Regulatory News

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION AS DEFINED IN ARTICLE 7 OF THE MARKET ABUSE REGULATION NO. 596/2014 ("MAR")

‘Resilience against Covid-19 headwinds; revenues increased and expenditure decreased in H1-2020’

Equals (AIM:EQLS), the fast-growing B2B focused e-banking and international payments group, announces its interim results for the six months ended 30 June 2020 (the ‘period’ or ‘H1-2020’).

H1-2020 Financial Highlights

• Group revenue up to £13.8 million
• B2B revenue increased year-on-year by 32% as the Group continues its focus on SMEs
• B2B now represents 66% of total revenue up from 50% in H1-2019 and 60% in H2-2019
• Gross profit held firm, lower by only 6% despite disruption caused by Covid-19
• Gross expenditure lower by 26% on H2-2019 through cost reduction exercises
• Adjusted EBITDA* of £0.7 million
• 46% reduction in loss after tax compared to prior six months, resulting from lower capitalisation and fewer exceptionals
• House funds £7.6 million as at 18 September 2020 (as reported on 29 June 2020: £7.7 million)

Post period end Highlights

• International Payments business resilient to-date in Q3-2020 at £3.8 million (£68k per day) compared to Q2 -2020: £3.5 million - (£58k per day)
• Banking Services remain flat, but better than expected
• Travel focused product lines continue to be impacted by Covid-19 travel restrictions and lack of consumer confidence
• Corporate Expenses platform recovering to pre-Covid-19 levels
• Revenue per day £114k in Q3-2020 to date versus £93k per day in Q2-2020

Commenting on the Interim Results, Ian Strafford-Taylor, CEO of Equals Group plc, said:

“We believe it is testament to the quality of the business and the resilience of our B2B focused model that we are reporting both an increase in revenue and decrease in underlying expenditure against the headwinds posed by a combination of Covid-19 and the changes forced upon the business as a result of the demise of Wirecard.

“Our revenues continue to grow against this unprecedented backdrop and we have not yet completed our exercise of cost savings which will benefit the second half of the year.  With a stable cash position, we remain positive about our future prospects and although we are conscious of the potential for further disruption as a result of Covid-19, and indeed Brexit, we remain confident about the outlook for the Group.”

Analyst meeting
A conference call for analysts hosted by Ian Strafford-Taylor (CEO) and Richard Cooper (CFO) will be held at 09.30am today, 23 September 2020.  A copy of the Interim Results presentation is available at the Group’s website: http://www.equalsplc.com.

For retail investors, an audio webcast of the conference call with analysts will be available after 12pm today: https://webcasting.buchanan.uk.com/broadcast/5f4e5332b14d87262643ddd2

Notes

* Adjusted EBITDA
Adjusted EBITDA is defined as earnings before: depreciation, amortisation, impairment charges and share option charges. Following shareholder observations at the time of the 2019 annual results, adjusted EBITDA no longer includes R&D tax credits, instead these are accounted for in the taxation line.

** Accounting clarification and restatement
Totals may not sum due to rounding.  Percentages are calculating on underlying figures before rounding.  A detailed review of the accounting policies and recognitions have led to some minor re-profiling between the first and second halves of the year ending 31 December 2019.  Where costs cannot be accurately attributed to each segment, they have been allocated on the basis of revenue.

For more information, please contact:

Chief Executive Officer’s Report

The Group entered 2020 with a clear aim to capitalise on the developments in its product and brand undertaken over the previous two years with a focus on B2B customers. The performance in Q1-2020 underlined the success of this strategy and the trajectory of the Group at that time. However, in late March, Covid-19 rapidly changed our priorities and the swift actions taken to ensure everyone could work remotely bore immediate fruit. Existing plans to ‘right-size’ the business were accelerated during this time and should be fully completed by the end of 2020 without harming the Group’s future prospects and opportunities.

During lockdown, the Group availed itself of the Government’s Covid-19 assistance with up to 73 staff being placed on furlough. The remaining staff, contractors and all directors cooperated by taking a 20% reduction in salaries for the three months of Q2-2020. Planned capital expenditure was also significantly lower at £0.2 million (including a replacement telephone system) from the £2.3 million incurred in FY-2019. This, combined with other tight financial controls, has resulted in the Group’s financial position remaining robust, and as such, at the time of writing, the Group had £7.6 million of free cash, and its monthly operational cash-burn rate is getting close to zero.

In addition to the Covid-19 headwinds, towards the end of the half-year the industry was confronted with the demise of Wirecard AG, which caused issues for Wirecard’s UK operating subsidiary and one of the Group’s counterparties. The Group already had contingency plans to deal with an issuer problem of this nature enabling it to tackle both the immediate effects and to accelerate migration away from Wirecard. Moving away from Wirecard represents a significant logistical and operational challenge, at the end of which the Group will be much better placed in terms of reduced unit cost and improved revenues from its card programmes. The successful and rapid implementation of these contingency plans and the agility of the Group in terms of both its systems and its people bodes well for the future.

Other operational improvements made so far this year were:

• Implementation of core payment partnership with Citi Group, supplementing existing arrangements with Barclays and RBS and providing additional functionality and improved settlement capabilities paving the way to straight-through-processing (STP);
• Integration of a new compliance system to lower onboarding friction, particularly for B2B customers;
• Migration of customer-facing phone system to a superior functionality, lower-cost and more robust cloud-based solution improving efficiency of outbound sales and customer services functions;
• Significant progress in the migration of cards from Wirecard to new multi-currency B2B Equals Spend cards and B2C FairFX cards, on target for full transition by end of October 2020; and
• Rebuild and rebrand of the B2C FairFX website and app to support a new multi-currency card offering.

Financial Overview

A summary of the Group’s underlying transaction values is shown below:

Underlying transaction values

Overall transaction values were up 24% on H1-2019 but down 4% on H2-2019.  However, in International Payments values were 65% higher than H1-2019 and 14% higher than H2-2019 illustrating that the focus on this division is paying off.

Revenues

The financial performance held up well in H1-2020.  Group revenues were £13.8 million (H1-2019: £13.6 million) with a strong performance from International Payments in particular which generated £8.2 million (H1-2019: £4.8 million). Banking Services was consistent at £2.5 million. The Equals Spend B2B expenses platform was hit by the pandemic with revenues for the first half 38% lower than H1-2019 but recovering strongly in June and beyond. Travel money products (cards and cash) were directly impacted by the Covid-19 pandemic and revenues were 57% down on H1-2019, again showing recovery towards the end of the period.

Gross profits at £8.7 million were slightly below H1-2019 (£9.3 million) reflecting the impact of Covid-19 on the cards business where costs fell less than revenues due to fixed cost elements. The completion of the Wirecard migration will improve this position going forward and will also represent a lower-cost operating model for the card offerings.

The combination of marketing expenditure and gross operational expenditure was £11.5 million, 26% lower than H2-2019 (£15.6 million) and 7% lower than H1-2019 (£12.3 million), reflecting the cost savings initiated in late 2019 and accelerated during the period. The Group continued with its restructuring, taking its headcount down from a high of 337 employees to 280.  Further reductions are planned before the end of FY-2020 as more engineering deployments are completed in the next few months and the Wirecard migration, to which the Group has allocated temporary resource to enable a seamless experience for its customers, is completed.

Without withholding supplier payments, the Group’s free cash position as reported on 29 June 2020 was £7.7 million. I am pleased to report that as of Friday, 18 September 2020, the free cash position was £7.6 million. The Group has a deferred PAYE liability of £1.8 million and a settlement agreement has been reached with HMRC over a period to 31 August 2021. The Group has filed R&D tax credit claims for £2.3 million which will be used, when received, to accelerate the payment of deferred PAYE. This is a significantly more robust cash position than management had originally forecasted when Covid-19 first struck and it enables the Group to look forward with confidence.

Current Developments

The stated strategy of the Group - to focus on the B2B customer base by providing simple, integrated payments solutions augmented by market expertise to help SME’s manage their multi-currency exposure and domestic payment needs - is proving successful.

The Group has assembled a unique product set that combines its FX heritage, systems and access via licences and permissions with our excellent settlements capabilities and card platforms thereby allowing SMEs access to sophisticated, bank-grade treasury functions to execute quick, cheap, complex and secure spot and forward foreign exchange contracts. The key for the Group going forwards is to further refine the Sales and Marketing strategy to grow customer numbers whilst continuing to improve the product offering.

Accordingly, the ‘Go-To-Market’ (‘GTM’) approach for SMEs (B2B) and consumers (B2C) has been sharpened with the Equals Money brand to be used for B2B and the newly refreshed FairFX brand for B2C. Both brands now operate on the same underlying payments infrastructure increasing operational efficiency and enabling the Group to leverage the combination of its historic customer base and the acquired assets of CityForex, Hermex, Casco and CardOneBanking into a clear holistic proposition for B2B customers whilst simultaneously maximising the B2C proposition under the FairFX brand.

The Sales and Marketing approach has been radically refined, with focus on SMEs with currency needs and utilising data-science to improve the complete funnel of customer acquisition from lead sourcing/qualification through to sign up and on-boarding. Removing friction in all these areas is a clear goal.  In addition, utilising the Equals Spend B2B platform as a route in to SMEs rather than solely targeting foreign exchange represents a clear advantage to the Group in the sales cycle. To underpin this process, CRM is vital and therefore the Group is undertaking a CRM upgrade project, a new supplier has been identified and the data architecture work has commenced. Completion of this project is scheduled for early 2021 but benefits to customer acquisition will accrue throughout the implementation phase during 2020 and the Group anticipates significant improvements for FY-2021 as a result of this investment. Upon completion, the CRM platform will yield an enhanced and operational leads-management solution plus a fully integrated customer management tool for account managers/dealers that will enable better cross-selling, stronger conversion as well as more sales time spent selling.

In International Payments, the upgraded self-service tool for B2B, namely Equals FX, including full forward-contract functionality, will allow Equals dealers to focus on larger client opportunities and further develop business with existing customers, as well as enabling the sales team to win more business from competitors via the increased functionality to offer the B2B customer base.

The Group has also undertaken a core account infrastructure project whereby the Banking Services platform becomes the key system underpinning all Group products. This platform will allow 24/7 instant deposits in GBP direct into unique accounts per customer and the ability to hold up to 35 currencies through the new relationship with Citi and the implementation, already completed, of GB Multicurrency IBANs. This will enable the Group to serve new B2B customer segments, notably marketplace/international e-commerce sellers and e-invoicing platforms, as well as better serve the current Spend and International Payments customers.

The migration away from Wirecard as an Issuer, combined with the extension of self-issuing for Equals’ own Banking Services proposition, allows the Group to offer both pre-paid and debit card solutions. This ability to offer a choice between pre-paid and debit will dramatically enhance the current Equals Spend proposition enabling the platform to diversify away from pure expense management into the multinational purchasing card use case.  It will also facilitate a step-change in CFO/Card Controller ease of use, therefore allowing the Group to gain market share in this poorly served segment.

The strength of the underlying infrastructure at Equals now allows the Group to provide its platforms to other financial services companies, a B2B2B proposition, via APIs. In line with this, the Equals Money website will be re-launched in October 2020.  This will provide, as its first two modules, the Equals Connect platform for other FX dealing companies wishing to operate on the Group’s infrastructure, and Equals Faster Payments under which the Group leverages its in-house direct Faster Payments gateway to third parties. The Group has a strong pipeline of demand for both platforms and further roll-outs of underlying capabilities are planned in the future. This strategy allows the Equals Group to access market volumes in numerous ways, both directly and via third-parties, which in turn increases the ability of the Group to gain volume-based discounts and access.

Future plans and opportunities

• B2B, and specifically SMEs, remains the priority for the Group as it represents 66% of the US$230 billion revenue opportunity of the global International Payments market. The focus being on the provision of world-class technology combined with expert personal service to serve customers with International and Domestic Payments needs. External research forecasts continuing growth in these markers with SME Accounts Payable, and Marketplace pay-outs to SMEs expected to grow at 10% CAGR over the next five years.
• Development of non-GB IBAN facilities. Whilst the Group already has GB-prefixed multi-currency IBANs, the ability to receive foreign currency into non-GB prefixed IBANs is important to better serve the SME marketplace customers who pay high fees to marketplaces (such as Amazon) for automated currency transfers, and compete with TransferWise and others targeting this space. This project should be completed by the end of Q1-2021.
• Highly targeted marketing of International Payments. Utilising the Group’s full range of products, the dealer service for B2B customers providing market expertise and best execution, Equals self-serve proposition covering spot and forward transactions and the Group’s Equals Connect platform catering to the B2B2B market segment.
• The delivery of a more sophisticated, easy to use suite of currency risk-management tools. With the management of cash flow remaining a top priority for SMEs, exacerbated by Covid-19 and post-Brexit challenges, tools for supply chain management and Currency Risk Management, augmented by reliable efficient and rapid payment systems will be paramount.
• Further improvements to the B2B Equals Spend expenses platform. Additional functionality to be added to widen the use case from pure expense-management including Debit card capability to draw on central funds leading to Equals to enter the ‘purchasing card’ marketplace. In addition, increased integration of the platform to accounting software providers.
• B2C Currency Cards - Once the Wirecard migration is completed by end-October 2020, the Group will have re-platformed to a single multi-currency card and is able to operate this programme at a significantly lower cost going forward, leveraging the B2B payments infrastructure. The B2C target segment will remain ABC1s with high levels of travel / foreign property and investments and the Group will seek to leverage mutually beneficial partnerships to access more specific target segments. The addition of ‘Linked Cards’ enables meaningful new use cases for both domestic and international use with a particular appeal for families with children, nannies, home-help or elderly relatives.  Discovery work is underway to finalise the GTM for these segments.

Board composition

As the Group continues to evolve and plan for its next phase of growth, there have been a number of changes to the Board, starting with the recruitment of CFO, Richard Cooper in October 2019, who has substantial experience in public markets.

Alan Hughes, an experienced banker, joined the Board in February 2020 and then took up the Chairmanship at the end of June with John Pearson stepping down but remaining as a Non-Executive Director. Ajay Chowdury stepped down from the Board on 29 July 2020 after serving since 2014. On 15 September 2020, the Group announced that Sian Herbert, a former partner with PwC, would be joining the Board as a Non-Executive Director and Chair of the Audit & Risk Committee with Bob Head who has served since July 2016 stepping down on 1 October 2020. I am immensely grateful to Ajay and Bob for their contribution and wise counsel over the years and pleased to welcome Sian to our Board at the start of October 2020.

Employees

As with many companies, it has been an immensely challenging time for the Group’s employees. The whole business moved to remote working from late March, and regrettably up to 73 employees were placed on furlough, and as the business reduced its cost base, the remaining employees and all directors took a 20% salary reduction for a whole quarter. The Group’s headcount has dropped from a peak of 337 in January 2020 to 280 currently, with further reductions coming before year-end as the Wirecard migration is completed. I am very grateful for the incredible efforts that the Group’s employees have made as they have risen to the many challenges we have faced in 2020 and pleased that we have an extremely motivated and united team as we move forwards.

Outlook

Revenues have held up well during the financial year to date with the inevitable Covid-19 related fall in April and May 2020. Revenue per working day was £126k in Q1-2020, £82k in April and May, £112k in June, and in the 62 working days from 1 July until Friday 18 September, average revenue per day was £114k. As referred to earlier, the Group’s cash position was £7.6 million compared to £7.7 million as reported on 29 June 2020. The Group has some outstanding redundancy/leaver costs to cover in Q4-2020, but operationally, management expects that the Group will be cash break-even in Q4-2020 and then move into positive territory in Q1-2021.

We believe it is testament to the quality of the business and the resilience of our B2B focused model that we are reporting both an increase in revenue and decrease in underlying expenditure against the headwinds posed by a combination of Covid-19 and the changes forced upon the business as a result of the demise of Wirecard.  Our revenues continue to grow against this unprecedented backdrop and we have not yet completed our cost reductions which will benefit the second half of the year.  With a stable cash position, we remain positive about our future prospects and although we are conscious of the potential for further disruption as a result of Covid-19, and indeed Brexit, we remain confident about the outlook for the Group.

Ian Strafford-Taylor
Chief Executive Officer

23 September 2020

Chief Financial Officer’s Report

The Group has chosen to present extracts from the primary statements in an alternative format and explain the major movements to the prior period or year along with issues of accounting impact and judgement.  The periods most relevant to the primary statements have been presented, full period disclosures are made in the Consolidated Interim Financial Statements. The report is in three sections:

A - Income and Expenditure Account
B - Balance Sheet
C - Cash Flow

Transactions with business customers are reported as ‘B2B’ and transactions with retail customers reported as ‘B2C’.

Totals may not sum due to rounding.  Percentages are calculating on underlying figures before rounding.  A detailed review of the accounting policies and recognitions have led to some minor re-profiling between the first and second halves of the year ending 31 December 2019. Where costs cannot be accurately attributed to each segment, they have been allocated on the basis of revenue.

R&D tax credits are included in the charge to taxation, and no longer to Adjusted EBITDA*

A: Income and Expenditure account and its notes

Table 1

*Adjusted EBITDA is defined as Earnings before: depreciation, amortisation, impairment charges, share option charges, and separately reported items.

Revenue
Revenue was £13.8 million (H1-2019: £13.6 million) for the six months with International Payments contributing 60% totalling £8.2 million (H1-2019: 35%, £4.8 million). The impact of Covid-19 was keenly felt in both the Card businesses and the Cash business, which, between them fell by 52% to £3.0 million (H1-2019: £6.2 million), which was a better outcome than management had expected.

Table 2 - Revenue
£000’s

B2B revenue rose by 32% to £9.0 million (H1-2019: £6.9 million) which more than offset the impact of Covid-19 on the Cards and Cash businesses. Despite the challenging conditions and historically low interest rates, revenue from Banking Services fell by only 1% against the same period last year.

Gross profit
Gross profit margin held up well in International Payments and Banking Services, but due to the credit in H1-2019 with zero cost of sale card rebate income, gross profit on cards was significantly reduced and this lowered the overall gross profit margin on cards from 71% to 49%. The Group expects the sustainable gross profit margin to be around 62%.

Table 3 - Gross profit
£000’s

Contribution
Contribution at £7.9 million was fractionally lower than in H1-2019 (£8.0 million) on similar levels of revenue, reflecting more targeted marketing expenditure.

Gross costs

Table 4 - Costs, gross of separately reported items

Gross costs (i.e. including capital expenditure and exceptional items) at £11.5 million were 7% lower than H1-2019 (£12.3 million) and 26% lower than H2-2019. Costs continue to be reduced mainly through controlled headcount reductions as development projects get delivered and efficiencies are delivered resulting in some de-skilling.

Headcount
Headcount numbers have fallen from 337 in January 2020 to 296 in August 2020. The Group anticipates headcount to drop below 280 by year end. The Group availed itself of the Government’s furlough scheme with up to 72 employees being placed on furlough during lockdown, but this is now down to 30. A number of employees have been temporarily re-deployed to assist with the migration of consumer and business cards from Wirecard following its demise in late June 2020.

Professional fees
One consequence of the Covid-19 pandemic was that the 2019 audit suffered delays as remote working was not entirely conducive to the verification process and there was a significant cost over-run. £102k relating to this has been expensed in 2020 but shown as a separately reported item.

Property costs
The Group has property commitments in London for both offices and retail outlets. Two retail outlets have been shuttered but the Group retains the lease commitments and will consider providing for these at 31 December 2020.

Amounts capitalised
£2.2 million of staff costs has been recognised as internally developed software, representing 27% of the staff costs, down from £4.2 million in H1-2019 (48%). A further £0.3 million of intangible assets were acquired in the period.

Separately reported items

There is an accounting standards distinction between those items of a one-off and material nature (‘separately reported items’) and other items of materiality which management regard as exceptional items. In the period under review, there are no ‘exceptional items’ only ‘separately reported items’ as shown below:

Table 5: Separately reported items

With the demise of Wirecard AG and its UK operating subsidiary, the Group has made a provision of £530k against card-stock and prepaid issuance costs (normally amortised over three years). The Group incurred £343k of staff restructuring costs in the period, augmented by additional professional fees brought on by the Covid-19 pandemic. Additional costs are anticipated to be incurred in the H2-2020.

Adjusted EBITDA
Adjusted EBITDA now excludes R&D tax credits, £0.7 million has been accrued within taxation, based on development spend in H1-2020.  The result for the period was a profit of £672k against a pre-Covid-19 result in H1-2019 of £1.9 million. The principal movements were attributable to a lower level of capitalisation of internally developed software.

Table 6a -Reconciliation of adjusted EBITDA to loss after tax H1-2020

Table 6b -Reconciliation of adjusted EBITDA to profit after tax H1-2019

Impairment review
Due to the uncertain outcome of Covid-19 on the asset values carried at 30 June 2020, the Group has not been able to conclude at this time whether any impairment will be recognised. A full review will be carried out for the full year. It should be noted that a £nil value was ascribed to the retail bureaux assets of City Forex when it was acquired in 2018 and thus there would be nothing to impair for these bureaux.

Depreciation and amortisation
Depreciation for the period remains relatively consistent at £668k (H1-2019: £615k). Amortisation has increased to £2,058k (H1-2019: £1,117k) as a result of projects being completed and the assets available for use.

Operating result
The Group made an operating loss before taxation of £3.2 million for the period, compared to a loss of £7.7 million for the whole of 2019.

Tax
The Group has recognised a net tax credit of £177k (H1-2019: £623k) of which £734k (H1-2019: £1,149k) relates to an R&D tax credit for the six months to 30 June 2020. The reduction in R&D tax credit arises principally as a result of less project expenditure incurred which is subsequently eligible for R&D relief.

At the time of writing, the Group has submitted R&D claims to HMRC for the 2019 financial year of £2.3 million.

The Group availed itself of postponing four months of PAYE totalling £1.8 million but has now reached instalment agreements with HMRC over a period of one year, to be accelerated on receipt of the R&D claim above.

A bridge showing the changes between the earnings after tax from H1-2019 through H2-2019 and into H1-2020 is shown below:

B: Balance sheet
At 30 June, the Group had Net Current Assets of £10.4 million (30 June 2019: £7.9 million) and Cash at bank of £7.9 million up on 30 June 2019 (£4.9 million) but lower than at 31 December (£11.3 million).

Fixed assets
Additions of £120k include investment in a superior telephone system which has enabled staff to work from home during the Covid-19 outbreak.

Internally capitalised software
The Group continues its investment in product development and has capitalised a further £2.5 million of which £2.2m was staff costs.

Other balance sheet items
The Group has accrued a further £0.7 million for R&D credits. £2.3 million remains outstanding but filed with HMRC, in relation to previous periods and £0.2 million was received in January 2020 in relation to previous periods.

Non-Controlling Interest
Of the £3.1 million loss for the period, £83k relates to the Non-Controlling Interest of the Equals Connect business acquired in 2019.

C. Cash flow
The table below aggregates the movements across Bank and Liquidity providers:

Table 8

The Group is fully focused on getting to operational cash break-even by Q1-2021 and is on target to do so, subject of course, to trading reaching Management’s expectations and there not being a further Covid-19 revenue impact.

Richard Cooper
Chief Financial Officer

23 September 2020

INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2020

INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION
FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2020

INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2020

INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2020

INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2020