MPAY.L Regulatory News (MPAY)

25 September 2019

Mi-Pay Group plc

('Mi-Pay', the 'Group', or the 'Company')

Interim Results

Mi-Pay (AIM: MPAY), a leading provider of digital transformation, mobile payment and payment fraud management solutions to Tier 1 Mobile Network Operators, Mobile Virtual Network Operators and digital content providers, is pleased to present its unaudited interim results for the six months ended 30 June 2019.

Operational Highlights

·; Renewed contracts with 2 major Clients:

o 2-year extension to 31 March 2022 with our largest client (31% of annual revenue in 2018).

o 5-year extension from 1 January 2019 with our third largest client (12% of annual revenue in 2018).

·; Continued to deliver operational excellence with high payment success rates and low fraud levels.

·; Delivered an 85% reduction in payment fraud levels within our direct managed fraud service resulting in a 46% gross margin (H1 2018: 7%).

·; Significant investment in delivering Mi-Pay's full compliance to the new European wide payment regulation framework PSD2 (Payment Services Directive) ahead of the majority of the market and the implementation date, mitigating our clients' risks.

Financial Highlights

·; Delivered a 15% increase in fully managed payments to £58.1 million (H1 2018: £50.2 million).

• Successfully managed and indemnified £29.2 million of payments for fraud versus £17.8 million for the first 6 months of 2018, driving an increase in revenue of £0.1 million.

• Total revenue recognised in the period was £1.7 million (H1 2018: £1.6 million).

• Total gross margin remained strong at 63% (H1 2018: 62%).

• Total gross profit increased to £1.1 million (H1 2018: £1.0 million).

• Administrative expenses flat at £1.1 million (H1 2018: £1.1 million) despite continuing volume growth.

• Approximately breakeven at EBITDA level (H1 2018: £0.1 million loss).

• Cash & cash equivalents as at 30 June 2019 remained at £3.1 million (30 June 2018: £3.1 million).

• Operational cash outflow for the period of £0.2 million (H1 2018: £0.3 million outflow) which is expected to be offset post period end by the receipt of a £0.3 million annual research and development tax credit in October 2019.

• Basic and diluted loss per share 0.2 pence (H1 2018: 0.3 pence loss per share).

Michael Dickerson, Chairman of Mi-Pay Group plc commented:

"In the six-month period to 30 June 2019, we delivered further growth as consumers transferred to our on-line digital payment services, building on our previous periods of growth to EBITDA profitability. We are pleased to have further supported this by extending two of our major contracts and expect these clients to increase their volumes over the longer term. Our growth has enabled us to maintain our EBITDA break-even position for the 12 months to 30 June 2019.

We have continued to invest in delivering new market compliance regulations and are well placed to take advantage of the ongoing uncertainty this is bringing. Short-term growth is impacted by this uncertainty and the previously announced Client consolidation. Over the longer term, we expect to continue to build on our long term, naturally growing transaction flows and proven ability to deliver our secure payment services into the expanding and increasingly complex e-commerce market, underpinned with our ongoing investment in our solutions and our free cash position."

For further information, please contact:

Chief Executive Officer's review

H1 2019 Operational Review

Trading

We have continued to grow and have now delivered an approximately breakeven Earnings Before Interest, Tax and Depreciation (EBITDA) for the 12 months to June 2019 (£0.3 million loss for the 12 month period to June 2018).

Our processed payment transactions grew during the period to £58.1 million (H1 2018: £50.2 million) driven from existing clients. The period under review represents our tenth consecutive six-month period of growth in terms of payment values processed, and this growth was underpinned by the renewal and extension of two of our major clients' contracts. Our fully indemnified payment fraud management service delivered £0.2m million of revenue in the period (H1 2018: £0.1 million), from £29.2 million of payment transactions (H1 2018: £17.8 million). We achieved gross profit margins of 46% on our revenue of £0.2 million (H1 2018: 7%) as we continued to enhance the solution.

Our professional services revenue remained flat at £0.2 million for the period and continues to be supported by our secure card vault solution that collects and processes all the payment transactions for a major UK Mobile Network Operator, securely transferring over £292 million of payments in the period (H1 2018: £264 million).

Our total revenue therefore increased to £1.7 million (H1 2018: £1.6 million) against which we continued to deliver strong gross profit margins of 63% (H1 2018: 62%).

Whilst we have continued to grow over the period and secured over 43% of our 2018 revenues in longer contracts, it is disappointing that, due to an internal restructure, during September 2019 one of our larger clients (13% revenue in 2018) consolidated their payment transactions to another existing provider as they restructure and downsize their own operation. When combined with the slowing of new business growth due to the market challenges with new legislation, this will affect our full year performance growth expectations. Over the longer term, we will continue to build on our naturally growing client base and have taken positive action in relation to budgets and spending to mitigate such losses to seek to ensure that the Group remains EBITDA positive and continues to invest in and develop its solutions.

From an investment and market perspective, we have continued to invest and develop the key areas of the business, which we are able to do efficiently with our in-house teams:

Payment Compliance and Optimisation

From September 2019, the new Payment Services Directive (PSD2) comes into effect across Europe, which affects all e-commerce payment providers. The regulation has required significant internal development to ensure we protect our Clients and retain compliance. We are on track and expect to meet all requirements in full. However, it is clear that many areas of the payment market will not be compliant in the original targeted timeframe and, as such, we expect to see a challenging period of adoption in H2 2019 and into 2020. We have ensured Mi-Pay is in a strong position to take advantage of these new opportunities to support retailers and solution providers struggling to navigate the challenges. We will monitor this closely and adapt accordingly. Regulators have recently announced delays of up to 18 months on this directive and as such we expect short term impacts to be reduced.

Payment Fraud Management

Whilst the new payment directives "Strong Customer Authentication" mandates card issuers to adopt stronger consumer authentication practices to prevent payment fraud risk, this mandate excludes recurring, voice activated and low value transactions; which are the majority of our managed payments. Therefore, our current fraud management capability will remain highly relevant in our market and, as such, we will continue to invest and build on our market leading performance in the area of payment risk management. We will continue to introduce new additional capabilities to improve performance and enhance our proven capability in optimising and managing risk in lower value, high-risk transactions.

Business Intelligence

Given all the changes in the processing regime and its increasing complexity, our Clients will need enhanced intelligence on how their consumers use their service and the impact of the new regulations. Through our systems we are able to provide deeper analysis on consumer behaviour than more traditional payment institutions and will look to use this to help drive new revenues for the Company and help our Clients better understand their e-commerce solutions.

The growth of our solution in Asia remains slow, however we continue to work with our contracted client in the region to drive growth via new payment methods and wider country expansion.

Financial Review

¹Adjusted Net cash flow from operating activities excludes cash flows from the management of client payments, exceptional items and £273,750 payments made to Directors for settlement of deferred salaries, subsequently fully reinvested as Ordinary share capital on 1 March 2018

²Adjusted Cash flow from financing excludes £273,750 cash inflow from the settlement of deferred salaries, subsequently fully reinvested as Ordinary share capital on 1 March 2018

Our strong performance in transaction volume growth and improved fraud management performance drove revenues and gross profits up by £0.1 million for the period, enabling us to deliver a gross margin of 63% (H1 2018: 62%). Our overall margins remained strong.

Our administrative expenses remained stable at £1.1 million for the period (H1 2018: £1.1 million) as we continued to see the benefits of cost reductions delivered in 2018. We will target further efficiencies through better use of technology and align our costs appropriately with revenue as we adjust to changes in the market. The growth in gross profit led to an improvement in our operating loss excluding depreciation, reducing from a £0.1 million loss in H1 2018 to £nil for the period, in line with our expectations, following on from our H2 2018 breakeven EBITDA.

On our balance sheet, compared to as at 31 December 2018, our trade and other receivables increased by £0.4 million due to increases in amounts owed to us in relation to payment transactions processed. This was offset in trade and other payables which also increased by £0.4 million, reflecting the increased amounts due to our Clients. There were no other material movements.

The Group ended the period with £3.1 million in cash and cash equivalents (£3.5 million at 31 December 2018), noting that of this balance, £2.8 million related to the management of client payments (£2.9 million as at 31 December 2018). Excluding the client related cash movements, cash outflow was £0.3 million in the period, comprising:

·; £0.2 million outflow due to net operational expenditure

·; £0.1 million related to capital investment and lease payments.

We expect this outflow to be offset by a receipt of £0.3 million for our 2018 research and development tax credits which is expected to be received in October 2019, based upon our experience in previous periods. The Company remains free of any long-term debt.

Brexit

We continue to review the risks associated with Brexit. 43% of our revenue during the period was related to clients based in Europe, primarily in Ireland for payment services (29%) and our fraud services in Holland (12%). We see these two regions as our largest risks in relation to Brexit. Our solutions are primarily local domestic payment solutions, delivered on behalf of local entities for their local customers and we believe this reduces our risk. For our Irish client, our services are directly supported by an Irish registered payment institution which will enable us to transact locally via a local entity should this be required, underpinned by a long-term contract. We process successfully using this methodology today in Asia pacific. Our fraud service is a software solution that does not involve the processing of cash and can be managed and processed locally if required. Whilst some incremental costs and administration effort would be involved, we do not believe this will be material. For our resources, where the majority of our support teams are based in Europe, this operates as a stand-alone trading entity, abiding by all local laws, taxes and compliance. We expect this to have minimal impact given the flexibility we have across the Group. Crucially, we are committed to continue to comply with the most rigorous data protection regulation and, as such, will retain full compliance with the European Union 'General Data Protection Regulation' regime and will retain our global PCI data security standard.

Employees

We recognise that the performance achieved in this period would not have been possible without the support and continued dedication of our staff. They continue to support our delivery model and enhance the solutions to our clients, support the strong transaction growth, develop, and deliver improved, secure technologies. In particular, their focus on adapting our technology to ensure we deliver payment compliance has been a critical investment, and our focus on driving improved fraud management solutions and a fully stable infrastructure delivers enhanced overall financial performance. They are our most valuable resource and we would like to thank them for their efforts and the stability they give to the Group. We encourage a strong, innovative culture and our resources in the United Kingdom and Romania offer a highly skilled, experienced and stable delivery structure with a proven capacity to scale efficiently as we grow. In H2 2019, we will look to invest further in our security, fraud and business intelligence solutions, product delivery and commercial resources with their support.

Outlook

We will continue to drive growth from our long-term clients and enhance our solutions and payments services to support their transition from retail to digital solutions. In addition, we have ensured our solutions are adapted to the new compliance environment, securing stability for the future. This will allow us to target potential new opportunities where Clients face challenges in adapting to change. As we look to grow outside of our traditional mobile operator market, we will focus on new verticals where payment risk and transaction optimisation is key to success, such as the fast growing digital content and gifting markets where we see similar experiences to that of the mobile pre-pay market.

Our challenges over the coming period relate to the economic uncertainties of Brexit and new compliance requirements creating uncertainty in the market, restricting Client investments and increasing the likelihood of internal consolidation. We will mitigate the impact by growing existing services to clients and manage our cost base accordingly.

The Board remains confident that our total market opportunity continues to increase as the digital payments market expands globally and our solutions become increasingly relevant to a wider set of customers, geographies and vertical markets. Our fully compliant risk management solutions retain our strong position, allowing us to take advantage of this consumer migration to digital e-commerce.

John Beale

CEO

Consolidated Statement of Comprehensive Income

For the period of six months ended 30 June 2019

Consolidated Statement of Financial Position

As at 30 June 2019

John Nicholas Beale

Chief Executive Officer

Consolidated Statement of Cash Flows

For the period of six months ended 30 June 2019

Consolidated Statement of Changes in Equity

For the period of six months ended 30 June 2019

Consolidated Statement of Changes in Equity

For the period of six months ended 30 June 2018

Consolidated Statement of Changes in Equity

For the year ended 31 December 2018

Notes to the Financial Information

1. Basis of preparation

The unaudited consolidated half-yearly financial information in this report has been prepared on the basis of the accounting policies expected to apply for the financial year to 31 December 2019 and in accordance with recognition and measurement principles of International Financial Reporting Standards (IFRSs) as endorsed by the European Union. The accounting policies applied in the preparation of this half-yearly financial information are consistent with those used in the financial statements for the year ended 31 December 2018. There has been no material impact from the application of IFRS16. This interim report has not been reviewed by the Group's auditors, and does not constitute statutory accounts within the meaning of the Companies Act 2006. The financial information for the six months ended 30 June 2018 and 30 June 2017 is not audited.

The financial information contained in this document does not include all of the information required for full annual financial statements and do not comply with all of the disclosures in IAS34 'Interim Financial Reporting'. Accordingly, whilst this financial information has been prepared in accordance with IFRS they cannot be construed as being in full compliance with IFRS.

The financial information for the year ended 31 December 2018 does not constitute the full statutory accounts for that period. The Annual Report and Accounts for 31 December 2018 have been filed with the Registrar of Companies. The Independent Auditors' Report on the Annual Report and Accounts for 2018 was unqualified and did not include references to any matters which the auditors drew attention to by way of emphasis without qualifying their report and did not contain statements under Section 498(2) or 498(3) of the Companies Act 2006.

2. Segmental analysis

The chief operating decision maker has been identified as the Chief Executive Officer (CEO) of the Group. The chief operating decision maker is responsible for regularly assessing the performance of the Group's operating segments and performing the function of allocating resources. To assist the chief operating decision maker in this process, internally generated reporting is prepared for each operating segment.

The Group has three operating segments that it reports on. These operating segments are:

·; Transaction Services Revenues: This segment generates revenue from the processing of transactions on behalf of clients and is Mi-Pay Group plc's core business.

·; Fraud Services Revenues: This segment generates revenue from the assessment of transactions as to the likelihood of being fraudulent and processes or rejects based on this assessment with the company taking a risk as to the potential fraud.

·; Professional Services Revenues: This segment generates revenue from the development, delivery and hosting of our platform and client solutions.

The CEO assesses the performance of the operating segments based on revenue and gross profit. The CEO uses these measures to assess performance because they are quick to analyse and directly relevant to evaluating the results of each segment. ¹

The segments are continuing operations and results are as follows:

Operating Segments

¹ There is no inter segment trading and assets and liabilities are not allocated to segments.

3. Operating Loss

This is arrived at after charging / (crediting)

4. Staff costs

5. Loss per share

The numerators shown above represent the total loss from continuing operations for the period or year.

Since the Group was in a loss making position for all three periods presented, there was no difference between the weighted average number of shares used to calculate basic and diluted net loss per share.

6. Trade and other receivables

7. Trade and other payables

8. Share capital and premium

On 1 March 2018 Mi-Pay placed 4,141,048 new ordinary shares of 10p nominal value each ('Placing Shares') at a placing price of 12.5p per share (the "Placing Price") (the 'Placing').

9. Share Based Payment

The Group operates two equity-settled share-based remuneration (share options) schemes for employees: a United Kingdom tax authority approved EMI share options scheme and an unapproved share option scheme. The granting of options to employees in 2014 and 2018 was decided upon by the Group and no legal or constructive obligation exists to grant further options in future years.

On 28 February 2018, the Group issued options over a total of 3,750,000 Ordinary Shares (under the terms of the Group's existing share option scheme), with an exercise price of 13 pence per share. Existing share options over 3,763,425 Ordinary Shares with an exercise price of 41 pence have been cancelled, or forgone. As a result of cancellation of previously issued share options, the £624,729 of share option reserve as at 31 December 2017 was transferred to retained deficit during the six month period to 30 June 2018 with no impact on the Consolidated Statement of Comprehensive Income for the six month period to 30 June 2019. A charge of £38,992 was made to the Consolidated Statement of Comprehensive Income for the new issue during the period to 31 December 2018.

The vesting condition for employees awarded share options is to deliver 3 consecutive months of positive Earnings before Interest and Tax and that the individual remains an employee of the Group over the vesting period which was achieved in the year to 31 December 2018. The contractual life of the options is ten years and there are no cash settlement alternatives.

The movement in the number of share options in the 6 month period to 30 June 2019 is set out below.