PEL.L Regulatory News (PEL)

Date: 14 June 2016

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

Embargoed until 7am

Paragon Entertainment Limited

Final Results Statement

Paragon Entertainment Limited (AIM: PEL), the attractions design, production and fit-out business, is pleased to announce its final results for the year ended 31 December 2015.

Financial Highlights

· Revenue of £8.5 million (2014: £7.7 million) grew by 10%

· Gross profit of £1.97 million (2014: £1.53 million) grew by 29%

· EBITDA profit of £0.24 million (2014: loss of £0.08 million)

· Earnings of £0.60 million (2014: loss of £0.98 million)

· Basic EPS of 0.32p (2014: loss of 0.52p)

· Successful renewal of banking facilities

· Completed sale of Merry Hill attraction

Operational Highlights

· Appointment of Chief Operating Officer, John Dobson, and various other senior appointments

· Major projects completed include 'Land of the Lions' at ZSL, 'Hamleys' in Prague, Rolling Stones' 'Exhibitionism' in Saatchi Gallery, the Heritage Skills Centre in Boathouse 4 building at Portsmouth Historic Dockyard

· Current projects include 'Kung Fu Panda', 'Madagascar', 'Little Explorers' and 'Magic Planet' in the Middle East

· Secured further strategic relationships with two companies providing for reciprocal representation of each other's products and services

· Paragon's workshops remain very active and the business intends consolidating its activities in one location

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

"During 2015 we were successful in closing out a number of legacy challenges. Paragon moved into profitability at every level of measurement for the first time since AIM admission in 2011 and we have now laid a solid foundation for the business to resume its growth."

"In 2015, we designed and built some fabulous attractions, including 'Land of the Lions', 'Exhibitionism', and Hamleys Prague. We are also currently working on 'Kung Fu Panda' and 'Madagascar' in the Middle East."

"At Paragon, we are absolutely passionate about the interplay between artistic vision, beautiful design and functional engineering, while keeping an eye on the commerciality of what we do. Because of this, we have been producing some of our finest work, thereby confirming our market-leading position. By continuing to nurture our long term partner relationships and by producing such high quality work, we are confident that we will continue to deliver on market expectations."

- 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 thematic build of the Wallace and Gromit ride at Blackpool Pleasure Beach;

· Licensing and distribution installations at Gullivers, Milton Keynes and Art Mall, Ukraine.

The Group listed on AIM in 2011.

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

CHAIRMAN'S STATEMENT

Our 2015 annual results are particularly gratifying, not just because Paragon moved into profitability at every level of measurement, but because they tell the story of what the Paragon team has managed to achieve in adversity.

Further details are set out in the Financial review. However, by way of highlights, we have:

· Grown revenue by 10% to £8.5 million (2014: £7.7 million).

· Delivered EBITDA of £238,000 (2014: loss of £84,000).

· Posted our first profit for the year since being admitted to AIM in 2011, being £601,000 (2014: loss of £980,000). This translates into earnings per share of 0.32 pence (2014: loss of 0.52 pence) and, while the profit was flattered by exceptional items, it remains an important milestone for us.

· Increased gross margins from 19.8% to 23.2% which is still a little under our 5-year average margin of 24.9%, so we remain focused on improving this key metric. Note that UK margins in our industry are being squeezed but our concentration on, and ability to win, higher end, more prestigious and overseas projects is currently mitigating this trend.

These results should be seen in the context that, around 18 months ago, Paragon entered a difficult period of rapid change which we had to overcome in order to build a long-term sustainable strategic position. As we moved through 2015 we resolved a number of challenges:

· We focused on addressing our bankers' concerns after breaching our EBITDA covenant in Q4 2014. Our overdraft facility was extended until 9 July 2016 and our bankers have stated their intention to extend this for a further 12 months in July.

· We resolved a contentious contract with a client and, although our H1 2015 EBITDA suffered a negative effect of approximately £0.6 million, we managed to contain any further exposure to Paragon.

· Our mall attraction in Merry Hill, Birmingham, continued to lose money despite significant remedial action and was sold in H1 2015.

· We successfully resolved a historical HMRC tax liability which had arisen prior to the acquisition of Paragon Creative Limited.

We have continued to make positive progress, emerging as a far stronger team and a more disciplined business. Here are some of the key items on which we have focused:

· Strengthening management with

- the internal appointments of a head of production in 2015 and a head of interactives in 2016,

- the external appointments of a head of finance in 2015 and, our new head of licensing and distribution in 2016, and

- the appointment of our inaugural Chief Operating Officer, John Dobson, who is a qualified Chartered Accountant and has held international management positions.

· Revisiting our strategy and 5 Year Plan and making adjustments, where appropriate.

· Streamlining internal processes and reducing our overhead costs.

· Focusing on cash management.

· Improving corporate governance.

· Engaging more meaningfully with both our bankers and the wider investment community.

· Successful renegotiation and settlement of a legacy liability to HMRC liability (see note 4, "Exceptional and other items"). We made this decision because we were confident about Paragon's prospects. In so doing, we protected the income statement from a decline of £0.5 million and the balance sheet from a diminution in value of £0.4 million.

I would like to congratulate everyone at Paragon for the 2015 results and thank our financiers and investors for their on-going confidence in us. I would also like to welcome all of my new colleagues to the Paragon Family.

Mark TaylorExecutive Chairman

REPORT OF THE CHIEF EXECUTIVE OFFICER

Strategic review

We compete primarily as an attraction 'design & build' business with a small (but growing) business segment where we license rights and distribute products. For the purposes of this review, I have treated licensing and distribution as part of our design and build business.

Our strategic review of the attractions 'design and build' industry leads us to think we operate in an addressable market of £1 to £2 billion per annum. We currently have less than 1% of this market so there is solid room for growth and expansion. It is harder to quantify our 'licensing and distribution' business and I have not included this in the above analysis. There is also scope to diversify into new markets which we are not currently tracking. We are currently satisfied with our broad strategic direction notwithstanding that we are constantly considering how best to scale our business while retaining quality and remaining prudent.

Market review 

We are uniquely positioned to design and build theme parks, domestic and international museums, zoos and aquaria, experiential retail, family entertainment centres ('FECs') and science centres because of the quality of our work and breadth of our in-house skills. None of our competitors has this breadth of scope.

In 2015 we competed for, won and executed projects valued at £7.4 million on behalf of new clients, with the remaining £1.1 million of revenue being repeat business from existing partners. In 2015, our work had the following geographical split: 55% UK, 7% Europe, 35% Middle East & North Africa ('MENA') and 3% rest of the world.

In 2016 we expect that £9 million of our turnover will come from repeat partnership business, amounting to approximately 82% of our revenue guidance for the current year. In 2016, we anticipate our work to have the following geographical split: 15% UK, 5% Europe, 70% MENA and 10% China.

The UK museum and heritage market is currently weak and we believe it will stay like this for two to three years. However, there is considerable growth in retail, theme parks, FEC's and science centres worldwide. We have worked hard over the last 18 months developing these markets and our shift in geographical and market spread reflects the effort we have invested as well as the more global nature of our business.

Internal review

We are currently in a suppliers' market with some of our capacity booked into 2017. The driving force behind this is undoubtedly MENA and we see this market lasting into part of 2017.

To further reinforce the 2017 outlook, we have done the following in 2016:

· Recruited new management.

· Appointed a new Chief Operating Officer.

· Supplemented our existing representation agreement with PCME Interiors LLC, Dubai, (formerly with Incorp) by signing two further representation agreements in keeping with our strategic plan:

o H2E, Latvia, to grow and explore the Eastern European markets, and

o Lefunland, China, to secure manufacturing opportunities, and also for play equipment (previously with YuKids).

· Continued to recruit in-house project management, design and production staff to service existing and future projects.

During the remainder of 2016 we intend to:

· Increase capacity, including the possible expansion of our facilities.

· Increase efficiency.

· Consolidate some of our existing facilities in one location.

· Bring in new talent, where required.

· Investigate the viability of a purpose-built facility to accommodate us in a few years' time.

In this report we have dealt mainly with the commercial side of our business. However, we are very clear on Paragon's unique selling proposition: the quality of our in-house manufactured products.

Throughout 2015 and into 2016 the work being delivered by our workshop and management team has continued to improve from what was already a market-leading level.

Although global investment markets have had a rocky start to the year, we remain busy, growing and profitable. We are in this fortunate position partly because of our investment in partnerships over the last three years, partly because we have corrected a number of issues, and partly because our industry is growing. However, the primary reason is that we have remained true to our purpose: We are absolutely passionate about the interplay between artistic vision, beautiful design and functional engineering.

Because of this, we design and build some of the most stunning attractions, heritage spaces and retail experiences in the world.

Mark PyrahChief Executive Officer

Financial review

Results and comparison with previous period

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

(2) Underlying operating profits are defined as EBITDA less depreciation and amortisation of intangibles not related to acquisition.

Reported results for the year

These financial statements report the financial performance of the Group for the year ended 31 December 2015. The financial performance for the comparative period 2014 is taken from the audited accounts for that year.

Revenue

Revenue from continuing operations increased 10% to £8.5 million (2014: £7.7 million).

Gross profit

The gross profit of the Group increased 29% to £1.970 million (2014: £1.526 million).

Gross margins have seen an increase from 19.8% to 23.2%. 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 £1.6 million (2014: £1.9 million).

Underlying operating expenses, which are operating expenses before depreciation, impairment, amortisation, share based payments and exceptional items, were £1.7 million (2014: £1.6 million).

EBITDA and operating profit

The reported EBITDA was earnings of £0.2 million (2014: loss of £0.1 million).

The underlying operating profit was £0.1 million (2014: loss of £0.2 million).

The earnings per ordinary share for the year was 0.32 pence (2014: loss of 0.52 pence). Normalised earnings per share, before charging amortisation, depreciation, charges for share options and exceptional items, was earnings of 0.05 pence (2014: loss of 0.13 pence).

Interest and facilities

The Group incurred an interest charge of £25,000 (2014: £37,000) for the year of which £24,000 (2014: £16,000) was payable against bank loans, bank overdraft and financial leases.

Bank facilities

The Group has debt facilities with HSBC which amount to a £0.3 million term loan and a £0.8 million overdraft facility. The Group has also entered into several financial leases and premium credit arrangements.

At the end of December 2015, the Group was utilising £0.2 million of the overdraft facility.

The Group has a secured bank loan with a carrying amount of £247,000 at 31 December 2015 (2014: £281,000). According to the terms of the agreement, this loan is repayable in equal capital and interest payments over the next six 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. It also carries a tangible net worth covenant. The bank overdraft facility has been renewed until 9 July 2016, and the bank has indicated that they will renew for another year.

Taxation

The Group has incurred no taxation in respect of the year to December 2015. The ability to utilise certain tax losses brought forward has meant that current tax is £nil. A reduction in the deferred tax assets have been more than balanced by the unwinding of the tax liability associated with the intangible assets. A tax credit of £0.3 million is reported relating mainly due to Research and Development tax incentives received during the year.

In 2015, we agreed a settlement with HMRC of a pre-Admission liability of £0.7 million which reduced the liability by £0.4 million and the balance will be paid in instalments over a twenty month period, from November 2015.

Profit for the year

The Group's overall profit for the year is £601,000 (2014: loss £980,000). This is favourably impacted by the income of £286,000 received during the year for the Research and Development tax incentives for 2013 and 2014, and also the net exceptional items income of £420,000 arising out of the HMRC settlement. Without these two items the overall result would have been a loss of £105,000.

Discontinued operations

Effective from 15 May 2015, the Group entered into a trade and asset sale agreement for the operations at Merry Hill for a total of £150,000, resulting in a profit on disposal of £58,000.

As a result of irrevocable action taken in November 2014 in relation to the surrender of the lease at Merry Hill, the whole operation was classified as a discontinued operation. The operation sustained a loss of £8,000 for the period (2014: £629,000). Non-current assets with a book value of £121,000 were reclassified as held for sale in 2014. There were no other assets or liabilities associated with this item.

The total amount which had been invested in Merry Hill amounted to £1.3 million and the cumulative operating losses (before depreciation and impairment) to 31 December 2015 amounted to £0.6 million.

Cash flow and financing

Operating cash flow

The Group sustained an operating cash outflow for the year to 31 December 2015 of £0.5 million (2014: cash outflow of £0.4 million).

Cash position

The Group's net cash position at 31 December 2015 was a deficit of £0.2 million (2014: cash balance of £0.3 million).

Net assets

As at 31 December 2015, the Group had net current assets of £0.7 million (2014: liabilities of £0.5 million). In 2014 there was a £0.8 million liability recorded for the payment of deferred consideration on the acquisition of Paragon Creative Limited. In 2015, this deferred consideration was waived by the vendors as part of the settlement in respect of the HMRC liability.

Jarrod Marsden

GROUP FINANCIAL CONTROLLER

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2015

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2015

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2015

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2015

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2015

1. Basis of preparation

Financial statements

The full year results for the year ended 31 December 2015 have been extracted from the audited consolidated financial statements. The financial information set out in this preliminary announcement does not constitute statutory accounts but is derived from those accounts. While the financial information in this preliminary announcement has been prepared 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 audited financial statements for the year ended 31 December 2015. The auditors have reported on those accounts and their reports were unqualified and did not draw any attention to any matters by way of emphasis without qualifying their report. The Group has published its Annual Report and Accounts for the year ended 31 December 2015 on its website www.paragonent.com.

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 "Licensing and Distribution"), and one historic operating segment that has been closed (Attractions). These operating segments are monitored by the Group's Chief Operating Decision Maker 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 share based payments and exceptional items and head office recharges) 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:

2015

2014

Information about geographical areas

Major customer

Revenues from the largest customer of the Group's Design and Build segment represents £1,408,000 (2014: £2,940,000) of the Group's total revenues for the period.

3. Revenue

4. Exceptional and other items

During 2015, the deferred consideration of £750,000 due to the vendors in respect of the sale of Paragon Creative Limited to Paragon Entertainment Limited was waived within terms of a settlement with HMRC and has been credited to the Statement of comprehensive income. The net costs of £244,000 charged to the comprehensive income statement, related to the settlement agreement with HMRC and include fees, legal advice and closure of the scheme. In order to understand the underlying profits of the Group, these are shown as exceptional items. The sum of £268,000 remains outstanding to HMRC by agreement and will be paid to HMRC over a period of 20 months from November 2015. Management believes there to be no further costs in this regard.

During 2015, fees relating to BDO advice in regards to the Research and Development tax credit claim amounted to £36,000. Legal fees relating to the restructure of the Group due to the sale of Merry Hill attraction amounted to £25,000, and further legal costs to settle a particular customer contract amounted to a further £25,000. Management does not expect any further related legal costs to arise.

During 2014, a subsidiary of the Group incurred costs which, under the terms of the sale and purchase agreement for the acquisition of Paragon Creative Limited, requires the vendors to indemnify the company. The income and costs in relation to this are charged to the comprehensive income statement. In order to understand the underlying profits of the Group, these are shown as exceptional items.

During 2014, the Group engaged in several restructuring exercises related to improving the efficiency and effectiveness of the Group. The result was a number of redundancies and closure of the London office. Management do not expect any further related costs to arise.

During 2014, an assessment was made in relation to contingent consideration related to the acquisition of The Visitor Attraction Company Limited. As the conditions have not been met, there has been an adjustment of the fair value of the contingent consideration and it has been credited to the comprehensive income statement. In order to understand the underlying profits of the Group, this is shown as exceptional items.

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. In 2014, as the Company generated a loss for the year, share options were anti-dilutive.

The calculations of basic and diluted loss per share are:

Weighted average number of ordinary shares in issue:

There are 3.1 million employee EMI options (2014: 5.8 million) and further Management Preference Options and Marwyn Participation Option which vary in number. The latter two options have been included in the calculation of diluted EPS, whereas the EMI Option has not been included because their exercise is dependent upon the share price, which has not been met and therefore has an anti-dilutive effect.

Normalised earnings per share

Normalised earnings per share has been calculated by dividing the profit or loss attributable to shareholders before amortisation, charges for share options and exceptional items including impairment charge on property, plant and equipment 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 2014 the loan maturity had been classified as due on demand, due to the breach of bank covenant detailed below 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 incurs interest at 7.00 per cent APR.

Maturity analysis

The maturity of the bank loan is 2022 but the loan has been classified as 'due on demand' due to the prior year breach of bank covenant detailed overleaf and the requirements under IAS 1 regarding disclosure. The maturity of all hire purchase liabilities is 2017. The future minimum payments, should the bank not take any action in relation to the prior year breach, are payable as follows:

Exposure to interest rate changes

The exposure of the Group's borrowings to interest rate changes and contractual re-pricing dates at the end of the reporting periods are as follows:

An increase in the Bank of England base rate of 1.0% would not have a significant effect on the Group's exposure to interest rates.

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 next review date is July 2016 and the bank has indicated that they will renew for another year.

Prior year breach of loan covenant

The Group had a secured bank loan with a carrying amount of £281,000 at 31 December 2014. According to the terms of the agreement, this loan is repayable as an equal capital and interest payment over 7 and a half years, completing in 2022. However, 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. It also carries a tangible net worth covenant.

As a result of lower than expected performance, the Group reported a small EBITDA loss for the year to December 2014 and consequently the company breached the interest cover covenant upon the publication of the audited financial statements.

The Group had been in discussions with the bank and the bank had notified the Group that it does not intend to take any action in relation to the breach, although reserves its rights under the terms of the agreement.

Under reporting requirements set out in IAS 1, the whole value of the loan as at 31 December 2014 was therefore classified as due within one year.

The company has met the loan covenants for the year to 31 December 2015.

7. Cash used in operations

Non-cash transactions

There are no significant non-cash transactions