READCLOUD LIMITED — Interim / Quarterly Report 2021

Mar 3, 2021

ReadCloud Limited

Australia's Leading eReading Solution

Half-Year Results Presentation March 2021

ASX : RCL

Disclaimer

This presentation has been prepared by ReadCloud Limited ("Readcloud"), based on information available as at the date of this presentation. The information in this presentation is provided in summary form and does not contain all information necessary to make an investment decision.

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Forward looking statements

This presentation may contains certain forward looking statements that are based on ReadCloud's beliefs, assumptions and expectations and on information currently available to ReadCloud's management. Such forward looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of ReadCloud to be materially different from the results or performance expressed or implied by such forward looking statements. Such forward looking statements are based on numerous assumptions regarding present and future business strategies and the political and economic environment in which they operate in the future, which are subject to change without notice. Past performance is not necessarily a guide to future performance and no representation or warranty is made as to the likelihood of achievement or reasonableness of any forward looking statements or other forecast. To the full extent permitted by law, ReadCloud and its directors, officers, employees, advisers, agents and intermediaries disclaim any obligation or undertaking to release any updates or revisions to information to reflect any change in any of the information contained in this presentation (including, but not limited to, any assumptions or expectations set out in the presentation).

1H FY21 Highlights

• H1 FY21 consolidated revenue ↑ 11% to $3.49 million (1H FY20: $3.15 million), with FY21 full-year revenue expected to be skewed to the second half as in prior years
• Completion of the acquisition and integration of College of Sound and Music Production ("COSAMP")
• 50 new school customers across both the School Curriculum and Vocational Education and Training ("VET") segments
• ReadCloud is now in over 530 school customers1 (↑ 51% from January 2020)
• Over 117,000 users1 on the ReadCloud platform (↑ 14% from January 2020), with user numbers set to increase in the coming weeks
• The Group is well capitalised, with $7.04 million cash and zero debt as at 31 December 2020

Full-curriculum segment

4

• 1H FY21 segment revenue ↑ 6% to $3.06m (1H FY20: $2.88m)
• 1H FY21 segment revenue affected by:
  • 22 new direct full-curriculum customer schools for 2021 (QLD, VIC, TAS, WA)
  • 4 lost direct full-curriculum customers that have moved to a single publisher model for their eBooks (lost eBook revenue $0.45m, negligible lost margin)
  • delayed school eBook purchasing decisions and sales orders (direct and Reseller schools) – this revenue will be picked up in 2nd half
  • publishers sympathetic to impact of COVID-19 on schools in 2020 offering significantly discounted digital reactivations
  • significant under-performance of an existing Reseller partner (lost schools)
  • COVID-19, with schools facing challenging priorities and this impacting marketing efforts
• Improved growth dynamics expected to return as COVID-19 restrictions are lifted and COVID-19 issues become less of a burden
• Two new Reseller partners for 2021 (Ziggies and Lilydale Books) successful in signing up new school customers for delivery of the fullcurriculum
  • notable wins include two prestigious private schools in Perth and a leading independent school in Melbourne
• On-boarding process for full-curriculum schools for the 2021 school year has gone well, leveraging new streamlined systems that ReadCloud has built into its back-end platform

Vocational Education & Training ("VET") segment

• 1H FY21 segment revenue ↑ 58% to $0.43m (1H FY20: $0.27m)
• Acquisition of COSAMP, the leading VET-in-schools provider of music industry qualifications, completed 28 October 2020
• Integration of COSAMP has gone well and the significant cross-selling opportunity is already being capitalised on
• COSAMP contributed revenue of $0.04m for 1H FY21, with a further $0.44m of invoiced auspicing fee revenue deferred to 2H FY21
• ReadCloud's existing VET business (Australian Institute of Education & Training, "AIET") has 30 new school customers for 2021 school year (VIC, QLD, SA & WA)
  • includes 2 existing ReadCloud direct full-curriculum customer schools that are Registered Training Organisationsin their own right – new revenue stream
• Some customer churn in the AIET business, mainly due to strict approach to compliance
• AIET contributed revenue of $0.39m for 1H FY21 (1H FY20: $0.27m), with a further $0.35m of invoiced auspicing fee revenue deferred to 2H FY21
• The enrolment process for VET school customers and students is well underway final school and user numbers for this segment to be ascertained following completion of student enrolments and VET subject choices in March
• As in prior periods, student auspicing fees for AIET VET courses being delivered in 2021, comprising the majority of AIET's auspicing fee revenue, will be invoiced to schools in late March / early April 2021

1H FY21 Results – Underlying EBITDA

($)	Note	1H FY21	1H FY20	1H FY21 vs1H FY20
Sales and fee revenue	1	3,179,785	2,964,130	7%
Less publisher & bookseller fees	2	(1,928,312)	(1,979,631)	-3%
Gross profit		1,251,473	984,499	27%
Gross profit (%)	3	39.3%	32.9%
Add: Other revenue	4	311,022	188,668	65%
Less operating expenses:
Advertising and marketing	5	(23,070)	(76,124)	-70%
Employment expenses	6	(1,471,981)	(1,254,050)	17%
Legal & compliance		(58,149)	(64,613)	-10%
Professional services expenses	7	(187,138)	(140,808)	33%
Telephone, internet & data hosting		(42,315)	(40,928)	3%
Travel expenses	5	(28,031)	(96,193)	-71%
Other expenses		(225,367)	(192,485)	17%
Finance costs		(6,416)	(2,839)	126%
Total operating expenses		(2,042,467)	(1,868,040)	9%
Add: Net interest expense / (revenue)		5,509	559
Underlying EBITDA*		(474,463)	(694,314)	-32%

• 1. Refer commentary on full-curriculum segment revenue page 4
• 1. $ Decline from prior comparable period reflects improved margins on eBook sales as a result of change in product sales mix (towards higher margin products in 1H FY21) and a new digital distribution agreement with a major textbook publisher
• 1. Gross profit % improvement a result of improved margins on eBook sales, increased software licence fee revenue (1H FY21 $0.44m vs 1H FY20 $0.36m) and increased auspicing fee revenue (1H FY21 $0.44m vs 1H FY20 $0.36m)
• 1. Comprises R&D tax incentive income and Federal Government cashflow boost
• 1. Impacted by COVID-19
• 1. Increase over 1H FY20 attributable to both the COSAMP acquisition ($0.09 million) and additional operational staff in both the VET and full-curriculum segments
• 1. Increase attributable to additional investment in RTO compliance monitoring and systems via the use of external consultants

* EBITDA adjusted for Interest, Tax, Depreciation and Amortisation, Sharebased payments, transaction costs incurred on the COSAMP and AIET acquisitions

1H FY21 Result – Balance Sheet

$	Note	31-Dec-20	30-Jun-20
Cash and cash equivalents	1	7,040,591	3,387,609
Trade and other receivables	2	3,231,137	597,366
Prepayments		95,193	55,946
Total current assets		10,366,921	4,040,921
Property, plant & equipment		244,700	111,385
Intangibles	3	5,769,030	4,450,488
Right-of-use assets		336,844	290,143
Total non-current assets		6,350,574	4,852,016
Total assets		16,717,495	8,892,937
Trade and other payables	4	2,219,941	389,416
Other current liabilities	5	966,232	356,571
Contingent consideration	6	250,000	-
Lease Liabilities		157,610	164,064
Total current liabilities		3,593,783	910,051
Non-current liabilities	6	389,992	183,553
Total liabilities		3,983,775	1,093,604
Net assets		12,733,720	7,799,333

• 1. Strong cash position at 31 December and zero debt. $5.96m (net of transaction costs) received from exercise of ASX-listed and unlisted options
• 1. December quarter typically the low point in the Group's cash cycle. 31-Dec-20 trade receivables balance reflects extended payment terms given to direct full-curriculum school customers in order to match schools' funding cycles
• 1. Intangibles include capitalised software development ($2.2m), goodwill ($2.21m for AIET acquisition and $1.15m for COSAMP acquisition) and other acquired intangibles
• 1. Mainly comprises amounts owing to publishers in respect of 1H FY21 eBook sales to full-curriculum schools
• 1. Comprises employee entitlements (31-Dec-20: $0.16m, 31-Dec-19: $0.15m) and contract liabilities / unearned revenue (31-Dec-20: $0.81m, 31-Dec-19: $0.21m)
• 1. Up to $0.40m in RCL shares payable to the vendors of COSAMP (present value $0.37m, $0.12m classified as non-current), contingent on defined revenue targets for FY21 and FY22

1H FY21 Result – Cash Flow

($)	Note	1H FY21	1H FY20	1H FY21 vs1H FY20
Receipts from customers	1	1,081,439	673,118	+61%
Payments to suppliers & employees	2	(2,293,685)	(2,342,819)	-2%
Research and development taxincentive refund		390,614	393,123	-1%
Interest income		907	2,280	-60%
Net cash used in operating activities		(820,725)	(1,274,298)	-36%
Payment for purchase of business	3	(1,033,155)	(360,000)
Payments for PP&E		(9,701)	(66,137)
Software development		(319,074)	(331,700)
Net cash used in investing activities		(1,361,930)	(757,837)
Lease payments –principal & interest		(96,711)	(45,770)
Proceeds from issue of shares (net ofcosts)	4	5,955,594	1,850,496
Repayment of borrowings		(23,246)	-
Net cash from financing activities		5,835,637	1,804,726
Net (decrease) in cash		3,652,982	(227,409)
Cash at the beginning of year		3,387,609	3,067,599
Cash at end of year		7,040,591	2,840,190

• 1. Receipts from customers ↑ 61% over the prior comparable period
• 1. Includes transaction costs of $0.13m associated with the COSAMP acquisition
• 1. $1.05m up-front cash consideration paid for COSAMP acquisition less $17k cash acquired
• 1. 1H FY21 represents proceeds received from the exercise of ASXlisted and unlisted options. Prior comparable period represents the proceeds (net of costs) from June 2019 share placement

Outlook

• ReadCloud platform users 117,000 as at the end of February 2021 (↑ 14% from January 2020), with user numbers set to increase (VET enrolments)
• The Group is well-placed to continue its strong growth, driven by:
  • a strong balance sheet ($7.04 million cash and zero debt) provides ability to continue expansion through targeted acquisitions and increased business development activities;
  • strong momentum in new school acquisitions in both the direct full-curriculum and VETin-school segments, especially as COVID-19 impacts reduce pressure on schools;
  • Increased investment and focus in the VET sector, supported by favourable recommendations in the Productivity Commission's recent report on the VET sector (released in January 2021), including a focus on improved career pathways encouraging more secondary students in Years 9 to 12 to undertake VET-in-schools programs;
  • organic growth within existing school customers driven by expanded usage of the ReadCloud platform and VET auspicing services across additional courses and year levels;
  • continuing success in cross-selling; and
  • accelerating digital adoption within both the full-curriculum and VET in school, especially after experiencing COVID-19 impacts.

* Lower rate of user growth reflective of the loss of Reseller school users, which are being replaced by higher margin direct full curriculum and VET-in-school users

Corporate Snapshot

ASX Code: RCL
Share Price (26 February 2021)	$0.51
Market capitalisation (@ 51 cents)	$60.2m
Shares onissue	118.3m
Options on issue (unlisted)	1.5m
Current cash (31 December 2020)	$7.0m

Board & Management		*Includesindirect holdings
Cristiano Nicolli	Non-Executive Chairman
Paul Collins	Non-Executive Director
Guy Mendelson	Non-Executive Director
Lars Lindstrom	Executive Director (CEO)
Darren Hunter	Executive Director (CIO)
Luke Murphy	Chief Financial Officer
Melanie Leydin	Company Secretary

Substantial Shareholders
Group*Thorney	10.9%
Kinderhook 2 LP	8.5%
Lars Lindstrom	7.2%
Holdings/Darren Hunter*Hunmar	6.0%
West Elk Partners LP	5.8%
Top 20	74.4%
and management shareholdings*Total Board	19.8%

Key Investment Highlights

• ReadCloud is the leading digital education solution for Australian schools, delivering clear educational benefits and saving schools and students money
• ReadCloud is growing rapidly with over 117,000 users in over 530 school customers and continues to grow market share
• Strategic acquisition of COSAMP provides a valuable addition to ReadCloud's VET-in-schools business together with significant cross-sell opportunities that are already being capitalised on
• Strong momentum in new school acquisitions in both the direct full-curriculum and VET-in-school segments expected to continue, especially as COVID-19 impacts reduce pressure on schools
• Large market opportunity in Australia with an immediate target market of 2,775 secondary schools with 1.6 million students and 236,000 students yearly taking VET courses in school
• ReadCloud's highly scalable platform is leveraged to improving operating margins as course and user numbers increase
• A strong balance sheet ($7.04 million cash and zero debt) provides ability to continue expansion through targeted acquisitions and increased business development activities, particularly in the VET segment
• Experienced and motivated team with a clear growth strategy

ReadCloud Limited

284 Bay Street Brighton VIC 3186

Lars Lindstrom | CEO lars@readcloud.com

ASX : RCL