YPB Group Ltd (ASX:YPB) Half Yearly Report

Significantly reduced loss in H1 2018

Anti-counterfeit and customer engagement solutions provider YPB Group Ltd (ASX:YPB) provides a commentary on H1 2018.

- Normalised post tax operating loss improved 67%

- Reported post tax loss improved 44%

- Revenue up 22%

- Operating costs pre write-offs and fx adjustments down 33%

- Further improvement expected H2 2018

H1 2018 saw an improvement in the company's operating results. Revenue rose and costs fell. The normalised post-tax operating loss excluding write-downs improved to $1.99m from $5.95m, a 67% improvement.

Reported post tax loss improved 44% to $4.35m. Non-cash balance sheet write-downs were $2.36m in 2018 and $1.78m in 2017.

Net cash used in operating activities in H1 2018 improved 35% to $3.0m. Cash consumption improved at a slower rate than the P&L loss due to payments from restructuring accrued in a prior period but paid in this period. The improvement of H1 is expected to gather pace with clearly lower cash consumption in H2 2018.

While pleasing to see revenue rise, the quantum was unsatisfactory. Deal closures and contract start-ups continued to lag expectations due to carry-over inertia from previous management prior to the Executive Chairman resuming operational leadership. Despite that fact, a newly dynamic and focused sales ethos has been created in H1 2018 and the probability of much better sales results in H2 2018 is high. There has been significant progress with sales personnel, culture and partners which is expected to become apparent in H2 2018 client wins and revenue growth.

Operating costs in H1 2018 were 33% below pcp. Costs would have fallen further but costs associated with the Token project and extraordinary legal fees related to the capital raise early in H1 2018 were incurred. Consulting and legal and accounting fees are expected to fall in H2 with less project activity and the in-housing of previously outsourced finance functions. Further cost improvement should naturally occur in H2 2018 with no further specific cost action.

Despite this, a new cost review and adjustment plan is well developed and will commence in September 2018 with a focus on salaries. Costs must be productive and expenses not yielding results after sufficient grace are again being thoroughly scrutinised. The Board remains intent on making the company financially self-sufficient as quickly as possible.

The Bracknor loan was reduced by $1.5m in H1 2018 and the balance of $0.373m will be repaid prior to year end. Bracknor holds no YPB shares and has had no impact on the share price in H1 2018.

Outlook

H2 2018 should see a clearly improved financial performance over H1 with faster new client flows and revenue growth. Unfortunately, the cultural and operational inertia at the business coalface has taken longer to rectify than expected. That has lead the Board to withdraw its forecast of profitability in 2018. While 2018 profitability is still possible if the largest opportunities in progress close and contribute revenue in H2 2018, it is not probable. The prior forecast was dependent on rapid revenue growth but results have lagged expectations.

The company will also no longer be disclosing potential pipeline values to the market. While current possible deals still have circa +$100m of potential annual revenues, the company's track record of predicting values, probability and timing of closure is insufficiently strong for the release of pipeline values to be helpful to shareholders.

Despite the above comments, the Board retains a firm goal of achieving profitability and expects that to occur in 2019. The timing and magnitude of any profit is primarily dependent on growing revenues through product sales and/or licensing Motif Micro technology.

H1 2018 results are bitter-sweet: improvement was good but not good enough. Most importantly, however, the financial data give zero insight into the very positive progress made in the business over the half year. The team and its performance have been rebuilt and reset and the level of active engagement with customers and prospects has lifted immeasurably.

The withdrawal of guidance is not reflective of diminished opportunity, rather it is simply acknowledgement of milestones missed. In fact, the company's opportunity set continues to grow significantly with:

1. Macro

- The rapid growth of Pan-Asian consumer markets;

- The greater opportunity that creates for in-country consumer goods and Western manufacturers;

- The greater opportunity for counterfeiters flowing from technology and market access created by online markets;

- An increased desire of brands to directly engage with their customers and authenticity undoubtedly triggers engagement; and

- The eventual spread of serialisation (item level unique identities) right across consumer goods markets.

2. Technology

- Smartphone readability of a high security anti-counterfeit mark (Motif Micro), as announced on 24 August 2018, is extraordinarily important for the company's prospects. It is a world leading breakthrough in taking highly secure anti-counterfeit solutions to the mass market for the first time. Smartphone readability is expected to accelerate both direct sales by YPB and its partners and licensing of Motif Micro technology to third parties.

- The Connect serialisation and customer engagement platform is performing well after extensive rebuilds over 2017. It is a stable and scalable platform, offering highly costeffective anti-counterfeit and direct-to-customer marketing solutions.

- The planned blockchain enablement of Connect is generating clear interest from potential channel partners and clients.

3. Sales and revenue

- As noted above, the company's sales staff, processes and culture have been rebuilt. Sales activity is high, as too are expectations of accelerated closures. Energy, focus and optimism pervade the sales teams.

- Partners and channels have expanded and are active. New partners in Namaste, Australian Made and AliHealth and the rekindling of the Orora relationship should all increasingly bear fruit in H2 2018 and beyond.

- Licensing interest in Motif Micro is high and the smartphone readability breakthrough is expected to bring opportunities forward. The payoff from this work, however, is more likely to be in H1 2019 due to the complexities of negotiations.

4. Token Issue US$30m target

- The probability of a successful Token Issue is high due to the new strategic partnership with a consortium of leading blockchain, crypto currency and crypto exchange experts as announced on 29 August 2018.

- A successful Token Issue would create significant shareholder value and make the company financially robust.

YPB's Executive Chairman John Houston said: "While I am pleased with the improved result, I am far from satisfied. Nevertheless, I am confident that the business has been transformed internally and that will become apparent externally via significantly improved financial results in the current and subsequent halves. Our opportunities are greater than ever and importantly, after false starts, we finally have the core team, processes and culture to capture them. I look forward to delivering significant success to shareholders in the second half. After years of building to this point, YPB is entering a dynamic new phase driven by accelerating new client wins, our world leading Motif Micro technology breakthrough and the prospect of financial strength from Token Issue success."


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