 16: $11.2bn). Volume represents all transactions including fee generating credits and chargebacks processed by the division. It excludes volume processed for other Group divisions. Revenue represented 2.1% of volume, in-line with H1 2016.

Reported gross margin for the Payment Processing division was 42.0% in H1 2017 (H1 16: 39.2%).

Payment Processing bad debt expense was 0.9% of sales in H1 2017, down from 2.2% in H1 2016 and roughly flat compared to 1.0% in H2 2016. The year-on-year decrease was driven by a merchant specific provision in the prior period.

Approximately 59% of Payment Processing's H1 2017 reported fee revenue is derived from North America, with 11% from Europe and the remaining 30% from Asia and the rest of the world. E-commerce is Payment Processing's largest vertical, representing 68% of H1 2017 divisional fee revenue. Online gambling, largely driven by the Major Merchant Asia Gateway, contributes another 31% to divisional fee revenues, with the balance from gaming.

E-commerce encompasses a number of end verticals, such as direct marketing, e-retail and professional services such as dentists, doctors and insurance companies. The announced acquisition of MCPS will substantially increase the bricks and mortar retail component of Payment Processing volume and revenue.

Digital Wallets

*H1 2016 gross profit and margin is re-presented for change in allocation of intercompany costs. See page 146 of the 2016 annual report for further details.

The Digital Wallets division contributed $159.1m of reported revenue in H1 2017 (H1 16: $146.7m), representing 30% (H1 16: 30%) of the Group's reported fee revenue.

Year-on-year organic constant currency revenue growth was 9%, compared to 28% in H1 2016. The reduction in growth in part reflects a normalisation following exceptional growth in 2016, but also the impact of a number of individually small effects that as a whole drove a decline in volumes year-on-year. These included the withdrawal from online gambling in Japan due to local regulatory changes, restrictions on the issuance of prepaid cards linked to wallets in non-SEPA areas, and increased KYC measures implemented by Paysafe to improve the quality and sustainability of the business, or to satisfy local rules.

These factors drive a 6% decline in year-on-year Digital Wallets transaction volume to $10.7bn (H1 16: $11.3bn). Digital Wallets volume includes uploads and withdrawals to and from wallets, and member-merchant and member-member transactions.

Reported revenue growth was 8% in H1 2017 (H1 16: 195%). H1 16 growth includes the impact of the Skrill acquisition which took place in August 2015.

Monetisation of transaction volumes increased during the period as fee increases were put in place during H2 2016 and H1 2017. In addition, growth in Issuing and consolidation of the Income Access acquisition added revenue but not Wallet transaction volume. Revenue divided by volume increased to 1.5% (H1 16: 1.3%).

The fee increases, coupled with the volume decline being driven by lower margin lines of business and a reduction in bad debt, led to an increase in reported gross margin for the Digital Wallet division to 80.6%. This compares to a gross margin of 75.9% in H1 2016.

Reported bad debt as a percentage of revenue decreased to 0.8% from 1.9% in H1 2016.

Digital Wallets' largest regional market is Europe, which accounted for 66% of the division's fee revenue in H1 2017. 34% comes from the rest of the world, including 1% from North America. Merchant fees from online gambling are the division's largest revenue stream, contributing 57% of H1 2017 fee revenue. Merchant revenues from online gaming were 5% of the division's total, with the remainder coming from consumer fees and e-commerce merchant fees.

The majority of e-commerce and other fees relate to consumer fees, which have increased as a percentage of revenue in part due to fee changes.

Prepaid

*H1 2016 gross profit and margin is re-presented for change in allocation of intercompany costs. See page 146 of the 2016 annual report for further details.

The Prepaid division has been renamed "Cash Solutions" and will be referred to as such in future financial reports.

The Prepaid division contributed $110.8m of reported revenue in H1 2017 (H1 16: $105.5m). This represents 21% of the Group's reported fee revenue (H1 16: 22%).

Year-on-year organic constant currency revenue growth for Prepaid was approximately 9%, compared to 11% in H1 2016 excluding the impact of Ukash discussed in previous results. Reported revenue growth was 5% in H1 2017, lower because the majority of revenues are euro denominated.

In March 2017, paysafecard in Greece successfully implemented migration of volumes to the 'my paysafecard' platform to support local regulatory requirements.

Prepaid payments volume was $1.4bn (H1 16: $1.4bn). Volume represents merchant transactions paid for with a prepaid voucher provided by the division.

Prepaid revenue in H1 2017 was 7.7% of payment volume (H1 16: 7.6%).

H1 2017 gross margin for the division was 52.4%, compared to 52.3% in H1 2016.

Europe represents 92% of the division's total fee revenue. Online gambling is the strongest vertical for the division, accounting for 62% of H1 2017 fee revenue (H1 16: 61%). Gaming contributed 16% of H1 2017 fee revenue (H1 16: 18%), with remaining 22% of fee revenue coming from e-commerce and consumer fees.

E-commerce verticals include social and freelancer communities, online dating, music, film and entertainment, internet services and travel.

Principal risks and uncertainties

The principal risks facing the Group are incorporated in the Enterprise Risk Management framework which prioritises the risks and assigns responsibility to an executive for monitoring and risk mitigation. The Group has a comprehensive system of controls in place to manage the risks comprising the Enterprise Risk Management framework through a combination of a "top down" approach (driven by the Audit Committee and the Board) and a "bottom up" process (originating from operations).

There are a number of potential risks and uncertainties that could have a material impact on the Group's financial performance and position. These include risks relating to cyber security, data privacy, outsourcing, loss of a major customer, security, fraud and money laundering, transaction processing, product innovation, relationships with financial institutions, acquisitions and partnerships, attracting and retaining the best talent, changes in online gambling and payment processing regulations, failure of a major customer, and changes in the online gambling industry and competitive environment. These risks and our mitigating actions remain as set out in the 2016 Annual Report.

Directors' responsibility statements

We confirm that, to the best of our knowledge:

a. the unaudited condensed consolidated interim financial statements have been presented in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union and give a true and fair view of the assets, liabilities, financial position and profit for the Group;

b. the interim management report includes a fair review of the information required by 4.2.7R of the UK Financial Conduct Authority's Disclosure Guidance and Transparency Rules ("DTR") (indication of important events during the first six months of the financial year and their impact on the condensed financial statements, and description of principal risks and uncertainties for the remaining six months of the financial year); and

c. the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions in the first six months of the financial year and any changes in the related parties transactions described in the last annual report).

This Half Year Report was approved by the Board of Directors and authorised for issue on 8 August 2017.

Cautionary statement

This Half Year Report (the "Report") has been prepared in accordance with the Disclosure Guidance and Transparency Rules of the UK Financial Conduct Authority and is not audited. No representation or warranty, express or implied, is or will be made in relation to the accuracy, fairness or completeness of the information or opinions contained in this Report. Statements in this Report reflect the knowledge and information available at the time of its preparation. Certain statements included or incorporated by reference within this Report may constitute "forward-looking statements" in respect of the Group's operations, performance, prospects and/or financial condition. By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions and actual results or events may differ materially from those expressed or implied by those statements. Accordingly, no assurance can be given that any particular expectation will be met and reliance should not be placed on any forward-looking statement. Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. The information contained in this Report is subject to change without notice and no responsibility or obligation is accepted to update or revise any forward-looking statement resulting from new information, future events or otherwise. Nothing in this Report should be construed as a profit forecast. This Report does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase or subscribe for any shares in the Company, nor should it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares of the Company or any invitation or inducement to engage in investment activity under section 21 of the Financial Services and Markets Act 2000. Past performance cannot be relied upon as a guide to future performance. To the extent permitted by law, neither the Company nor any of its affiliates, advisors or representatives shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this Report or its contents or otherwise arising in connection with this Report.

Accompanying notes form part of these unaudited interim condensed consolidated financial statements.

These financial statements were approved and authorised for issue by the Board of Directors and signed on its behalf by;

Joel Leonoff Brian McArthur-Muscroft

President and Chief Executive Officer Chief Financial Officer

Accompanying notes form part of these unaudited interim condensed consolidated financial statements.

The Directors consider that all results derive from continuing operations.

Accompanying notes form part of these unaudited interim condensed consolidated financial statements.

Accompanying notes form part of these unaudited interim condensed consolidated financial statements.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

for the six months ended 30 June 2017 and 2016

(tabular amounts only are in thousands of U.S. dollars, except per share data)

1. REPORTING ENTITIES

NETELLER plc was a private company incorporated under the laws of the Isle of Man ("IOM") on 31 October 2003 and was registered as a public company on 1 April 2004. NETELLER plc changed its name to NEOVIA Financial Plc on 17 November 2008. On 1 March 2011 NEOVIA Financial Plc changed its name to Optimal Payments Plc. On 10 November 2015, Optimal Payments Plc changed its name to Paysafe Group Plc (the "Company"). The principal activities of the Company and its subsidiaries (together referred to as "the Group") are described in Note 2. The Group includes the Company and its wholly owned subsidiaries as set out under "Basis of consolidation" in Note 4 and "Investment in subsidiaries" in Note 27 to the Group's consolidated financial statements for the year ended 31 December 2016.

At 30 June 2017, the Group had 2,299 employees (31 December 2016: 2,116 employees).

2. NATURE OF OPERATIONS

The Group provides services to businesses and individuals to allow the online processing of direct debit, credit card and alternative payments. Included within the Group's suite of products and services are digital wallets which act as a store of value for e-money, and prepaid vouchers. Paysafe Financial Services Limited (FRN:900015), Skrill Limited (FRN:900001), and Prepaid Services Company Limited (FRN:900021), all wholly-owned subsidiaries of Paysafe Group plc, are authorised by the United Kingdom's Financial Conduct Authority under the Electronic Money Regulations 2011 for the issuing of electronic money and payment instruments. Skrill International Payments Limited (FRN:536371), a wholly-owned subsidiary, is regulated by the Financial Conduct Authority as a payment institution. Paysafe Merchant Services Limited, a wholly-owned subsidiary, is licensed by the Financial Services Authority of the Isle of Man (Ref. 1357) to carry on money transmission services, and paysafecard.com Schweiz GmbH, a wholly-owned subsidiary, is licensed by the Swiss Financial Market Authority as a financial intermediary.

3. BASIS OF PREPARATION

Statement of compliance

The interim condensed consolidated financial statements have been prepared in accordance with applicable IOM law and International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union. They do not include all disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the annual consolidated financial statements of the Group for the year ended 31 December 2016. In addition, the interim condensed consolidated financial statements have been prepared in accordance with the accounting policies set out in Note 4 'Significant Accounting Policies' included in the Group's consolidated financial statements for the year ended 31 December 2016.

The interim condensed consolidated financial statements were authorised for issue by the Board of Directors on 1 August 2017.

Statement of going concern

These interim condensed consolidated financial statements of the Group have been prepared on the going concern basis, as the Board of Directors have a reasonable expectation that the Group and parent have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.

New standards

There are no new standards, interpretations or amendments that are effective for periods beginning on or before 1 January 2017 that have a material effect on the Group's financial information.

In Note 4 under "Future changes to accounting standards" of the consolidated financial statements for the year ended 31 December 2016, the Directors of the Group confirmed that they do not anticipate that the application of IFRS 9 or IFRS 15 in the future will have a material impact on the amounts reported in the Group's consolidated financial statements. The Directors of the Group confirm that this continues to be the case as at the balance sheet date.

4. GOODWILL

The Group had the following balances by cash-generating unit (CGU):

5. INTANGIBLE ASSETS

The Group had the following balances:

6. TRADE AND OTHER RECEIVABLES

The Group had the following balances:

1 This balance relates to a receivable from a former U.S. subsidiary of Skrill Limited whose acquisition has not yet been concluded.

7. RESTRICTED CASH

The Group had the following balances:

8. CASH AND CASH EQUIVALENTS

The Group had the following balances:

9. SHARE CAPITAL

Holders of the ordinary shares are entitled to receive dividends and other distributions, to attend and vote at any general meeting, and to participate in all returns of capital on winding up or otherwise.

Holders of the deferred shares are not entitled to vote at any annual general meeting of the Company and are only entitled to receive the amount paid up on the shares after the holders of the ordinary shares have received the sum of £1,000,000 for each ordinary share held by them and shall have no other right to participate in assets of the Company.

Issue and repurchase of ordinary shares

During the six months ended 30 June 2017, 432,876 (for the year ended 31 December 2016: 6,567,745) ordinary shares were issued as a result of the exercise of vested options under the ESOS and LTIP plans (see Note 18).

Additionally, during the six months ended 30 June 2017, 500,250 ordinary shares were issued as a result of the acquisition of FANS Entertainment Inc. (1,070,962 and 3,210,400 ordinary shares issued as a result of the acquisition of FANS Entertainment Inc. and Meritus Payment Solutions, respectively, for the year ended 31 December 2016).

During the six months ended 30 June 2017, the Company repurchased 5,813,486 ordinary shares under the current repurchase plan for consideration of £22,412,000 ($27,743,000) and the excess of the purchase price over the carrying value of approximately of £22,411,000 ($27,742,000) was charged to share premium (710,221 ordinary shares for consideration of £2,539,000 ($3,123,000) for the year ended 31 December 2016). As at 30 June 2017, all of the repurchased shares had been cancelled. 

10. LONG-TERM DEBT

During the six months ended 30 June 2017, the Group made a repayment of $14,905,000 (14,000,000 Euro) on the Term A facility ($15,839,000 (14,000,000 Euro) was repaid on the Term A facility during the six months ended 30 June 2016).

11. SHARE CONSIDERATION PAYABLE

12. TRADE AND OTHER PAYABLES

The Group had the following balances:

13. CONTINGENT CONSIDERATION

During the six months ended 30 June 2017, the Group paid $996,000 of contingent cash consideration related to the acquisition of MeritCard Solutions LP upon achievement of certain financial performance targets. An amount of $697,000 was recorded as an exceptional gain for the financial performance targets that were not met. 

As part of the consideration for the Group's acquisition of FANS Entertainment Inc. ("FANS"), contingent consideration of $2,084,000 was being held as a liability on the statement of financial position. The contingent consideration represented 790,908 of shares ("earn out shares") that were to be issued to the vendors of FANS subject to the satisfaction of certain financial performance criteria. In the period, the Group agreed to settle the contingent consideration by paying $3,315,000 in cash to the vendors in exchange for those vendors giving up their rights to those shares. An exceptional loss of $1,231,000 was recorded as a result.

14. OPERATING SEGMENTS

The Group's operating segments are based on its main revenue generating activities. For each of the segments, the Group's CEO reviews internal management reports to a gross margin level on a monthly basis. The following summary describes the operations in each of the Group's reportable segments.

Payment Processing: fees are generated through the Paysafe and Paysafe Asia straight-through processing platforms where customers send money directly to merchants, as well as payolution's online payment services, and the FANS white label technology solutions and consulting services.

Digital Wallets: fees are generated on transactions between members and merchants using the NETELLER service and Net+ prepaid cards, and the Skrill Wallet and Skrill prepaid cards.

Prepaid: fees are generated from merchants accepting payments made using paysafecard prepaid vouchers and charges to consumers.

There have been no changes to the Group's operating segments in the period.

Information regarding the results of each reportable segment is included below;

Segmented reporting for the six months ended 30 June 2017:

Segmented reporting for the six months ended 30 June 2016:

Investment income of $4,389,000 (2016: $3,366,000) is excluded from the measure of segment revenue and non fee expenses of $201,941,000 (2016: $170,916,000) and finance costs of $10,554,000 (2016: $15,151,000) are excluded from the measure of segment profit as these are not considered by management when assessing the performance of the segments.

Processing costs and bad debts are the only two costs which vary directly with revenue, and accordingly have been shown separately. For the six months ended 30 June 2017, cost of sales for Payment Processing, Digital Wallets and Prepaid were 58% (2016: 62%), 19% (2016: 23%) and 48% (2016: 47%) of revenue, respectively.

14. OPERATING SEGMENTS (continued)

Major Merchants

The Group has one merchant who represented 19% of total fee revenue for the six months ended 30 June 2017 (2016: 20%) across all reportable segments and geographies. The majority of this revenue comes from Asia.

15. FINANCE COSTS

16. TAX

The Company is incorporated in the IOM and is subject to a tax rate of zero percent. No provision for IOM taxation is therefore required. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

The Group charge for the period can be reconciled to the profit shown per the interim condensed consolidated statement of comprehensive income as follows:

Cash taxes paid in the period of $32,201,000 are primarily due to the settlement of all US taxes in relation to 2016 and the payment of $3,800,000 in UK taxes following the finalisation of the UK/Bulgaria advance pricing agreement. Going forward, the group will pay all taxes in material jurisdictions via quarterly or monthly payments on account.

17. EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share is based on the following data:

The average market value of the Company's shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding.

18. SHARE BASED PAYMENTS

For the six months ended 30 June 2017, the Group recognised total expenses of $4,397,000 (2016: $5,490,000) related to share option transactions.

Changes in the number of equity-settled share options ("ESOS"), Long Term Incentive Plan ("LTIP") and Sharesave options outstanding are detailed in the tables below:

The ESOS options outstanding at the end of the period had a weighted average exercise price of £2.78 (31 December 2016: £2.72) and a weighted average remaining contractual life of 1.34 years (31 December 2016: 1.25 years). The weighted average share price of ESOS options exercised in the period based on the date of exercise was £4.35 (31 December 2016: £3.98).

The LTIP options outstanding at the end of the period had an exercise price of £0.0001 and a weighted average remaining contractual life of 8.04 years (31 December 2016: 7.93 years). The weighted average share price of LTIP options exercised in the period based on the date of exercise was £4.06 (31 December 2016: £4.35).

The European Sharesave options outstanding at the end of the period had an exercise price of £3.28 (31 December 2016: £3.00) and a weighted average remaining contractual life of 2.86 years (31 December 2016: 3.42). No European Sharesave options were exercised in the period.

18. SHARE BASED PAYMENTS (continued)

Assumptions used in LTIP and Sharesave options pricing model

The fair value of the "special" options granted under the LTIP was determined using a bespoke Monte Carlo pricing model that takes into account the market-based performance conditions specific to this plan. The following table shows the principal assumptions used in the valuation:

The fair value of options granted under the European Sharesave was determined using the Black Scholes pricing model that takes into account factors specific to this plan, such as the expected life and vesting period. The following table shows the principal assumptions used in the valuation:

19. ADJUSTED EBITDA

Adjusted EBITDA is defined as results of operating activities before depreciation and amortisation, finance costs, share-based payment expense, foreign exchange gains and losses, gains and losses on disposals of assets and fair value gains and losses on share consideration payable. These adjustments generally relate to non-cash items, which by their nature are volatile and vary significantly based on factors outside the Group's control, including foreign exchange rates. It is also adjusted for exceptional items, which are defined as items of income and expense of such size, nature or incidence that, in the view of management, are not reflective of the underlying performance of the Group and should be disclosed to explain the performance of the Group. In the current period, these exceptional, non-recurring items include acquisition costs, restructuring costs and the net loss on settlement of the contingent consideration. In the prior period this included acquisition and restructuring costs, largely relating to the transformational acquisition of the Skrill Group in August 2015.

Adjusted EBITDA is not a financial measure calculated in accordance with IFRS as adopted by the European Union. The presentation of these financial measures may not be comparable to similarly titled measures reported by other companies due to the differences in the ways the measures are calculated.