RM2.L Regulatory News (RM2)

28 September 2016

RM2 International S.A.

Interim Results

RM2 International S.A. ("RM2" or the "Company"), the sustainable composite pallet innovator, announces its unaudited results for the six months to 30 June 2016.

Financial Highlights

Operational Highlights

John Walsh, Chief Executive Officer of RM2, commented:

"The first half of 2016 has been a period of significant strategic progress for RM2. In March, Canada's largest retailer, Loblaw's, began accepting RM2's pallets in its supply chain. This was quickly followed by an agreement with Zhenshi for the production of our pallets in China at a significantly reduced cost. After the period end, we struck a further agreement with Jabil for the mass production of our pallets in Mexico. When fully operational, this will mean that RM2 will have a well-balanced manufacturing capability in both North America and Asia, allowing us to flex production more efficiently between two highly qualified and professional manufacturers to better meet the demands of our customers. 

"Demand for our innovative and environmentally friendly BLOCKPal pallet remains strong and we are in advanced discussions with a number of new customers. We expect to make a number of further announcements in the coming months."

For further information, please contact:

Notes to Editors

RM2 International S.A. specialises in pallet development, manufacture, supply and management to establish a leading presence in global pallet supply and improve the supply chain of manufacturing and distribution businesses through the effective and efficient use and management of composite pallets. It is quoted on the AIM market of the London Stock Exchange under the symbol RM2.L.

For further information, please visit www.rm2.com 

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position

Consolidated statement of changes in equity

Consolidated Statement of Cash Flows

Notes (unaudited) to the Interim Consolidated Financial Information

Corporate information

RM2 International S.A. (the "Company") is a limited company (Société Anonyme) incorporated and domiciled in Luxembourg with the registration number B132.740. The registered office is located at Rue de la Chapelle 5, L1235 Luxembourg. The Company is the ultimate parent entity of the RM2 Group (the "Group").

The Group is principally engaged in developing, leasing and selling shipping pallets and in providing related logistical services.

This unaudited interim consolidated financial information does not constitute statutory accounts.

Basis of preparation

While being compliant with AIM Rule 18 minimum requirements, the unaudited interim consolidated financial information does not include all the information and disclosures required in the annual financial information, and should be read in conjunction with the Group's historical financial information for the year ended 31 December 2015.

The accounting policies and basis of preparation adopted are consistent with those followed in the preparation of the Group's historical financial information for the year ended 31 December 2015. None of the newly applicable IFRS standards and amendments had an impact on the Group's interim consolidated financial information.

Early adopted standards

The Group did not early adopt any new or amended standards and does not plan to early adopt any of the standards issued but not yet effective.

Significant accounting judgements, estimates and assumptions

When preparing the unaudited interim consolidated financial information, Management undertakes a number of judgements, estimates and assumptions about recognition and measurement of assets, liabilities, income and expenses. The actual results may differ from the judgements, estimates and assumptions made by Management, and will seldom equal the estimated results.

The judgements, estimates and assumptions applied in the interim consolidated financial information, including the key sources of estimation uncertainty, were the same as those applied in the Group's historical financial information for the years ended 31 December 2015.

Going Concern

The Group's financial result for the first half of 2016 was a loss of USD 24.0m and the cash outflow was USD 30.2m, mainly attributable to the manufacturing activity during the first three months of the year. Cash reserves at 30 June 2016 were USD 4.3m. Following the receipt of the proceeds from the issuance of convertible preferred shares, the cash balance at 31 August 2016 was USD 18.4m, excluding restricted cash.

The financial performance of the Group was again heavily impacted by manufacturing activities during the first quarter. The re-sizing of the manufacturing operations in Canada, initiated in early January 2016, generated a drop in the cost per unit by circa 20%, but the absolute value of production cost remained too high to be sustainable. The factory produced significantly above the standard cost, contributing more than USD 12.0m to the operating loss of USD 24.0m. Following the suspension of production in Canada, the plant's headcount continues to decrease, and at end of August 2016 was down to 53. The plant's cash outflow consists of payroll, rental of building and clearing the accounts payables backlog and is now below USD 900,000 per month.

The precise timing of the commencement of manufacturing in China is principally dependent on the lead-time required to clear customs for the equipment sent from Canada. The pultrusion machines shipped from Canada on July 15th are currently awaiting customs clearance in Shanghai. The Group is actively working with Zhenshi on revisions to their agreements arising from the review by the Customs authorities and on preparing answers to other queries raised by the Customs authorities. Once these matters are attended to and the initial shipment is cleared, the Group will send further Fabrication, Assembly and Coating equipment to China. The equipment will be housed in a 20,000 square metre facility to be built out by an affiliate of Zhenshi. The RM2 production process will utilise 10,000 square metres, leaving spare capacity for future expansion.

The commercial pipeline remains promising and the inventory built prior to the cessation of production is being allocated to major customers. A significant sale of pallets, to be delivered in Q4 2016 is under signature process with a major US-based company. The Group continues to conduct pre-sale trials in the US of its BLOCKpal product among international companies in retail, food & frozen industries and FMCG sectors.

The business plan and cash flow forecast for the next 12-month period starting from June 1, 2016 which is considered as the going concern analysis period, have been updated by management using the same conservative assumptions used in the last going concern assessment. Management confirmed recurring net cash outflows of c. USD 2.0m per month (including both commercial entities and the plant). The expected sale of pallets in Q4 2016 is not factored into the net monthly cash outflow of USD 2.0m and could bring additional cash inflows up to USD1.0m per month in the course of 2017, subject to the delivery schedule required by the customer. The one-time-costs relating to the transition to China previously estimated at USD 8.8m now amount to USD 9.9m as the Group has decided to upgrade some equipment before commissioning. At the end of August, only USD 1.6m has been paid regarding these one-time-costs.

While there are currently material uncertainties as mentioned in the FY2015 financial statements which may cast significant doubt on the Group's ability to continue as a going concern, it is possible that the Group may be unable to realize its assets and discharge its liabilities in the normal course of business. Management has, however, identified four strategic cash-contribution-projects, any one of which will contribute significantly to ensuring the going concern of the Group. In addition to the significant sale of pallets to be delivered before year-end, management has undertaken a better monetization of the current pool of pallets and the real estate building in Switzerland. Further, management continues to work towards the placement of an additional USD 10.0m of convertible preferred shares as authorized by the General Assembly. Depending on which combination of these initiatives is realized and their related size, the Group may recognize by year-end adequate accounting impairment (non-cash items) on the values of these assets. However, these four items allow the Group to confirm its confidence in the going concern status of the Company through June 2017 and beyond. These assumptions are the Directors' best estimate of the future development of the business. The Directors are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future and accordingly, continue to adopt the going concern basis in preparing the consolidated financial statements.

Business review and Key Performance Indicators

The business report considers the key performance indicators to be the levels of production, the sales or leasing of pallets and the cash reserves of the business.

Following the signature of the manufacturing agreement with the Chinese partner Zhenshi in April 2016, the Group initiated the decommissioning of equipment at the Canadian manufacturing site as of 4 April, 2016, producing only marginal quantities of samples, with determination of the future of the Canadian site remaining for further consideration by the Board. Approximately 92,000 pallets were produced in Canada in the first four months of 2016. The addition of new manufacturing equipment as forecasted amounted to USD 5.0m., bringing the net book value of industrial assets to USD 40.0m.

As the Group moves toward an outsourced production model, the Group has carefully managed the inventory and the commercial deployment over the first half of 2016. 20,000 pallets have been deployed in the field, taking the total active pool size to 250,000 pallets. The pallet inventory has grown to 160,000 pallets, which will be allocated to future contracts until outsourced production starts in the course of 2017. The revenue generated by the lease activity in the first half of 2016 was USD 2.7m, which almost equals the full year 2015 rental revenue. The Group expects to contract a significant sale of pallets in the last quarter.

The Group has announced the issuance of convertible preferred shares with a cumulative preferred 9% dividend payable each year, which has been supported by existing investors for USD 20.0m. Funds were received on July 18th, 2016.

Cash reserves, excluding restricted cash, at 30 June 2016 were USD 4.3m (Dec 2015 USD 34.5m).

Cash reserves, excluding restricted cash, at 31 August 2016 were USD 18.4m.

Significant events and transactions

The Group's management believes that the Group is well positioned despite the continuing difficult economic circumstances. Factors contributing to the Group's manageable position are:

Overall, the Group is in a manageable position thanks to a high quality commercial pipeline, which will be deployed in a profitable way once an adequate financing is in place. The Group's objectives and policies for managing capital, credit risk and liquidity risk are described in its recent annual financial statements.

Revenues and segment reporting

The Group has only one operating segment for the disclosure of revenue. However the revenue analysis is broken down by revenue stream as disclosed here below.

Operating segment is reported in a manner consistent with the internal reporting used by the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segment, has been identified as the Board of Directors of the parent company that makes strategic decisions.

The Group has determined the operating segments based on the reports reviewed by the Board of Directors, which are used to make strategic decisions.

The Board of Directors is responsible for the Group's entire business and considers the business to have a single operating segment that represent the production, the sale and the rent of pallets including related logistical services. The asset allocation decisions are based on a single, integrated investment strategy, and the Group's performance is evaluated on an overall basis.

The internal reporting provided to the Board of Directors for the Group's assets, liabilities and performance is prepared on a consistent basis with the measurement and recognition principles of IFRS.

There were no changes in the reportable segments during the year.

The Group has a diversified customer portfolio. During the period there was 1 client who represents more than 10% of the Group's revenues.

Turnover

Geographical information

The parent company is based in Luxembourg. The information for the geographical area of non-current assets are presented for the most significant areas where the group has operations, being Luxembourg (country of domicile), rest of Europe and North America.

Non-current assets for this purpose consist of property, plant and equipment, investment properties and intangible assets.

Cost of sales

Factory absorption is the variance between actuals costs to produce pallets and the standard costs used in valuing the pallets produced in inventory and assets. The total cost of the production facility for which the total manufacturing capacity is circa 3 million pallets was not fully absorbed by production in the year and the under absorption is shown as a cost of sales.

Administrative expenses

Other operating income and expenses

Property, plant and equipment- other

Property, plant and equipment - Pallet pool

Intangible assets

*Goodwill relates to the Equipment Tracking acquisition in 2013

Inventories

Trade receivables

Trade payables

Interest-bearing loans and borrowings

Share capital and reserves

2016

There have been no issues of shares during the period.

2015

On 12 March 2015, 253,000 restricted shares were granted to certain employees. The restricted shares vest three years from the date of grant if the recipients are still employed by the Group at such time.

On 17 June 2015, the Company repurchased 333,334 previously issued restricted shares. These shares are held as non-voting treasury shares. These shares have been acquired from two former employees benefiting from the ESOP plan. These shares have been acquired at nominal value.

On 21 October 2015, the Company issued 75,000,000 ordinary shares at GBP 0.40 per share.

On 3 November 2015, the Company awarded 5,500,000 options over its ordinary shares of USD 0.01 each under its 2013 Stock Option and Incentive Plan to its non-executive directors. The options have an exercise price of 46.5p, being the closing share price on 2 November 2015, and duration of 10 years. The options will vest over a 3 year period in equal annual instalments but cannot be exercised until the stock closes above a thirty day average closing price of 100p.

On 3 November 2015, the Company awarded 800,000 options over its ordinary shares of USD 0.01 each under its 2013 Stock Option and Incentive Plan to some employees. The options have an exercise price of 46.5p, being the closing share price on 2 November 2015, and duration of 10 years. The options will vest over a 3 year period in equal annual instalments.

As at 31 December 2015, RM2's issued share capital was 398,030,156 Ordinary Shares of USD 0.01 each in the capital of the Company.

2014

On 6 January 2014 the Company completed the IPO issuing, 155,903,548 shares at £0.88 on AIM and receiving net proceeds, after payment of fees of USD 215,760,052. Following repayment of USD71,679,712 of development loans, fees and interest, the Company's balance sheet was free of debt (other than the mortgage on the office building in Switzerland) and retained USD144,080,340 to finance capital expenditure, production of inventory and overheads. The premium arising on the newly issued IPO shares has been taken to the Share Premium Account.

On 6 January 2014 the Company issued 4,157,428 Ordinary Shares at par to a significant shareholder.

On 24 January 2014, 2,316,405 restricted shares were granted to certain Directors having Performance Conditions (see note 22).

On 3 April 2014, 900,000 restricted shares were granted to a consultant subject to certain vesting conditions.

On 13 June 2014, 2,317,000 restricted shares were granted to certain employees, 1,000,000 of which were subject to Performance Conditions, and 1,317,000 of which were subject to certain vesting conditions.

On 22 September 2014 1,000,000 restricted shares were granted subject to certain Performance Conditions.

Following such issuances, the Company had 322,777,156 Ordinary Shares issued.

Ordinary shares issued and fully paid

As at 30 June 2015 and 30 June 2014, the share capital issued composed of one Class of Ordinary Shares having equal rights.

Share premium

Earnings per share

Basic earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares.

The following reflects the income and share data used in the basic and diluted earnings per share computations:

Management considers that there is no dilutive effect from the options as they would be negative.

Publication of announcement and the Interim Results

A copy of this announcement will be available at the Company's registered office 14 days from the date of this announcement and on its website.

This announcement is not being sent to shareholders. The Interim Results will be posted to shareholders shortly and will be made available on the website.

Subsequent event

Strategic alliance

On September 26, 2016, the Company announced that it has entered into a strategic cost-saving manufacturing agreement with Jabil Circuit, Inc. ("Jabil") for the mass production of the RM2 BLOCKpal pallet in Mexico. The agreement with Jabil, a global leader in digital manufacturing and supply chain solutions, will allow RM2 to scale production to market demand. Initial production is expected to be deployed in Q1 2017. Pallets produced at the facility will initially be deployed with RM2's customers in North America.

This agreement is complementary to the agreement announced in April this year for the production of pallets by Zhenshi Holdings Groups Ltd in China, allowing RM2 to address the volume demands of its clients. Production costs at the two facilities are expected to be similar. The initial aggregate annual outsourcing capacity of the Company remains at c1.5 million pallets.

Under this five-year, renewable agreement, the Company provides existing machinery on a bailment basis to Jabil and makes no initial capital outlay. Should the Company not order a minimum of 143,000 pallets per quarter, it is liable to a pay an under-production gross-up payment to Jabil to enable Jabil to recover USD2 million in capital commitment to the project.