Preliminary Results

RNS Number : 4905O

Phorm Inc

30 June 2010

 

30 June 2010

Phorm, Inc. ("Phorm" or the "Company")

Preliminary Results

 

Phorm (AIM: PHRM and PHRX), the personalisation technology company, today announces its audited financial statements for the year ended 31 December 2009.

Highlights:

Year to date 2010

·; Commercial deployment of Navegador (the local branded version of Webwise Discover, launched in 2009) in Brazil, in partnership with market leading telecoms group Oi, major publishers and online media buyers

·; Opt-in rates significantly above both our own and analyst estimates

·; Invoicing of our first revenues of $1.6 million (R$2.88 million)

·; Continued progress in business development globally; we are at the final approval stage with a number of ISPs

 

Year to 31 December 2009

·; Launch of Webwise Discover, the personalised content consumer and publisher proposition

·; Successful completion of two market trials with KT in South Korea, including the serving of advertising

·; Successful equity fund-raising of £15 million completed

·; Significant reduction in costs, with operating losses falling to $29.7 million (2008: $49.8 million).

 

Enquiries:

Phorm, Inc.

Sarah Simon +44 20 7297 2433 (analysts and investors)

Alex Laity +44 20 7297 2710 (press)

 

Citigate Dewe Rogerson +44 20 7638 9571

Simon Rigby

Justin Griffiths

 

Canaccord Genuity Limited +44 20 7050 6500

(Nominated Adviser)

Mark Williams

Andrew Chubb

 

 

Chairman and Chief Executive's Statement

 

2009 was a difficult year for Phorm, Inc and its subsidiaries (together "Phorm"), given the postponement of our UK launch and the delays experienced in Korea. Nevertheless, we have learnt a number of important lessons from our experiences. These lessons have caused us to adapt our approach and we are pleased that this has resulted in great progress in many markets where we are engaged. In particular, in March 2010 we announced our Brazilian launch with leading telecoms group, Oi, together with the three leading portals, UOL, Terra and IG. We have since signed 5 further publishers and have a number of additional publisher contracts pending in Brazil.

 

The first lesson was that a compelling consumer proposition had to be the centrepiece of our offer. As a result, we accelerated the development of Discover, launched as Navegador in Brazil, which enables consumers to be presented with personalised content on participating websites without the user having to do anything other than opt in once. We believe this enables us to successfully meet the challenge of a full opt-in strategy, with a proposition that is compelling for both participating consumers and websites.

 

The second lesson was that since our approach of involving ISPs was fundamentally different from anybody else's, we would be held to a higher standard of privacy. We have risen to this challenge and demonstrably support the highest standards of privacy in the market. We have implemented a full opt-in approach in Brazil and have adapted our technology in such a way as to make it impossible to damage the browsing experience. As a result, we believe that technical trials such as those undertaken by BT in 2008 are no longer necessary. It is now possible to ensure that the only data that our system comes into contact with is that of a consumer who has explicitly granted opt-in permission. In establishing these highest standards and having commenced implementation in Brazil, Phorm is now able to lead the way on privacy just as the focus increasingly falls on the need for such an improved standard in the industry as a whole.

 

The third lesson was that given the potential for the time to commercial deployment to take longer than expected, due to a number of external factors beyond our control, we had to ensure that we were able to withstand both the passage of time generally, as well as the possibility that any one ISP might take considerably longer to launch than originally predicted, as has been the case in Korea. For that reason, we decided to engage simultaneously with many ISPs globally. This would prevent progress from being tied to the status of any one discussion and make it possible for our ISP partners to proceed at their own pace while learning from the experience of all others. Furthermore, through our experiences to date in the UK, Korea and Brazil we have also improved the efficiency of our engagement model enabling us to support business development activities with multiple ISPs through to contract signature with a small team.

 

Against this background of lessons learned we are moving closer to realising our goal of commercial deployment in a number of markets. At this point, we are at the final approval stage with a number of ISPs worldwide. We are optimistic that a number of these opportunities will lead to contracts for deployment signed this year with deployments to commence over the course of the next twelve months.

 

Our optimism reflects the fact that a number of important proof points have been achieved:

·; The discussions we have had in Brazil with advertisers and publishers indicate that they have a high level of interest in participating at rates which, if they can be scaled, strongly validate our business model;

·; Our explicit opt-in strategy has been well received by consumers. Whilst the roll-out to consumers in Brazil is at an early stage, opt-in rates observed to date suggest that initial concerns about the commercial effectiveness of an opt-in approach are unfounded. We are delighted that our opt-in rates are significantly above both our own and analyst estimates.

·; We have shown that consumer reaction to the Navegador / Discover proposition is strong and have refined the product such that it can be widely accepted by participating websites as a new way to present the right content to their users.

 

As a management team, we are pleased with the progress that has been achieved during 2009 and 2010 to date and recognise the contribution and dedication our employees have shown in readying the Group for the next stage in its development. We expect the pace of deployment in Brazil to increase rapidly during the second half of 2010 from the existing modest coverage of subscribers, and to begin serving revenue-generating ads in the coming months.

 

The time to commercial deployment has been longer than we had hoped, and based on our current projections, we anticipate that further funding will be necessary in the next twelve months, the extent of which will depend on a number of factors, including the speed of deployment in Brazil, consumer, publisher and advertiser take-up and the rates achieved on ads served. We are already actively engaged in seeking funding, as discussed further below. We have also decided that it is appropriate to move some operational activities out of the UK to Brazil, to bring them closer to our existing market and to access the lower cost base in Brazil.

 

We have also re-evaluated our financial strategy as we strongly believe that the current stock price does not adequately reflect the nature of the global opportunity that we face. We have considered carefully whether or not to raise further equity at the parent company level and suffer the impact of the resulting dilution. Given the current position of the business and the expected news-flow we have concluded that the most effective way to deliver on the opportunities ahead is to combine careful husbanding of our cash resources (including the revenues that we expect to generate) with a strategy of funding each market at the local level rather than at the parent level, if local funding is indeed required. We believe that the long-term impact of dilution - at this moment in the company's development - significantly outweighs the short-term financing risks. We are pleased that $1.6 million (Brazilian Real ("R$") R$2.88 million) of committed revenue has now been invoiced. Although we are not yet at the stage where revenues are being earned from served ads, we continue to receive a steady flow of advertiser briefs for campaigns that will go live in the coming months.

 

By offering local strategic and financial investors equity participation in the local subsidiary, we achieve several things:

i) secure strategic partners at the local level;

ii) capitalise on the greater local appreciation of the significance of our partnerships;

iii) establish a method for effectively compensating any market's employees through equity participation directly attributable to the success of the local entity; and

iv) less dilution at the parent.

 

On this basis, we have already engaged in substantive discussions with local financial and strategic investors in Brazil, with a view to their making a direct investment at the local level and we have a number of options available at the parent company level.

 

In summary, we believe Phorm is very well positioned for the next critical phase: demonstrating how all of the components of our model come together to create a strong, highly scalable, business. Whilst in the near-term, we expect that we will need to raise funds to take us into this next critical phase, based on current conversations, we are very confident that we will secure the funding necessary to do so.

 

Financial report

 

Operating losses for the year were $29.7 million (2008: $49.8 million). The operating loss includes a non-cash share-based payment charge of $3.5 million (2008: $7.4 million) and restructuring costs of $0.7 million (2008: $3.7 million). The reduction in the operating loss before share-based payment charges, from $42.4 million in 2008 to $26.3 million in 2009 reflects the actions taken by the Group in late 2008 and in 2009 to reduce its operating cost run-rate, as well as a significant positive foreign exchange effect from the appreciation of the US dollar against sterling, in which an increased proportion of the Group's costs are denominated.

 

The cost reduction exercises undertaken have comprised reducing staff-related costs, including recruitment and agency staff costs and the number of employees, which fell by 13% over the year, lower property rental costs, reduced expenditure on marketing and communications, and lower professional advisor fees.

 

For the six months ended 30 June 2009, we reported an operating loss (before non-cash share-based payment charges) of $12.3 million; this compares to $14.0 million in the second half of the year.

 

Losses after taxation were $29.7 million (2008: $48.0 million). Loss per share was $1.88 (2008: $3.57).

 

The Group used $26.6 million in funding its operating activities, significantly reduced from $42.4 million in the year ended 31 December 2008, largely as result of the lower operating losses discussed above.

 

Cash flows from investing activities fell from an inflow of $1.0 million to an outflow of $0.9 million, as lower interest rates and a reduction in the average cash balance in the year reduced the amount of interest received in the year. Capital expenditure of $1.1 million (2008: $0.8 million) was largely restricted to the acquisition of computer equipment associated with the deployment of the Group's services to ISPs.

 

During the course of 2009, the Company benefited from continuing support from its investors. In June 2009 we undertook an equity fundraising, resulting in a cash inflow of $23.4 million, net of expenses.

 

Our balance sheet at 31 December 2009 showed net assets of $20.3 million (2008: $22.4 million) with cash and cash equivalents of $19.7 million (2008: $23.2 million) and virtually no debt.

 

Since the year-end the Group has continued to make progress in a number of different markets towards securing arrangements with ISPs, the most advanced of which are in Brazil, where in March 2010, we announced the launch of our Brazilian operations, with the signing of a commercial deployment agreement with Oi. The Group has continued to incur operating cash costs of approximately $2.2 million per month during 2010 to date, and as at 31 May 2010, the Group's cash position stood at $7.8 million. However, as mentioned above, the restructuring of operations following commercial launch in Brazil is expected to reduce operating costs significantly.

 

 

Kent Ertugrul

Interim Chairman and Chief Executive

30 June 2010

 

Consolidated income statement

Year ended 31 December 2009

 

		Year ended 31 December 2009			Year ended 31 December 2008
		Before share based payment expense	Share based payment expense	After share based payment expense	Before share based payment expense	Share based payment expense	After share based payment expense
		$	$	$	$	$	$
Continuing operations
Revenue		-	-	-	-	-	-
Cost of sales		(1,540,568)	-	(1,540,568)	(517,216)	-	(517,216)
Gross loss		(1,540,568)	-	(1,540,568)	(517,216)	-	(517,216)
Research and development		(5,892,142)	(732,540)	(6,624,682)	(6,002,998)	(1,132,863)	(7,135,861)
Sales and administrative expenses		(18,852,531)	(2,730,078)	(21,582,609)	(35,919,648)	(6,252,473)	(42,172,121)
Operating loss		(26,285,241)	(3,462,618)	(29,747,859)	(42,439,862)	(7,385,336)	(49,825,198)
Investment income				97,563			1,806,104
Financing expense				(2,089)			(3,749)
Loss before tax				(29,652,385)			(48,022,843)
Tax on loss on ordinary activities				-			-
Net loss for the year				(29,652,385)			(48,022,843)
Attributable to equity holders of the parent				(29,652,385)			(48,022,843)
Basic and diluted loss per share ($)				(1.88)			(3.57)

 

 

 

Consolidated statement of comprehensive income

Year ended 31 December 2009

 

			Year ended 31 December 2009 $	Year ended 31 December 2008 $
Loss for the year attributable to equity shareholders			(29,652,385)	(48,022,843)
Exchange gain / (loss) on translation of foreign operations			768,526	(13,322,359)
Total comprehensive income for the year			(28,883,859)	(61,345,202)
Attributable to equity holders of the parent			(28,883,859)	(61,345,202)

 

 

Consolidated statement of changes in equity

Year ended 31 December 2009

 

 

	Share capital $	Additional paid in capital $	Own Shares $	Translation reserve $	Accumulated deficit $	Total $
At 1 January 2009	13,815	115,442,602	-	(13,651,565)	(79,435,148)	22,369,704
Total comprehensive income for the year	-	-	-	768,526	(29,652,385)	(28,883,859)
Share-based payment charge	-	-	-	-	3,462,618	3,462,618
Issue of new stock	3,479	23,649,001	-	-	-	23,652,480
Own shares acquired	-	-	(341,837)	-	-	(341,837)
At 31 December 2009	17,294	139,091,603	(341,837)	(12,883,039)	(105,624,915)	20,259,106

Year ended 31 December 2008

	Share capital $	Additional paid in capital $	Own Shares $	Translation reserve $	Accumulated deficit $	Total $
At 1 January 2008	12,136	54,220,477	-	(329,206)	(38,797,641)	15,105,766
Total comprehensive income for the year	-	-	-	(13,322,359)	(48,022,843)	(61,345,202)
Share-based payment charge	-	-	-	-	7,385,336	7,385,336
Issue of new stock	1,679	61,222,125	-	-	-	61,223,804
At 31 December 2008	13,815	115,442,602	-	(13,651,565)	(79,435,148)	22,369,704

 

 

 

Consolidated balance sheet

31 December 2009

 

 

				2009 $	2008 $
Assets
Non-current assets
Property, plant and equipment				791,594	713,874
Total non-current assets				791,594	713,874
Current assets
Other receivables				1,881,811	1,823,700
Cash and cash equivalents				19,713,788	23,246,726
				21,595,599	25,070,426
Total assets				22,387,193	25,784,300
Current liabilities
Trade payables				(457,294)	(734,693)
Other payables				(1,555,517)	(2,631,405)
Obligations under finance leases				(11,234)	(10,068)
Provisions				(100,038)	(23,192)
Total current liabilities				(2,124,083)	(3,399,358)
Non-current liabilities
Obligations under finance leases				(4,004)	(15,238)
Total non-current liabilities				(4,004)	(15,238)
Total liabilities				(2,128,087)	(3,414,596)
Net assets				20,259,106	22,369,704
Equity
Common shares				17,294	13,815
Additional paid in capital				139,091,603	115,442,602
Own shares				(341,837)	-
Translation reserve				(12,883,039)	(13,651,565)
Accumulated deficit				(105,624,915)	(79,435,148)
Stockholders' equity				20,259,106	22,369,704

 

 

 

Consolidated cash flow statement

Year ended 31 December 2009

 

 

			Year ended 31 December 2009 $	Year ended 31 December 2008 $
Net cash used in operating activities
Net cash used in operating activities			(26,614,183)	(42,354,599)
Income tax paid			-	-
Net cash used in operating activities			(26,614,183)	(42,354,599)
Cash flows used in investing activities
Interest received			97,563	1,806,104
Proceeds on disposal of property, plant and equipment			80,828	-
Purchase of property, plant and equipment			(1,087,335)	(784,709)
Net cash (used in) / from investing activities			(908,944)	1,021,395
Cash flows from financing activities
Finance lease interest paid			(2,089)	(3,749)
Repayment of obligations under finance leases			(10,068)	(26,618)
Purchase of own shares			(341,837)	-
Net proceeds from issue of shares			23,652,480	61,223,804
Net cash inflows from financing activities			23,298,486	61,193,437
Net (decrease) / increase in cash and cash equivalents			(4,224,641)	19,860,233
Cash and cash equivalents brought forward			23,246,726	16,557,681
Effect of foreign exchange changes			691,703	(13,171,188)
Cash and cash equivalents carried forward			19,713,788	23,246,726

 

 

 

Notes to the preliminary announcement

Year ended 31 December 2009

 

1. Basis of preparation

 

The preliminary announcement for the year ended 31 December 2009 is an abridged statement of the full annual report which was approved by the Board of Directors on 30 June 2010. While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Company will publish full financial statements that comply with IFRSs on 30 June 2010.

The consolidated financial statements for the year ended 31 December 2009 have been prepared on a going concern basis. The directors' assessment as to the appropriateness of the going concern basis of preparation is set out in note 2 below.

 

The auditors' report on the consolidated financial statements for the year ended 31 December 2009 is unqualified but includes reference to matters to which the auditors draw attention by way of emphasis, without qualifying their report, in respect of a material uncertainty with respect to going concern. Further information in respect of the material uncertainty is set out in note 2 below.

 

2. Going concern

 

The directors have considered the appropriateness of the going concern basis, which has been used in the preparation of the consolidated financial statements.

 

During 2009 and up to the date of approval of the financial statements, the Group has made significant progress in the development and deployment of its technology and services. In particular, the commercial launch in Brazil in March 2010 represents a new chapter in the Group's development. The Directors expect that cash flows from Brazil, if realised as forecast, together with our financial strategy of seeking funding in local markets, will enable the Group to grow in a controlled and sustainable manner.

 

To date, the Group has incurred cumulative losses of $105.6 million. The Group has funded these losses and its operations through equity provided by its shareholders.

 

The Directors have approved a business plan which forecasts continuing cash outflows in the near term. The Group, however, has forecast significant revenues for FY10 sufficient to cover the operating costs in Brazil and to provide significant cash flows for the Group to fund other costs incurred as it seeks to achieve further deployments internationally. These forecasts include a number of key assumptions which have been validated through our initial experience in Brazil but have yet to be confirmed at scale due to the early stage of the Group's commercial deployment. At the date of approval of the financial statements, the Group has yet to secure the additional funding requirements set out in the business plan, but is in discussions with a number of parties regarding funding. In preparing the financial statements, the Directors have assumed that sufficient further funding will be made available to the Group to enable it to execute its business plan and realise the forecast inflows following commercial launch and roll-out of its technology.

In making this going concern assessment, the Directors have had regard to the following matters:

·; the Group's track record of successful fund raising from shareholders, as evidenced in both 2008 and 2009;

·; being in advanced discussions with a number of existing and potential new investors in Brazil and the UK;

·; the potential to secure revenue commitments from ISP partners at the point commercial deployments are contractually agreed;

·; the potential opportunity to raise further finance in local markets; and

·; commercial progress being made internationally.

In common with similar businesses at this stage of their development, and in light of the Group's dependence on further financing being made available to it from its shareholders or other providers of finance, the Directors consider the combination of these circumstances represent a material uncertainty that may cast significant doubt upon the Group's ability to continue as a going concern.

Nevertheless, after making enquiries, and considering the uncertainties described above, the directors have a reasonable expectation that the Group will have access to adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the financial statements.

The financial statements do not reflect any adjustments that would be required if the Group were unable to secure such financing to enable the Group to achieve profitability and positive cash flow, such that the going concern basis of preparation ceased to be appropriate.

 

The full audited financial statements for the year to 31 December 2009 can be found on the Investor section of the Phorm website.

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