PHRM.L Regulatory News (PHRM)

29 June 2012

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

Annual Report and Financial Statements - Year Ended 31 December 2011

Phorm (AIM: PHRM and PHRX), the personalisation technology company, today announces its audited financial statements for the year ended 31 December 2011.

Highlights:

Year to date 2012

·; Conditional agreements entered into with China City Investments Limited for a £20m equity investment into Phorm China valuing Phorm China alone at £100m (post money). Completion is expected by 31 July 2012

·; Further funding options to meet near-term working capital requirements for the Group are under active consideration

·; Operations went live in Romania last October and have commenced this year in an important Southern European market thereby broadening the Group's routes to significant revenue and operating profit

·; Our new markets and our business development pipeline comprise only full network deployments with ISP partners, unlike Brazil where deployments are currently restricted to part of each of the our ISP partners' networks

·; Commercial operations in Brazil continue to support the business model assumptions of advertiser pricing, being significantly higher than forecast, and publisher costs, being in line or lower than forecast, albeit not yet at scale

·; Opt in rates from all 3 deployed markets have been in line or higher than forecast

·; Business development pipeline is growing and is now becoming industrialized, rapidly shortening the time frames concerned

·; Intention to restructure the Company announced to enable the Company's shares to be fully CREST eligible and provide an aid to their liquidity

Year to 31 December 2011

·; Operating losses for the year were $30.5 million (2010: $27.9 million). Excluding non-cash items operating losses for the year reduced to $24.2 million(2010: $26.0 million)

·; Deployment in Romania with Romania Telecom. Full network invite process achieved in just 4 weeks

·; Opt-in rates achieved in Romania significantly ahead of forecast, reinforcing those seen in Brazil

·; Much slower than anticipated ramping in Brazil, but expected to improve in 2012 once user numbers grow

·; Equity placing in November 2011 for £33.6 million. Convertible loan notes of £16.075 million retired in their entirety. Group is now debt free.

Enquiries:

Phorm, Inc.

Mark Williams: +44 20 7297 2326 (analysts and investors)

Alex Laity +44 20 7297 2710 (media)

Liberum Capital +44 20 3100 2222

(Nominated Advisor and Joint Broker)

Chris Bowman

Richard Bootle

Mirabaud Securities LLP +44 20 7321 2508

(Joint Broker)

Jason Woollard

Peter Krens

Chairman and chief executive's statement

Operational performance

Although we were not able to achieve the substantial revenues and profitability for which we and our investors have been waiting too long, this year was a good year for Phorm.

Even though the speed of our rollout in Brazil has been an undeniable disappointment, we saw our dependency on the slow pace in that country decrease substantially as we have now gone operationally live, serving invitations and offering our Phorm Discover product in two new markets and are well positioned in several additional markets where we expect to go live within the next year. For both of the markets which have gone operationally live after Brazil, namely Romania and an important Southern European market, we expect to generate revenue in the second half of 2012.

In addition to the three live markets, we are in active preparation in several other markets, which we expect to go live within the next year. Each of these additional markets is positioned for roll out to the full network of the Internet Service Provider ("ISP") partner and therefore to generate significant revenue.

One of those markets is the People's Republic of China ("PRC"). After almost a year of due diligence by our highly influential investors both in our overseas markets and within the PRC, we were very pleased to announce that we have reached agreement for an investment of £20 million for a 20% equity interest in Phorm China. The investment is subject to satisfaction of closing conditions. We have stipulated, in our investment agreement, an intention to list our Chinese subsidiary in the public markets within three years of achieving 20 million daily active users in the PRC.

Together with a technology which our efforts to date have shown to be wanted by a large cross section of Chinese ISPs and highly valuable advice and assistance from our new partners in the traditionally challenging Chinese market, on completion, this investment will position us very well to achieve significant penetration in the world's largest internet market. As a measure of the size of this market, China has 180 million fixed line broadband accounts and 750 million mobile accounts. This is compared with 20 million fixed line accounts in the UK.

Our intention is to develop similar strategic partnerships in a limited number of key markets moving forward. This will help us balance a simplified corporate structure with the ability to bring in investment and partnerships which significantly accelerate the path to revenue in these key markets.

As progress continues, our ability to underpin the business case with actual statistics such as ad performance and opt-in rates grows, which in turn increases the traction which we are getting from ISPs around the world. We currently have a strong pipeline of business development opportunities with ISPs and expect many of those to move rapidly towards deployment during the course of next year. We expect a substantial increase in the pace and number of deployments when we become able to demonstrate substantial revenue in our current live markets.

With that in mind, we have given considerable thought to the issue of scaling our sales and execution capacity. We have made a number of senior level hires across the technology, legal and business development areas in anticipation of having to grow the company in a rapid yet organized fashion. We have also focused on compressing the time to market and standardizing the delivery process. We believe that it is essential to take these steps now in anticipation of the timeline for large-scale revenue and the size of our current pipeline.

On the funding side, apart from the recent agreements for investment into Phorm China, we were very pleased, during 2011, to have been able to retire all of the Group's debt and deliver a very good return to the investors who participated in our secured convertible loan note issue. Although the issuance of debt was useful and timely, we are pleased to be able to clear the Group of any dilution overhang and debt burden.

Importantly, we also recently announced that we would be restructuring the Company to ensure that the listed entity did not fall under the US Securities Act, which requires physical certificated settlement of our shares making trading in the shares more cumbersome than that of other shares. We believe that re-domiciling from a Delaware corporation to Singapore will make the shares significantly more liquid by enabling trading on CREST. The process of re-domiciling has begun and should be complete within a few months.

In conclusion, we expect significant additional news flow during the second half of this year and believe that it will become increasingly clear to investors that the long wait for revenues will have been worthwhile.

Funding and going concern

In November 2011, the Company announced a £33.6 million equity placing. This placing allowed the Company to retire its £16.075 million secured convertible loan notes in their entirety while providing working capital for the core business during 2012 to date. In addition, as mentioned above, agreement has been reached for investment of£20 million for 20% of Phorm China, subject to satisfaction of closing conditions. The sale of the 20% stake in Phorm China is the realisation of the investment strategy that the Company has been pursuing for some years. When received, the proceeds from the Phorm China investment can be used for business expansion and general working capital in Phorm China and its subsidiaries, but based on the current investment agreements, will not be available for wider group purposes. The current uncertainty with respect to the scale and speed of the revenues arising from the current deployment means that further funding for Phorm, Inc. is a necessity early in the second half of 2012 for wider group purposes and the Company is actively engaged in further funding discussions.

Further information in respect of the directors' assessment of going concern, including the material uncertainties identified, is set out in the attached notes to the preliminary announcement.

Financial report

Results for the year

The Company is pleased to be able to report that it did start generating revenue in 2011. However, the revenues generated are significantly lower than original expectations due to the speed of ramp up largely as a result of the changes to and challenges within the ISP networks in Brazil. Nevertheless despite the slower speed the commercial results in terms of advertising pricing and performance have been excellent, albeit at limited scale, but we believe the results to date support our views with respect to the future potential of the Company.

Total revenue of $50,419 was generated for the year ended 31 December 2011 (2010: $nil). The Group expects revenues to grow non-linearly as user numbers increase.

Operating losses for the year (before non-cash share-based payment charges) were $24.2 million (2010: $26.0 million). The non-cash share-based payment charges for the year were $6.3 million (2010: $1.9 million), principally as a result of the new grants to the Chief Executive Officer and another director announced at the time of the Group's equity raise in the fourth quarter.

For the six months ended 30 June 2011, we reported an operating loss (before non-cash share-based payment charges) of $13.0 million; this compares to $11.2 million in the second half of the year. The reduction in operating losses has been achieved despite a significant increase in capability supporting live operations in three markets. The Company will continue to focus on identifying cost savings and efficiencies as it continues to scale its operations and revenues.

In addition, the terms of the secured convertible loan notes resulted in a significant financing charge of $32.0 million of which $29.4 million was settled by issue of new shares. The proceeds from the Company's equity fundraising in the fourth quarter of 2011 permitted repayment of all loan notes in full, such that the Group is now debt-free.

Losses after taxation were $62.5 million (2010: $28.7 million). Loss per share was $2.36 (2010: $1.61).

Financial position

Our balance sheet at 31 December 2011 showed net assets of $18.2 million(2010: net liabilities of $4.3 million) with cash and cash equivalents of $16.1 million (2010: $5.7 million). The year on year improvement in the net asset position of $22.5 million is principally attributable to the increase in the Group's share capital and additional paid-in capital of $78.8 million, offset by the loss for the year of $62.5 million, foreign exchange losses on translation of overseas subsidiaries of $0.2 million, net of a share-based payment credit of $6.3 million.

Since the year-end there has been a material reduction in the net asset position of the Group as a result of continuing operating losses. As at 31 May 2012, the Group held cash and cash equivalents of $5.7 million.

Cash flows and funding

The Group's net cash used in operating activities reduced from $24.8 million in 2010 to $24.2 million in 2011, largely due to lower operating costs. Cash used in investing activities increased from $0.2 million to $1.1 million principally due to capital expenditure as the Group invested in equipment for the roll out of its technology in two new markets.

During the course of 2011, the Company has raised additional funds through issuing new equity in November 2011, resulting in a cash inflow of £33.6 million, net of expenses. The proceeds from the Placing were used to redeem the convertible loan notes ("CLNs") issued on 21 March 2011 (together with the Placing, the "Transaction") and to provide working capital and develop the opportunities previously described. The Company subsequently issued call notices to all holders of the £16,075,000 secured CLNs and redeemed the notes using a combination of cash and shares. The total cash repayable was £17.6 million, being the £16.1 million principal together with £1.5 million of interest (accrued at a rate of 15% per annum since the issue date of the CLNs). In addition, under the terms of the secured CLNs, the minimum threshold return was 1.1 times the principal and accrued coupon (£17.7 million) (the "Redemption Premium") as the CLNs were redeemed in the first year of issue. The Company opted to satisfy the balance of the Redemption Premium in shares. The Redemption Premium shares were issued at a price of 98.30p per Share, being the average of the lowest five daily closing prices over the 20 day trading period immediately prior to the redemption notice being given. The total number of Redemption Premium shares issued was 17,988,302.

The total number of shares issued pursuant to the Placing was 39,023,306 at a Placing price per share of 86.10p. Accordingly, the total number of shares issued by the Company pursuant to the Transaction was 57,011,608. Following the Transaction, the total issued share capital of the Company comprised of 75,491,515 shares with a nominal value of $0.001 each.

This was considerably more dilution than the Company had originally anticipated and reflected the poor performance of the share price, notwithstanding the commercial progress that had been achieved. As a result the Company continued to pursue its strategy of funding the Company by selling minority stakes in its subsidiaries. This strategy was first outlined in its annual report for the year ended 31 December 2009 and reiterated in the annual report for the year ended 31 December 2010. The Company was very pleased to be able to announce on 1 June 2012 that it had entered into agreements to raise £20 million, which is subject to closing conditions, via a subscription for a 20% equity stake in an operating subsidiary for Hong Kong and the People's Republic of China ("Phorm China").

The equity subscription gives Phorm China a post-money valuation of £100 million. The equity subscription is subject to the customary closing conditions and a requirement on Phorm to enter into a licensing agreement for its know-how and technology to Phorm China that will be operated by the Phorm team within Hong Kong and the People's Republic of China on an exclusive, perpetual, royalty-free basis. Closing is expected to occur on or before 31 July 2012.

Kent Ertugrul

Chairman and Chief Executive

28 June 2012

Consolidated income statement

Year ended 31 December 2011

Consolidated statement of comprehensive income

Year ended 31 December 2011

Consolidated statement of changes in equity

Year ended 31 December 2011

Consolidated statement of changes in equityYear ended 31 December 2010

Consolidated balance sheet

31 December 2011

Consolidated cash flow statement

Year ended 31 December 2011

Notes to the consolidated financial statements

Year ended 31 December 2011

1. Basis of preparation

The preliminary announcement for the year ended 31 December 2011 is an abridged statement of the full annual report which was approved by the Board of Directors on 28 June 2012. 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 29 June 2012.

The consolidated financial statements for the year ended 31 December 2011 have been prepared on a going concern basis. The director's assessment of the appropriateness of the going concern basis is set out in note 2 below.

The auditors' report on the consolidated financial statements for the year ended 31 December 2011 is unmodified but includes reference to matters to which the auditors draw attention by way of emphasis, without modifying 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

In accordance with their responsibilities, the directors have considered the appropriateness of the going concern basis, which has been used in the preparation of these financial statements.

During 2011 and up to the date of approval of these financial statements, the Group has made significant progress in the development and deployment of its technology and services. In particular, the generation of revenues in Brazil, and the operational launch in Romania and an important southern European market represent important commercial developments for the Group. The Directors recognise the fact that revenues have not grown as rapidly as originally expected due to slower than expected user growth in Brazil. However, the Directors are very encouraged by the speed of the deployment in both Romania and the southern European market which gives reasons for confidence with respect to future cash flows.

The Directors are encouraged by the post year-end announcement of an agreement of funding at a local level for Phorm China, which is subject to certain closing conditions. The Directors have increased confidence in the Company's ability to generate substantial revenues given the fact that it has now entered three markets rather than just one, with commercial deployment in two of these markets expected in the second half of 2012.

To date, the Group has incurred cumulative losses of $188.6 million. The Group has funded these losses and its operations through equity provided by its shareholders, including the equity issuance of $50.7 million, net of expenses in November 2011, which was used to repay the Group's secured convertible loan notes and provide working capital for the Group.

The Directors have approved a business plan which forecasts continuing cash outflows in the near term. The Group, however, has forecast revenues for FY12 and FY13 sufficient to cover the operating costs in Brazil, Romania and the southern European market 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 market trials but have yet to be confirmed at scale.

The principal risk with respect to achieving the results anticipated by the business model is the speed of roll-out of the service in each of its operational markets.

In the near term, the principal risk to the business is to ensure that the Group has sufficient working capital to allow the operating businesses to reach full commercial scale. At this scale, the Group's forecast shows that the business would be generating significant operating profits. At the date of approval of the Group's financial statements, the Group has yet to secure the additional funding requirements set out in the business plan and is, therefore, not fully-funded at the current time. The Group requires additional funding early in the second half of 2012 to continue to meet its liabilities as they fall due and is in discussions with a number of parties regarding funding; its strategy is to pursue a number of financing alternatives in parallel to ensure that it has sufficient funds to sustain operations. Discussions have been progressing on a number of fronts, and the Group expects to be able to make an announcement with respect to further funding shortly.

In preparing the Group's 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 additional markets.

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 and other investors, as evidenced in 2008, 2009, 2010, and 2011;

·; the announcement of agreements with Chinese City Investments Limited to invest £20 million for a 20% stake in Phorm China, which is currently subject to closing conditions;

·; the potential to secure revenue commitments from new ISP partners;

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

·; the 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 and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.

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 Group's financial statements.

The Group's 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 ended 31 December 2011 can be found on the Investor section of the Phorm website.

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