August 31, 2020 YPB Marketing

H1 2020 net operating loss improves by 52%

  • H1 2020 reported net loss down 52% on pcp
  • Improved result driven by lower costs
  • China new business momentum grew in H1 2020
  • Significant tech progress with MotifMicro and Connect platform

Product authentication and consumer engagement solutions provider YPB Group Limited (ASX:YPB) presents highlights of activities for the half year ended 30 June 2020 (H1 2020).

H1 2020 saw a further significant improvement in YPB’s financial performance.  Net operating loss of $1.7m was a 52% or $1.9m improvement on H1 2019.  The results of timely cost actions have set the Company up with a lean effective cost base.

  1. Financial performance continues to improve

Past and present cost action reduces loss despite revenue challenges

COVID-19 sidetracked execution of YPB’s H1 2020 plan.  As budgeted, revenue from Retail Anti-Theft (RAT) was zero in H1 2020 following the closure of that business late in H1 2019 and was the major factor in the 41% or $0.244m revenue fall on pcp.  However, COVID-19 also crimped planned revenues, interrupting normal customer ordering and new business development.

As noted, costs were down across the board falling 52% as reported or down 30% adjusted for exchange rate (FX) movements.  This was the benefit of:

  • the major refocus and reshaping of operations over the past two years;
  • further aggressive cost action and temporary staff salary reductions in the half as COVID-19 struck first in China and then in Australia and SE Asia; and
  • Directors moving to zero Director fees from April to December 2020 inclusive.

Cost of sales (i.e. direct product costs) also fell significantly to $10k from $152k, again reflecting the product costs of RAT in the prior period.

The mirror image of the low cost of sales was the very high gross margin in H1 2020.  The high intellectual property content of YPB’s revenues accounts for the 97% gross margin achieved in H1 2020 up from 75% in the prior period where RAT gross margins of circa 30% dragged down the average.

Very high gross margins are likely to be sustained and are a key element in YPB’s plan to profitability, as profit leverage to revenue growth is extremely high – effectively every incremental revenue dollar falls straight through to profit.  As revenue growth is achieved, the company’s profitability can improve rapidly.

Virtually all cost lines were down, many significantly.  The biggest contributor to the cost fall was lower labor costs (aggregated as consulting fees + directors fees + employment expenses) down circa $703k or 34% in H1 2020.  This was part staff rationalisation, part permanent salary cuts, part temporary and voluntary salary cuts (April through June), and lower capital raising costs.  The group also received subsidies from the government of local jurisdictions relating to the various COVID-19 financial assistance packages in Australia and China, but the quantum was immaterial at $21k.  Please note the increase in Directors’ Fees was for active new business development work a Non-Executive Director and was paid in the form of equity (performance rights) not cash.

A notable increase in professional fees was driven by unavoidable experts’ reports demanded by compliance requirements.

  1. Operations – momentum improving

China showing strong promise

The key operational development in the half was further new business momentum in YPB China, despite severe COVID-19 restrictions.  Although the potential is not yet fully proven, YPB China is unearthing significant new interest in YPB’s established T2 tracer-scanner technology driven equally by YPB’s excellent reputation in Tracer technologies and a heightened awareness of the need for product security and provenance.

The China operations were restructured last year with the cost base reduced significantly.  The sales function was more closely integrated with the skilled Australian sales team and new sales strategies and tactics were developed.

A key element of the strategy was to focus almost exclusively on channel partners – major suppliers of parts, packaging and other inputs to major branded consumer goods manufacturers both within China and internationally.  These intermediaries have privileged access to brands and offer leveraged – one to many – market access for YPB.

Key new channel partners were signed in H2 2019 and new parties have come on board in H1 2020.  More are likely.  Some neglected prior YPB relationships have also been rekindled.  Structured account management, previously a key weakness of YPB, has been instituted and is expected to drive solid recurring revenues from these relationships.

Via the channel partners, YPB now has a toe-in-the-door of some very high volume industries and the focus is now on driving volumes significantly higher.  This will take time, but the building blocks are being assembled for significant growth in YPB China.

Importantly, these opportunities relate primarily to the established T2 tracer-scanner technology for maintaining product security in supply chains.  The level of interest is indicating that there may well be a significant opportunity for this technology in China, as was identified at YPB’s inception, and that the conditions for market acceptance are now more propitious.

Importantly, the potentially bigger, consumer-facing opportunity of MotifMicro1 is well advanced in its path to commercial development and trials with PanPass, one of China’s largest security label printers.  COVID-19 has slowed both MM1 technical developments and high volume trials but major progress was made in H1.  Release of a fully commercial MM1 product is anticipated late in H2 2020, although it may slip into H1 2021.

Nevertheless, the preparation for commercial release and revenue generation from MM1 in China is well progressed and it is expected to begin generating revenues quickly upon its release.

SE Asian possibilities

Late in H1 2020 a new sales resource was added in Thailand.  Early progress in new business development has been encouraging and may bear fruit in H2 2020.

During H1 2020 an innovative MM1 high security shrink wrap was developed with OPP Gravure Printing Co. Ltd in Thailand.  Further development activities have been severely hampered by COVID-19 in Thailand but mutual interest remains in developing the relationship further.

Australia scores on a very heavy wicket

Prominent new customers in Nature One Dairy and Nature’s Care signed and commenced revenue contribution in H1 2020 with product bearing YPB technology released in the Australian domestic and also Export markets.  This was achieved despite the impediments of COVID-19 in Australia and Thailand and is testament to the dedication and determination of our commercial and technical teams.

Our channel partner relationships in Australia are now strong but have yet to translate into significant new business.  COVID-19 has certainly impeded new business progress but the willingness of brands to commit budget to product authentication and consumer engagement solutions in Australia remains unclear.  The cost base in Australia is low and will not be increased unless the revenue case with high volume Australian brands is proven.

  1. Technical – major advances with Connect and Motif1Micro

During H1 2020 the new generation Connect 2.0 consumer engagement platform was released.  It is a newly architected, user friendly, lower cost of operation product and went live in the half.  The migration of existing customers from Connect 1.0 to 2.0 is ongoing and expected to result in lower hosting and other operating costs for YPB once the migration is completed by the end of 2020.

Major progress was also made on MotifMicro1 smartphone readability culminating in the announcement on July 27 that the critical technical milestone of Android smartphone readability of the proprietary MotifMicro1 particle had been achieved.

Importantly, this technical step was also a key commercial milestone, with the addition of Android functionality to the existing iOS capability of MotifMicro a major technical hurdle on MotifMicro’s commercial development path.

The Android capability is included in the 2nd generation MotifMicro1 APP which was also released at the end of July.  Smartphone readability development is highly dependent on Artificial Intelligence skills and capacity and our Bangkok team has advanced AI skills.

  1. Funding

As of 30 June 2020, the Company held $532k in cash and cash equivalents. During the half year-ended 30 June 2020, the Company was provided with $1,200k of loans from an entity associated with Mr. John Houston, of which $600,000 was subsequently approved by shareholders post period end to convert to equity.   New equity totaling $800,000 was also raised post period end.

  1. Outlook

COVID-19 and its aftermath continue to make estimating the timing of new sales revenues and cash receipts unusually difficult.  Nevertheless, present indications are that H2 2020 revenue should stabilise at H1 2020 levels, and possibly grow, but with a heavy Q4 weighting.  The range of possible outcomes is wide and dependent on ‘normality’ resuming for YPB’s customers and their ordering patterns, and the timing of new business wins which in some instances are still being hampered by COVID-19 restrictions.

Costs are likely to rise somewhat in H2 2020 as the temporary COVID-19 salary reductions ended on June 30th.  But other cost items are likely to remain relatively flat and will remain tightly managed.  Changed work practices across the business community will permanently reduce a range of costs and improve staff productivity.