SmartPay (NZX: SPY), a leading provider of payments and transactional solutions in New Zealand and Australia, today announced its financial results for the year ended 31 March 2012 together with the announcement that it has substantially completed a positive recapitalisation and restructure of the business. This restructure is consistent with the new Chief Executive's previously advised strategy to move to a new business model based on sustainable, annuity style revenue and cash flow.
2012 Full Year Result
The full year result has revenue down 39% to $28.9m; an EBITDA loss of $1.95m and a Net Loss After Tax of $12.1m.
This result is a direct consequence of the following main components:
A maturing of the growth in the New Zealand terminal market following the completion of an industry wide terminal upgrade cycle which saw strong growth in the business in the prior period.
The previous business model and accounting policy required that the majority of revenue from rental contracts be recognised at the time of signing the contracts. While this model generated significant revenue and profits in the previous periods where the market was characterised by strong growth through the large volume of terminals deployed to meet the industry upgrade program, once this was completed the growth slowed dramatically making it difficult to continue to generate the level of new contracts necessary to maintain the previous level of revenue.
Slower than expected growth into the Australian market, largely due to funding constraints.
The significant restructure of the business by the new Chief Executive which included significant write-downs of balance sheet items to ensure that the business goes forward into the new business model, after the capital raising, with a strong balance sheet.
The total value of these adjustments amounts to $6.1m of which:
� $3.1m is reflected as a reduction in EBITDA including:
o write downs / write offs of stock ($1.5m);
o write downs / write offs of a number of other items including capital raising fees; legal and consulting fees; employee restructuring costs ($1.6m in aggregate);
� $3m is reflected as costs below EBITDA including:
o write downs / write offs of software ($1.4m)
o write down in the value of our FIVO Wifi assets ($0.5m);
o write off of finance charges capitalised under the previous model ($1.1m).
Importantly all these adjustments are non-cash in nature. Without these non-cash adjustments the business would have reported an EBITDA profit and a much lower bottom line loss.
Recently appointed Chief Executive, Bradley Gerdis, commented as follows "This result needs to be viewed in the context of the opportunity I saw when I invested in the business around 5 months ago".
"What I identified was a business with an enviable position in the New Zealand and Australian payments industry and which through its significant deployed terminal fleet should be generating a significant level of cash flow and profit. However this wasn't the case due to a combination of the structure of the balance sheet and the revenue recognition policy which left the company exposed with limited financial resources to grow outside the maturing New Zealand market".
"The opportunity I identified was to restructure the business through a combination of a balance sheet restructure / recapitalisation and a change in the business model to retain the monthly contracted cash flows from terminal rentals within the business. I am pleased to announce today that in a relatively short period of time we have achieved what we set out to do".
"Today we announce that we have secured both equity and debt commitments to facilitate the complete recapitalisation and restructure of the business. Through this recapitalisation we will be unwinding the previous rental securitisation model and bringing all the cashflow from our extensive terminal rental fleet back into the business. Consistent with this change in the nature of our business we will also be changing our accounting policy to recognise our rental revenue when received which will move the company to a stronger position with sustainable revenue and cashflow".
"This signals a significant and immediate turn-around of the business which will unlock immediate value for shareholders and position the business for the tremendous growth opportunity we have ahead of us, particularly in Australia which is a market I have direct experience in and is our key focus for growth."
"In addition to the recapitalisation of the business, we have made a number of other significant changes in the business which strengthen it and position it for growth, including:
� Board changes, including the proposed appointment of new Australia based industry focused Chairman; and
� Senior management changes including the appointment of a new Chief Operating Officer.
"It cannot be over emphasised that this is a "good news" story. The result announced today was simply a necessary conclusion to the previous model to enable the positive re-launch of the business to capitalise on a growing market opportunity. This is supported by our ability to complete the significant capital raising announced today where we have secured commitments for NZ$13m of equity capital from professional and sophisticated investors at a premium to recent trading levels."
It is worth noting that the consolidated result masks the positive progress we have achieved in our Australian business over the period with Australian revenue up 105% to $6.3m.
This is pleasing progress particularly given the challenging financial constraints of the company over the period.
2013 Financial Guidance
As an illustration of the immediate benefits of the restructure and recapitalisation of the business and the change in accounting policy as reflected above, once the recapitalisation is complete and rental revenues are brought back into the business, the Board expects the business to generate revenue in the order of $17.5m and EBITDA of $7.5m on an annualised basis.
These numbers are pre-growth in the business and are simply reflective of the current revenue and cash flows generated by the existing terminal fleet and other current revenue items once they are all brought back in-house and on the basis that revenue is recognised as it is received. Depending on the nature and timing of the growth achieved the prospects are to materially grow these numbers.
The key point to note is that these numbers represent a sustainable, annuity style business model which provides a solid foundation from which to grow.
Completion of Equity Raising
The Board of SmartPay is pleased to announce that it has secured commitments for subscriptions of NZ$13m of new shares at NZ$0.115 per share.
Subscribers to the placement include both institutional and private investors across New Zealand and Australia.
Recently appointed Chief Executive, Bradley Gerdis, commented "the quality of investors we were able to attract in this placement and the fact that we were able to raise the money at a premium to recent trading levels is testament to the solid foundation of the company and recent positive changes we have made in the business and reflects the value to be released through this recapitalisation and restructure of the business."
The placement of the shares is subject to shareholder approval which will be sought at a Special General Meeting of shareholders due to be called shortly.
Completion of Debt Raising
The Board is further pleased to announce that it has secured NZ$25m of new banking facilities from the ASB Bank to facilitate the capital restructure and provide growth funding.
The banking facility consists of two components:
1. NZ$20m 3 year facility for the recapitalisation and restructure of the balance sheet; and
2. NZ$5m growth capex facility.
The debt facility is fully committed and is subject only to shareholder approval of the NZ$13m equity placement and the satisfaction of usual conditions precedent which are largely procedural in nature.
Gerdis commented "the ASB have been fantastic in their rapid engagement and understanding of our needs and the opportunity to create value".
"In addition to supporting our New Zealand business the bank is supporting our Australia growth plans through the provision of a growth capex facility to assist us in funding terminal growth into this large market".
The funds raised under the equity placement and new debt facilities form the final piece of a recapitalisation plan that will see a complete restructure of the balance sheet including the repayment of high priced securitisation and mezzanine debt. The company also intends to redeem / convert the company's convertible notes. On this basis the only debt on the balance sheet post the recapitalisation will be the ASB facility which is at a very competitive interest rate.
The effect of this recapitalisation plan will be to maintain the contracted monthly rental cash flows from the company's extensive EFTPOS terminal fleet within the business resulting in a move away from the previous model of lumpy, unpredictable cash flow to an annuity style recurring cash flow model.
Chief Executive, Bradley Gerdis, says "this is an outstanding result and entirely consistent with our stated objectives when I joined the company earlier this year."
"The recapitalisation of our balance sheet significantly reduces our cost of capital and de-risks the business by moving away from the previous model of discounting the rental book cash flows to external financiers which resulted in lumpy and unpredictable cash flow".
"The high cost of capital of the previous funding model meant that a significant amount of the value generated by the business was leaking to its debt financiers with very little remaining for shareholders. We are now able to move to a model of maintaining the contracted rental cash flows within the business which results in smoother, sustainable, annuity style cash flow and sets the foundation for profitable growth and real shareholder value".
New Industry Focused Australian Chairman
The Board is pleased to announce the proposed appointment of Mr Ivan Hammerschlag as its new Chairman.
It is intended that Mr Hammerschlag will join the Board following the Special General Meeting of shareholders due to be called shortly to approve the equity placement.
Mr Hammerschlag is an experienced and successful Australian businessman and has chaired the boards of a number of successful Australian companies, both private and publicly listed.
Mr Hammerschlag is currently the Executive Chairman of RCG Corporation which is a retail conglomerate listed on the Australian Stock Exchange. When Mr Hammerschlag joined RCG in 2006 the company had a market cap of $8m and was suffering severe financial stress. Today the business is highly profitable with a market cap in excess of $80m.
Mr Hammerschlag's previous experience includes:
Owner of Freedom Furniture prior to its listing on the Australian Stock Exchange;
Co-owner of a retail software company, Divergent Technologies, which grew through a number of acquisitions before finally listing on the NASDAQ; and
Executive Chairman of five private equity backed companies in Australia.
Mr Hammerschlag has committed a substantial personal equity investment to become a shareholder of SmartPay around the time of his appointment. In connection with such subscription and Mr Hammerschlag's proposed appointment to the Board of SmartPay, SmartPay intends to grant Mr Hammerschlag incentive options comprising 2 million options at an exercise price of 15 cents per share exercisable between 1 January 2013 and 31 December 2014, 2 million options at an exercise price of 20 cents per share exercisable between 1 April 2013 and 31 March 2017 and 2 million options at an exercise price of 30 cents per share exercisable between 1 April 2014 and 31 March 2018. The terms of the options will otherwise be similar to the terms applying to the options granted to Haymaker Investments Pty Ltd (Bradley Gerdis) earlier this year.
Said Gerdis of Hammerschlag's appointment "We are extremely pleased to have secured the services of a Chairman of the calibre of Ivan. The core market for our payments solutions is the retail industry so to have the skills and profile of a leading Australian retailer on our Board will no doubt be a real asset to the company going forward."
Mr Hammerschlag commented "I am delighted to be invited to join the Board of SmartPay and in particular to support Brad in his vision for the company".
"In my many years of experience in the retail industry we are now seeing an increasing demand from merchants for innovation and value add functionality in their payments technology which creates a significant opportunity for SmartPay as a leader in this field".
"With the recapitalisation of the business and new growth funding in place I look forward to working with Brad and his team to take the business through its next growth phase."
The Board would like to note their appreciation for outgoing Chairman Wayne Johnson's long standing support of the business and particularly his contribution in facilitating the recent events and changes within the business.
Other Board Changes
Ian Bailey has today confirmed to the Board his resignation as a Director of the Company.
Bradley Gerdis will join the board as Managing Director following the Special General Meeting of shareholders due to be called shortly to approve the equity placement.
The Board would like to note their appreciation for Ian's dedication and leadership in building the business to its current position as a market leader in the New Zealand payments industry and facilitating the recent changes in the business.
Appointment of New Chief Operating Officer
The Company is pleased to announce the recent appointment of Mr Rod Severn to the position of Chief Operating Officer.
Rod is the first senior appointment made by Bradley Gerdis since his appointment as Chief Executive and is consistent with the previously stated objective to make a small number of senior executive appointments to support the evolving strategy for the business.
Rod joined SmartPay as Chief Operating Officer at the end of March 2012. He brings to SmartPay over 20 years of experience in the IT industry.
Prior to joining SmartPay, Rod's roles included:
� Sales Director for Maxnet, a NZ based full data centre and cloud virtualisation company;
� State Manager, NSW for Sun Microsystems where he managed 135 people across sales (hardware and software), technical, professional services and field roles;
� Country Manager for Sun Microsystems New Zealand; and
� Other senior sales and management roles including: Computer Associates, Fuji Xerox and Memorex Telex.
Said Gerdis of Severn's appointment "We are extremely pleased to have secured the services of Rod to lead the operational development of our business".
"This is a critical role for the successful delivery of our strategy and Rod's deep experience and track record of success in senior technology sales roles is already evident in some of the positive outcomes he has achieved in his short time in our business".
The company has resumed its plans to list on the Australian Stock Exchange and will proceed with the process immediately following the shareholders meeting to approve the capital raising.
The Board anticipates that the Company's shares will be dual listed on the ASX and NZX by the end of this calendar year.
The Company's previous accounting policy has been to recognise the majority of the revenue from its rental contracts up front in the period in which the contracts are signed. Under this methodology revenue was recognised up front on the signing of a contract as a finance lease transaction. This was consistent with Generally Accepted Accounting Principles (GAAP) for the nature of the business to date.
Going forward, following the restructure of the business, the business model will reflect that of a service and operating lease model. Accordingly the Board intends to change the accounting policy to reflect this through accounting for revenue when it is received over the life of a contract.
The benefit of the new accounting treatment will be to smooth revenue over the term of the rental contracts and better match revenue to costs.
Importantly the financial results released today were based on the previous accounting policy and revenue recognition model and as such will not be comparable with the new basis going forward.
Gerdis commented "the previous revenue recognition policy, while consistent with the nature of the business in the past as it followed the previous funding structure, is not appropriate for the business going forward. The benefits of recognising revenue when received rather than up front will facilitate the reporting of a more sustainable revenue line which will flow through the financial statements. It should also make our financial statements easier to understand which should promote investor support".
Strategy Update and Outlook
As a significant participant in the New Zealand payments industry and with a growing profile into Australia, SmartPay is now better placed than ever to capitalise on an increasing opportunity set.
Chief Executive, Bradley Gerdis, comments: "This is a complete re-launch of the business off a very solid operational foundation. We go forward with a new senior management team, a new Chairman, new board members, a number of new and supportive shareholders and a restructured balance sheet".
"When I joined the business in January as both Chief Executive and a major shareholder I saw a significant opportunity to build on the solid operational foundation already in place to grow a substantial business in a space I know well after having built a similar business from start-up to become a major player in the Australian payments industry".
"At the time of my initial engagement with SmartPay I recognised that the business faced some immediate challenges which needed to be addressed before it would be able to properly capitalise on these opportunities, the most pressing of which was its balance sheet and capital structure".
"In a relatively short space of time that work is now substantially complete and with all these positive changes in place the business is now correctly structured and well resourced for growth".
"Of course this is only the first step in a much broader strategy to create value for all shareholders. The next step is to add scale to extract the benefits of the operational leverage inherent in the existing platform".
"In terms of the broader strategy, the opportunity into Australia is real, sizable and immediate. This is expected to include strong organic growth which will in all likelihood be accelerated through strategic acquisitions aimed at fast tracking our capability, resources and scale into this market which has the potential to significantly exceed our current New Zealand business in terms of scale over time".
"The focus in New Zealand is to continue to build on our leading market position with a particular focus on extracting incremental value from our extensive existing merchant base".
"The business has an enviable reputation for technology innovation, a function of our existing IP base and our internal technology development capability. This is a core differentiator and will form the basis for the delivery of additional revenue generating products to our existing and growing merchant base".
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