PEL.L Regulatory News (PEL)

Date: 29 June 2018

On behalf of: Paragon Entertainment Limited ("Paragon", the "Company" or the "Group")

Paragon Entertainment Limited

Final Results Statement

Paragon Entertainment Limited (AIM: PEL), the attractions design, production and fit-out business, announces its final results for the year ended 31 December 2017.

Financial Summary

· Revenue of £14.8 million (2016: £14.4 million) grew by 2.6%

· Gross profit of £3.45 million (2016: £3.76 million) declined by -8.3%

· EBITDA of £0.30 million (2016: £1.19 million)

· Profit before tax of £0.12 million (2016: £0.31 million)

· Basic EPS of 0.06p (2016: 0.17p)

· Normalised EPS of 0.06p (2016: 0.48p)

Operational Summary and 2018 Outlook

· Paragon completed over 50 projects in 2017:

· Major projects completed include Hunger Games and Area Development at DPR, Little Explorers in Riyadh and Cairo, Egypt Galleries at National Museum of Liverpool, Cheshire Fire and Rescue Centre, National Trust for Scotland, Walking Dead at Thorpe Park, Hull 2017 Gallery and multiple Flip Out sites in the UK.

· Current projects include the Sheikh Abdullah Al-Salem Cultural Centre, Dig It!, and Saudi Arabia Basic Industries Corporation.

· In the UK, we are working on our Products for family entertainment centres, The Engine Shed, Tower of London, as well as multiple smaller projects. Further afield we are working on Hamleys and Euro Disney.

· We have further invested in Products in 2017 with work commencing on our first Dig It! Attraction for Emaar in Dubai and a project commencing at Bluewater in the UK.

· Sales and margin weakness in H2 2017 continued into 2018, and Paragon's first half of 2018 is forecast to end in a significant loss with a substantial recovery in the second half due to a notable acceleration in contracted work.

· Our current contracted order book is now at a record level with a good balance between UK and international work, and between short term and longer-term work.

Commenting on the announcement, Mark Taylor, Non-Executive Chairman of Paragon Entertainment said: 

"This has been a difficult set of results to present. We have a good track record of delivering what we say and we had commenced shifting the focus of our sales mix so as to diversify our sources of revenue. Despite our optimism in mid-2017, it is now apparent that the market started to deteriorate in the latter part of 2017 and into 2018. This meant that contract starts and payments were delayed at a time when our workshops were less efficient and not operating at capacity, and Paragon suffered a great deal of pain. Fortunately, the change in sales focus is starting to reap rewards and we face a rapid ramp up in workshop activity. We have taken the lessons of this experience on board and continue to take action to improve our operations. We currently have the best order book in our history, the support of our bank, and a bright future."

- ENDS -

Notes to Editors:

Paragon Entertainment Limited (AIM:PEL) is an award winning provider of attraction services from initial design production and consulting through to the fit out and installation of themed attractions, heritage exhibits, museums, aquariums and water parks, inter alia.

Paragon Entertainment is the holding company for Paragon Creative Limited.

The Group's projects have included:

· The design and build of Kidzania, London;

· The design and build of galleries at the Olympic Museum for the IOC in Lausanne, Switzerland;

· The design and build of the galleries at The National Museum of Kazakhstan;

· The design and build of Titanic Belfast;

· The Dig It! Brand;

· Little Explorers for MAF in the MENA region;

The Group listed on AIM in 2011.

Further information can be found at: http://www.paragonent.com/

CHAIRMAN'S STATEMENT

Our 2017 annual results have been a disappointment at a time when we felt we had moved into a new phase of business growth. In summary, we knew that our strategy of reducing Paragon's reliance on significant projects and customers was appropriate. However, a more difficult market than expected coupled with an inability to adapt our business sufficiently quickly caught us out. The anticipated demand has now started but the delay has caused Paragon considerable interim pain.

By understanding the reasons for our underperformance, we are well equipped to navigate the future.

Further details are set out in the Financial Review. The results reflect a year where we continued to grapple with several vexing issues but also a year in which there were some positive developments. The CEO's Report deals with the operational steps which have been taken in greater detail.

These challenges have been dealt with during a year of record revenue. However, the revenue has not been as profitable in the second half of the year but it is notable that we have managed growing operations against this backdrop. Clearly protecting and managing our margins will be a key focus in the coming year.

Three of our larger projects suffered from project delays, inefficiencies and delayed payments respectively, each of which is now finalised. These issues should have been identified earlier. Much of the control of this lies with Paragon's hands. We have strengthened our team with additional project management and financial skills, and we have increased our rigour. By way of example, we won a large museum contract earlier in 2018 which, during the initial design stage, we realised was not going to meet our required standards. We have therefore terminated the contract rather than become 'busy fools', something we may not have done or been able to do in prior years.

Sales momentum within a difficult industry environment slowed in the second half of 2017 and this slowdown continued into the first half of 2018. We forecast that we will make a significant loss for the first half year of 2018 and substantially recover it in the second half.

With the benefit of hindsight, we were slow to spot the severity of our own sales slow-down as we focused on better quality projects and we delayed addressing our cost base until 2018. Steps have now been taken to reduce costs and a new sales and estimating structure is in place. This should enable us to plan more effectively in 2018 and beyond.

In 2017 we continued to make a considerable investment in our strategy of diversifying beyond our core business of large once-off bespoke projects into smaller, more repeatable Products. These Products are often based on strong third-party brands which can be rolled out across multiple territories and they have started to deliver a rapidly growing share of total sales, vindicating this approach. We are well on track to meet our target of significantly increasing the share of revenue derived from Products. Our sales philosophy is underpinned by a strong partnership approach within our new Products focus and a new network of client relationships has been developed with an exciting future.

The losses incurred in the first half of 2018 have been significant and they have had an impact on the short-term cash flow of the company. As ever, we are dependent upon our contracting customers paying us on time and the directors remain confident that this can be managed. We have nevertheless managed to increase and extend our facility with our bankers, who remain supportive of the business. We achieved a clean audit report from our auditors with an emphasis of matter around short-term cash flow. This will remain an area of focus for our management team in the year ahead.

The positive news is that our efforts to boost our project and product pipeline been successful and we expect the second half of 2018 to be significantly improved. This gives us confidence that we have turned a corner. Our current order book is at a record level and supports our aspiration of achieving revenue of £20m in 2020 - our primary operational target is to ensure that this revenue is appropriately profitable.

In times like these it is appropriate to question the collective performance of Paragon. Indeed, there has been much introspection and the team has considered what needs to be done to get back on track. Their hard work and commitment in this volatile but exciting industry has been rewarded with criticism, pay cuts, redundancies and voluntarily forgoing incentives. I would like to thank the team for staying the course. 2018 will also be a difficult year but the momentum has swung and the team and I are confident that Paragon is well positioned for the future.

Mark Taylor

Non-Executive Chairman

REPORT OF THE CHIEF EXECUTIVE OFFICER

Strategic review

During 2017 we have focused the business on our unique core skill set, specialist 'design & build' of attraction projects, while developing and investing in our partnership and product based businesses. The focus of this strategy is to diversify the business from one-off bespoke, tendered projects into smaller, more repeatable Products. These Product and Partnership relationships have started to give substantially more certainty in our future earnings and during the course of the year we have invested heavily into this area of the business. Products require more up-front design and management input and cost, but then have less competition and are more standardised/ productised through production giving higher margins and certainty.

Our strategic aim is to have 50% of our business being delivered from non-traditional segments by 2020 while creating a better financial radar with more forward-looking information coming through better developed systems; a more reliable sales pipeline through focused project analysis prior to resource allocation in sales and estimating; and a more flexible production base with the ability to flex upwards and downwards to match our future order load.

Market review

A year of two halves has seen our revenue growth continue. The second half however did not match the first half, as revenue fell due to significant contract delays across the entire industry. We also had to work through some larger problematic projects with lower than anticipated margins.

In 2017, we expected that the proportion of revenue earned from Products would be greater. Though this plan is bearing solid fruit now, it did not happen fast enough in 2017. Project and contract delays affected the entire industry, so competition rose and general margins reduced. With a significantly lower order intake, customer contract delays meant we had excess capacity in Q3 but insufficient capacity in Q4 resulting in a large amount of sub-contracting out work which dented our margins.

While we maintain a strong presence in the Middle East, more of our order book is back in the UK. This is mainly due to the development of our Products segment and the demand for quality leisure to solve high street retail challenges.

Internal review

Our investment in infrastructure stalled mid-year following a complete reorganisation of the finance team. This resulted in:

· poor revenue forecasting through H2 2017 and Q1 2018; and

· delays in the introduction of significant software projects that would have given much clearer visibility on project cost overruns.

Despite these fundamental issues we have continued to develop a lower cost manufacturing system through:

· the recruitment of graduates in key areas such as project management and in our highly skilled Creative departments by teaming up with major universities; and

· growing our product market segment where we see extremely promising economies of scale over the next 18 months.

While this has been a difficult period for all our employees we emerge with a motivated team and a leaner business. Our contracted order book is now at a record level with a good balance between UK and international work, and between short term and longer term work, extending into 2019. This will allow the company to get back on track and, though the first half of 2018 will be disappointing, we can see H2 2018 looking substantially better.

John Dobson

Chief Executive Officer

Financial review

Results and comparison with previous period

(1) EBITDA is defined as earnings before depreciation, impairment, amortisation, interest, exceptional items and tax.

(2) Underlying operating profits are defined as operating profit before impairment, amortisation and exceptional items.

Reported results for the year

This final results statement reports the financial performance of the Group for the year ended 31 December 2017 which will be dispatched to shareholders shortly. The financial performance for the comparative period 2016 is taken from the audited accounts for that year.

Revenue

Revenue from continuing operations increased 2.6% to £14.8 million (2016: £14.4 million).

Gross profit

The gross profit of the Group decreased 8.3% to £3.449 million (2016: £3.762 million).

Gross margins have seen a decrease from 26.1% to 23.3%, partly attributable to an unexpectedly higher level of sub-contracting costs on some jobs and an under-absorption of direct costs during the year. As the Group engages on numerous bespoke projects, the gross margin can vary considerably with the mix, location and type of work required.

Operating expenses

Reported operating expenses for the year were £3.4 million (2016: £3.4 million).

Underlying operating expenses, which are operating expenses before impairment, amortisation and exceptional items, were £3.4 million (2016: £2.8 million), primarily attributable to building capacity in anticipation of higher revenue which did not ultimately materialise.

EBITDA and underlying operating profit

The reported EBITDA was earnings of £0.3 million (2016: £1.2 million).

The underlying operating profit (as defined above) was £0.07 million (2016: £1.0 million).

The earnings per ordinary share for the year was 0.06 pence (2016: 0.17 pence). Normalised earnings per share (see note 11), before charging amortisation and exceptional items, was 0.06 pence per share (2016: 0.48 pence).

Interest and facilities

The Group incurred an interest charge of £34,000 (2016: £25,000) in respect of bank loans, bank overdraft and finance leases.

Bank facilities

The Group has debt facilities with HSBC which amount to a £0.2 million term loan and a £0.8 million overdraft facility, which has been extended to £1.2 million. The Group has also entered several financial leases and premium credit arrangements.

At the end of December 2017, the Group was utilising £0.8 million of the overdraft facility (2016: £0.2 million).

The Group has a secured bank loan with a carrying amount of £175,000 at 31 December 2017 (2016: £211,000). According to the terms of the agreement, this loan is repayable in equal capital and interest payments over the next four and a half years, completing in 2022. The loan carries an interest cover covenant stating that at the end of each quarter, the Group's EBITDA must exceed interest by 3 times. The loan also carries covenants in relation to tangible net worth and debtor cover.

The bank overdraft facility has been renewed until 31 July 2018, and the bank has confirmed that they will renew the £1.2m facility for another year.

Taxation

There is tax credit for the year of £76,000 (2016: £63,000 tax charge).

Profit for the year

The Group's overall profit for the year is £115,000 (2016: £311,000).

The 2017 results are after charging £nil (2016: £511,000) for amortisation of acquired intangibles. In 2016 this included a charge of £314,000 for the complete write down of acquired goodwill from the purchase of TVAC (The Visitor Attraction Company).

Discontinued operations

The Group did not discontinue any operations during 2017 and 2016.

Cash flow and financing

Operating cash flow

The Group sustained an operating cash outflow for the year to 31 December 2017 of £1.6 million (2016: cash inflow of £1.7 million) caused primarily by an increase in trade and other receivables due to project delays and delayed payments from certain customers.

Cash position

The Group's net cash position at 31 December 2017 was a cash deficit balance of £0.78 million (2016: surplus of £1.2 million).

Net current assets

As at 31 December 2017, the Group had net current assets of £1.4 million (2016: £1.3 million).

John Dobson and Neil Jefferies

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2017

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2017

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2017

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2017

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2017

1. Basis of preparation

Financial statements

The full year results for the year ended 31 December 2017 have been extracted from the audited consolidated financial statements. The financial information set out in this announcement does not constitute statutory accounts but is derived from those financial statements. While the financial information in this preliminary announcement has been drafted in accordance with International Financial Reporting Standards ('IFRS'), this announcement does not itself contain sufficient information to comply with IFRS.

The financial information shown in this announcement has been extracted from, and is consistent with, the financial statements for the year ended 31 December 2017. The Group has published its 2017 Annual Report today which will be despatched to shareholders today and is now available on the Company's website www.paragonent.com for the purposes of AIM Rule 26.

Additional performance measures

The Group presents one-off items, underlying EBITDA, adjusted profit before tax and adjusted earnings per share information. These measures are used by the Group for internal performance analysis and incentive compensation arrangements for employees. The terms 'one-off items', 'underlying' and 'adjusted' may not be comparable with similarly titled measures reported by other companies. The term 'EBITDA' refers to operating profit or loss excluding operating one-off items, share-based payment charges, depreciation and amortisation of intangible assets. The term 'underlying operating profits' refers to EBITDA less depreciation. Finally, 'normalised earnings per share' refers to EBITDA less depreciation, net finance costs and attributable tax. 

2. Segment reporting

Management currently identifies the Group as having two active operating segments ("Design and Build" and "Products"). These operating segments are monitored by the Board and used to make strategic decisions on the basis of adjusted segment operating results. The "Head Office" segment comprises the corporate activities which are unrelated to the individual operating segments and are only incidental to the activities of the Group as a whole.

Performance is measured based on EBITDA (as stated before exceptional items) as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries.

Inter-segment pricing is determined on an arm's length basis. The information provided to the Board comprises the Statement of comprehensive income for each segment, the Statement of financial position and the Statement of cash flows and other financial and non-financial information used to manage the business on a consolidated basis.

Segment revenues comprise revenues made to external customers and made between segments.

Segment information for the reporting periods is as follows:

2017

2016

Information about geographical areas

Major customer

Revenues from the largest customer of the Group's Design and Build segment represents £5,430,000 (2016: £7,062,000) of the Group's total revenues for the period. 

3. Revenue

4. Exceptional and other items

During 2016, we incurred £45,000 which related to redundancy costs as a result of the restructuring of certain departments within the business.

5. Earnings per share

Earnings per share have been calculated by dividing the profit or loss attributable to shareholders by the weighted average number of ordinary shares in issue during the year.

The calculations of basic and diluted loss per share are:

Weighted average number of ordinary shares in issue:

There are 5.8 million employee EMI options (2016: 2.5 million) and further Management Preference Options that vary in number and have been excluded in the calculation of diluted EPS. The total number of options and overview of the schemes is provided in note 8.

Normalised earnings per share

Normalised earnings per share has been calculated by dividing the profit or loss attributable to shareholders before amortisation and impairment of intangibles, charges for share options and exceptional items by the weighted average number of ordinary shares in issue during the year. The numbers used in calculating the normalised basic earnings per share are reconciled below:

6. Borrowings

Security

The bank loan and bank overdraft are secured by an unlimited debenture by each of the companies in the Group. In 2017 and 2016 the loan maturity has been classified as due on demand, due to a breach of bank covenant in 2014 and the requirements under IAS 1 regarding disclosure.

The hire purchase liabilities are secured against the assets that are subject to the specific arrangement.

Interest rates

The bank loan incurs interest at 2.95 per cent and the bank overdraft at 5.00 per cent above the Bank of England base rate. The hire purchase liabilities incur interest at 7.00 per cent APR.

Maturity analysis

The maturity of the bank loan is 2022 but in 2017 and 2016 the loan has been classified as 'due on demand' due to a breach of bank covenant in 2014 and the requirements under IAS 1 regarding disclosure. A further breach occurred at 31 December 2017 in relation to the debtor covenant. The bank has notified the Group that it does not intend to take any action in relation to either breach, although reserves its rights under the terms of the agreement. The maturity of all hire purchase liabilities is 2018 - 2022. The maturity analysis of borrowings is as follows:

The future minimum payments in respect of hire purchase liabilities are as follows:

The carrying amounts and fair value of the non-current borrowings are as follows:

The fair value of current borrowings is broadly equal to their carrying amount, as the impact of discounting is not significant. The fair values are based on cash flows discounted using a rate based on the borrowing rate of 7.5%.

The Group has the following undrawn borrowing facilities:

The facilities expiring within one year are annual rolling facilities subject to a periodic review during each year. The facility was extended from £0.8 million to £1.2 million during the year. The bank overdraft facility has been renewed until 31 July 2018, and the bank has confirmed that they will renew the £1.2m facility for another year.

7. Cash used in/(generated from) operations

Non-cash transactions

There are no significant non-cash transactions.