RS2 Software plc - Full-Year Results

On 27 April 2020, RS2 Software plc published its Annual Report & Financial Statements for the year ended 31 December 2019.

Performance Overview

During 2019, RS2 generated revenues of €22.1 million, representing an increase of nearly 14% when compared to the adjusted corresponding figure of €19.4 million in 2018 (i.e. excluding a one-time release of deferred income of €5.6 million accounted for in 2018 in line with the implementation of accounting rule ‘IFRS 15 – Revenue from Contracts with Customers’). Revenues from licencing activities represented 61.4% of total revenues (2018: 80.8%) and amounted to €13.6 million (-13.4%). On the other hand, revenues from processing activities more than doubled to €8.53 million (2018: €3.73 million) reflecting RS2’s strategic shift from providing perpetual licences to managed services, merchant acquiring services and issuing services. Moreover, as the company continued to broaden its international presence, although revenues from Europe contracted by 16.7% to €15.3 million (2018: €18.3 million), RS2 registered considerable growth across all its other regions namely North America (€4.83 million compared to nil in 2018), the Middle East (+30.2% to €1.04 million), Asia (€0.8 million compared to €0.15 million in 2018) and South America (+36.3% to €0.16 million).

In view of the international expansion and growth in business, total operating costs surged by almost 31% to €24.1 million (2018: €18.4 million). In this respect, RS2 explained that it continued to invest heavily in its platform and IT infrastructure, administrative functions and high-talent HR, as well as global marketing and sales initiatives.

As a result, RS2 reported an operating loss of just under €2 million in 2019. Excluding deprecation and amortisation charges, RS2 posted a marginal negative EBITDA of €0.2 million.

Net finance costs increased to €0.12 million largely reflecting the inclusion of interest expense on lease liabilities (€0.07 million) following the implementation of the accounting rule ‘IFRS 16 – Leases’.

Overall, RS2 reported a pre-tax loss of €2.12 million compared to the adjusted pre-tax profit figure of €0.9 million in the 2018 financial year. After taking into account a tax charge of €1.09 million and a loss of €1.57 million pertaining to minority interests, the net loss for year amounted to €1.63 million.

The Statement of Financial Position shows that total assets increased by 13.7% to €31.8 million mostly driven by the recognition of ‘right-of-use’ assets (€2.56 million) as well as the increases in trade receivables (+€2.63 million) and intangible assets (+€1.46 million). On the other hand, accrued income and contract costs dropped by €2.04 million to €2.61 million whilst cash balances contracted by 28.8% to €2.42 million.

Total liabilities increased substantially to €17.7 million (31 December 2018: €10.7 million) reflecting the recognition of lease liabilities amounting to €2.56 million as well as the increase of €3.15 million in bank borrowings to just under €4 million which also includes the loan used to finance the acquisition of Kalicom Liebers Zahlungssysteme KG (“Kalicom”). As a result, net assets contracted by 8.4% to €17 million compared to €18.6 million as at the end of 2018.

Outlook

In his commentary, RS2’s CEO explained that during 2019, RS2 increased its customer presence in major markets and also won significant and strategic new contracts despite continuing to be selective in licensing sales and related services.

In Europe and Latin America, RS2 started the preparation of its direct acquiring business and is already engaged with merchants from different industries. In this respect, RS2 is in the process of obtaining its financial institution licence by the German authority which is expected to be issued during 2020. In tandem, the acquisition of Kalicom enables RS2 a quick start into the direct acquiring business with immediate capabilities of selling, installing and servicing terminals and processing card transactions in the German market for small and mid-size accounts in order to provide full merchant service offering and, at the same time, eliminating any dependencies on third parties providing these services. RS2 is also preparing to launch the services with its alliance partner for the travel industry in Q2 2020, starting with Europe and following up in Latin America and the rest of the world.

In North America, RS2 noted that it is well-positioned as a service provider by offering a global, complete and modern cloud-based processing platform for any form of payment, with rich functionality and API enablement. The company is in the final stages of signing several agreements in different industries in the US which will result in a significant increase in processing volumes. In fact, two clients are expected to go live in Q2 2020 and at least three more clients, of which one is significant, will go live in Q3 2020. RS2 will also be pursuing various opportunities to develop and grow the business through both organic and inorganic growth, by entering joint ventures, partnerships and direct acquisition/s.

In Latin America, RS2 continued to increase the services to its current customers in Brazil, Argentina and Colombia by supporting their regional expansion. The company also made reference to the partnership agreement with MoviiRed to offer consumers and merchants direct acquiring and issuing services as Colombia is a target market for RS2 in addition to the European and North American markets.

In the Asia-Pacific region, RS2 continued to increase its licencing and managed services to its customers, including delivering payment as a service for issuing and acquiring to financial institutions of any size and offering term licences for issuing and acquiring to large international banks. In addition, RS2 has been gearing to onboard into live production one of the largest financial institutions in Australia and New Zealand in Q2 2020.

Against this background, RS2 noted that although it is too early to fully estimate the financial impact of the ‘COVID-19’ pandemic’, it is expected that the 2020 financial results are likely to be negatively impacted, although the adverse effects will be partially mitigated by the company’s diversified business profile. In fact, RS2 is anticipating a growth in revenues in 2020 compared to 2019 as although some projects are being delayed, clients are holding on to their core initiatives. The licensing business is a stable business with a large part of the revenues already being contracted. On the other hand, the processing business will suffer a contraction in 2020 as new businesses, even though contracted, will not be rolled-out as planned due to the ‘COVID-19’.

The US business is on schedule to go live soon with its second line of business (namely ISOs and PayFacs clients) and is expected to be a significant contributor to revenue growth albeit at a slower pace than originally planned. Similarly, the launch of RS2’s own acquiring business will be delayed.

To mitigate the side effects from the ‘COVID-19’, cost containment measures have been put in place across all of the company’s operations and non-contracted capital expenditure plans have been postponed. Measures taken include curtailing of personnel costs, deferment of payments, and all other unnecessary costs. RS2 is also securing additional sources of funds and will have sufficient funds to meet its obligations.

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RS2 Software plc – Annual Report & Financial Statements for the year ended 31 December 2019.

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