2016 4E Commentary
- 2016 loss increased due to investment in accelerated commercial roll out of technologies
- Costs to fall by 40% by mid-2017
- Revenues to exceed costs (breakeven) by end June 2017
- Pre-tax profit of $5m for 2017 confirmed
Key 2016 developments
2016 was a year of increased investment in business building for YPB. Operating expenses increased as the multi-national, commercial roll-out of our technologies accelerated over the year. As planned, costs grew ahead of revenues and the operating loss increased. As previously foreshadowed, this investment in operations is expected to bear fruit in 2017 as revenue growth is anticipated to accelerate through the year and revenue is expected to exceed costs for the first time by end June 2017. A $5m pre-tax profit remains our expectation for 2017.
There were three primary accomplishments in 2016:
1. Assembly of a top-rate management team. YPB was successful in attracting management of a calibre well beyond that of most young companies with key executive and sales rolls filled.
2. Confirmation of product interest. The expanded sales capability saw much increased client interaction over multiple geographies which pleasingly confirmed that brand owners recognise the urgent need to protect against fakes and eagerly want to directly engage with their customers. Interest in our technologies is high and there are few, if any, competitive offers presently being considered by our potential clients.
3. Development of substantial new business pipeline. The combination of expanded sales effort and strong customer interest resulted in a substantial pipeline of potential new business with a total value of $110m (of possible annual revenue) as at end 2016. The pipeline grew more than five-fold over 2016. High quality distribution partners and prominent clients were engaged and signed. A portion of this pipeline converting to revenue will be the key driver of financial success in 2017.
In May 2016, YPB issued two key financial milestones: achieving run-rate break-even by end March 2017 and a pre-tax profit of $5m for 2017. On 2 February 2017, a 3 month slippage in the break-even expectation from end March to end June 2017 was announced due to slower contract closures but the profit expectation of $5m pre-tax for 2017 was confirmed.
On the same date, a 40% reduction in non-COGS costs by May 2017 was announced due to a refined geographic focus and the opportunity to move from direct sales to partnering. The key new partnership, which was expected by end February 2017 but which now should conclude in coming weeks, will allow a significant reduction in costs and likely see more rapid market penetration due to the credibility and distribution network of the partner.
The cost reductions being presently implemented will not benefit all of 2017 and total non-COGS costs for 2017 are likely to be 30% below 2016 costs. On an annual run-rate basis costs will reduce by 40% by mid-2017.
A key advantage of our multiplier partnership distribution model is that revenue can grow rapidly while risk is minimised with fixed costs and capital commitments being kept low. Profit leverage to revenue should be high as cost growth is likely to lag revenue growth.
While many young technology companies are prepared to lose money indefinitely in "land grab" strategies, the Board and Management of YPB are intent on building a sustainable, highly profitable business while still growing as rapidly as possible. We aim to minimise risk while maximising shareholder wealth.
Brief financial review
As noted above, costs increased in 2016 due primarily to increased staff numbers and several senior management hires. Expenses related to a greater sales effort, such as travel, also increased. Production costs grew as more product was shipped, particularly in the new retail anti-theft product lines.
The reported pre-tax operating loss, excluding impairments, increased from $6.762m to $12.113m.
Revenue grew 74% to $2.982m. Costs, excluding impairments and share-based payments, rose 78% from $8.194m to $14.551m. There were a number of costs associated with setting up international partnerships in 2016 that will not recur in 2017, which meant the full year 2016 cost base is exaggerated relative to the true operating cost base.
The true operating cost base as at end 2016 was approximately $11.1m. For the full year 2017, operating costs are expected to be $7.7m. By mid-2017, costs are expected to fall by 40% to $6.5m on an annual run-rate basis. COGS will be additional to this figure but will incur a sound positive margin and so although COGS will add to cost on a gross basis they will directly add profit on a net basis.
The cash operating picture was better than the profit report. Cash operating loss was up 65% from $5.767m to $9.493m. Cash receipts from customers of $3.262m was up 294% from $0.828m. Cash receipts exceeded reported revenue by $0.280m. Cash expenses increased from $6.595m to $12.755m.
Two non-cash impairment charges were taken through the profit and loss account. As a conservative measure, all goodwill of $3.089m was written off. A further impairment charge of $0.178m on intangible customer relationships was taken as a result of moving from a direct to a partnership distribution model in one specific geography.
A mark-to-market charge on the cash receivable from Lanstead of $1.060m arose due to the YPB share price being below the reference price specified in the Lanstead Equity Sharing Agreement.
The company was successful in raising capital in 2016. In May $4.5m was raised at $0.24 per share and in October 2016 $4.0m was raised at $0.25 per share.
A more expansive review of operations and results will be included in the forthcoming annual report.
To view the full report, please visit:
About YPB Group Ltd
YPB Group Ltd (ASX:YPB) is a pioneer in advanced brand protection solutions. Listed on the Australian Securities Exchange, YPB is expanding its global footprint with an established presence in Australia, China, Thailand, USA, Mexico, India and Pakistan.
YPB's patented Anti-Counterfeit technology combined with its Security Packaging and Anti-Theft solutions, Consulting Services and YPB's proprietary CONNECT platform enables clients to PROTECT their high value brands from the risks of counterfeit, product diversion and theft while providing the tools to CONNECT directly with their customers.
YPB Group Ltd