PEL.L Regulatory News (PEL)

Date: 20 April 2017

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 2016.

Financial Highlights

· Revenue of £14.4 million (2015: £8.5 million) grew by 70%

· Gross profit of £3.76 million (2015: £1.97 million) grew by 91%

· EBITDA profit of £1.19 million (2015: profit of £0.24 million)

· Earnings of £0.31 million (2015: £0.60 million)

· Basic EPS of 0.17p (2015: 0.32p)

· Normalised EPS of 0.48p (2015: 0.05p)

Operational Highlights

· Major projects completed include 'Kung Fu Panda', 'Madagascar' and 'Little Explorers' in the Middle East, with 'Coronation Street', 'Fountains Abbey', 'Rolling Stones' and 'Centre for Life' in the UK

· Current projects include 'Cloudy with a Chance of Meatballs' and 'Hunger Games', 'Sabic Life Galleries', and the 'Sheikh Abdullah Al Salem Cultural Centre' (SAASCC) in the Middle East

· In the UK, we are working on Manchester and Cheshire fire safety centres as well as other products for family entertainment centres ('FECs')

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

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

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

"We achieved two notable strategic aims in 2016: First, we achieved solid growth in revenue, EBITDA and normalised earnings, and second, we took the opportunity to invest in building capacity for the future.

In previous years, the growth in revenue would have placed enormous stress on the business but by anticipating this and investing in building long-term capacity, some of which we had previously neglected, we were able to manage the growth well. We have strengthened our management team, including appointing a new CEO, John Dobson, and freeing up the founder, Mark Pyrah, to continue to drive growth in the business. We also made several other new appointments to complement the high quality of existing skills in our team. We have invested in HR, technology and IT infrastructure, and re-configured our premises for the additions to the team.

The numbers speak for themselves: in short, we have continued to do what we said we would do, and we remain excited about the 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 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 2016 annual results are particularly gratifying and align with the strategic and financial aims we set at the start of the year. In prior years we under-invested in capacity, so we spent 2016 catching up on our investment in people, equipment and processes. This investment will now help underpin the future of the business.

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

· Grown revenue by 70% to £14.4 million (2015: £8.5 million).

· Delivered EBITDA of £1.19 million (2015: profit of £0.24 million).

· Continued to increase gross margins from 23.2% to 26.1%, which is now higher than our previous 5-year average, so we remain focused on maintaining this key metric.

We have continued to make positive progress, emerging as a far stronger team and a more disciplined business. Here are the points from last year that we said we would develop during 2016 and beyond:

· Strengthening management with a strong focus on blending our existing talented people with new talent from within and outside our industry. This gives the business a stronger cultural perspective both operationally and from a customer perspective.

· We have embarked on a strategic review of the business, focusing on key markets and customers, and where we feel we can add the most value to our customers' businesses.

· Streamlining internal processes for greater efficiency.

· Focusing on cash management.

· Improving corporate governance with the introduction of an additional Non-Executive Director, David Bridgford, who has a strong background in our market.

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

The entire Paragon Team have worked tremendously hard for this to happen and I am proud to be part of this team. I would like to welcome all my new colleagues, congratulate everyone at Paragon for the 2016 results, and thank our financiers and investors for their ongoing confidence in us.

Mark Taylor

Executive Chairman

REPORT OF THE CHIEF EXECUTIVE OFFICER

Strategic review

We have reassessed our strategic position with the creation of a clear vision, mission and core values. The core values concern the way we do business and as such have been communicated out to the entire workforce:

Vision:

To be the number one global attractions 'design & build' business in the world.

Mission:

Our core purpose is to use our unique mix of skills and expertise to design and build attractions that delight our customers and deliver sustainable value to all our stakeholders.

Core Values:

· Recognition: Recognise or honour employees for great levels of service and encourage repeat actions.

· Passion: We have the humility and hunger to learn.

· Creativity: Think outside the box, innovate, and perceive the world in new ways.

· Results: We love success.

· Customer at the Heart: The core to everything we do.

This, together with our strong sales growth in 2016, underpins our future as a major player in our market place.

We have also spent a significant amount of energy in 2016 realigning our business with our core skill set which is the 'design & build' of attractions. What do we mean by 'attractions'? 'A place which draws visitors by providing something of interest or pleasure'. Basically, anything from a museum to a theme park to a family entertainment centres ('FEC') to experiential retail.

We are now operating based on our "3P" strategy:

· Projects: Our traditional business of 'design & build.'

· Partnerships: We continue to develop stronger relationships with key partners like Hamleys, focusing on their global requirements for 'design & build.'

· Products: This segment is a small but growing part of our business and we are already rolling out FECs themed with quality third party brands.

For the purposes of this review, I have treated licensing and distribution as part of our design and build business.

Market review 

We are uniquely positioned to design and build theme parks, domestic and international museums, zoos and aquaria, experiential retail, 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 2016, we competed for, won and executed projects valued at £2.5 million on behalf of new clients, with the remaining £11.9 million of revenue being repeat business from existing partners. In 2016, our work had the following geographical split: 17% UK, 5% Europe, 75% Middle East & North Africa ('MENA') and 3% rest of the world. This is in line with previous market guidance.

In 2017, we expect that £7 million of our turnover will come from repeat partnership business, amounting to approximately 45% of our revenue guidance of £15.7 million for 2017 and we anticipate our work to have the following geographical split: 20% UK, 10% Europe, 65% MENA and 5% China.

Internal review

We have invested heavily in infrastructure in 2016 and will continue to do so in 2017. Some of the key projects are listed below:

· Completely updated our IT systems which will give huge efficiency improvements and set the business up for future growth.

· Continued to recruit new management in key disciplines such as HR, Purchasing, Contracts and Project management.

· Created training and development plans for the entire business including: management training, key skills training, formal apprenticeship scheme and graduate training program.

Our emphasis is clearly on developing our existing people, future generations and our internal systems to meet the future needs of our business so that we can better serve our customers.

John DobsonChief 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.

Results for the year

This final results statement reports the financial performance of the Group for the year ended 31 December 2016. The financial performance for the comparative period 2015 is taken from the audited accounts for that year.

Revenue

Revenue from continuing operations increased 70% to £14.4 million (2015: £8.5 million).

Gross profit

The gross profit of the Group increased 91% to £3.762 million (2015: £1.970 million).

Gross margins have seen an increase from 23.2% to 26.1%. 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 (2015: £1.6 million).

Underlying operating expenses, which are operating expenses before depreciation, impairment, amortisation, share based payments and exceptional items, were £2.6 million (2015: £1.7 million).

EBITDA and operating profit

The reported EBITDA was earnings of £1.2 million (2015: £0.2 million).

The underlying operating profit was £1.0 million (2015: £0.1 million).

The earnings per ordinary share for the year was 0.17 pence (2015: 0.32 pence). Normalised earnings per share, before charging amortisation, charges for share options and exceptional items, was 0.48 pence per share (2015: 0.05 pence).

Interest and facilities

The Group incurred an interest charge of £25,000 (2015: £25,000) for the year of which £25,000 (2015: £24,000) 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 several financial leases and premium credit arrangements.

At the end of December 2016, the Group was utilising £0.2 million of the overdraft facility (2015: £0.2 million).

The Group has a secured bank loan with a carrying amount of £211,000 at 31 December 2016 (2015: £247,000). According to the terms of the agreement, this loan is repayable in equal capital and interest payments over the next five 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 9 July 2017, and the bank has indicated that they will renew for another year.

Taxation

The Group has incurred taxation amounting to £21,000 in respect of the year to December 2016 (2015: £ nil). A reduction in the deferred tax assets has not been met by the unwinding of the tax liability associated with the intangible assets and as a result, a total tax charge of £63,000 (2015: credit of £0.3 million mainly arising from Research and Development tax incentives received) is reported.

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.

Profit for the year

The Group's overall profit for the year is £311,000 (2015: £601,000).

The 2016 results are after charging £511,000 (2015: £202,000) for amortisation of acquired intangibles. This includes a charge of £314,000 relates to the complete write down of acquired goodwill from the purchase of TVAC (The Visitor Attraction Company). The Group no longer feels this acquired goodwill has any value to its future growth and financial performance.

Discontinued operations

The Group did not discontinue any operations during 2016. A loss of £8,000 was sustained in 2015 in relation to the discontinued operation at Merry Hill.

Cash flow and financing

Operating cash flow

The Group sustained an operating cash inflow for the year to 31 December 2016 of £1.7 million (2015: cash outflow of £0.5 million).

Cash position

The Group's net cash position at 31 December 2016 was a cash balance of £1.2 million (2015: deficit of £0.2 million).

Net current assets

As at 31 December 2016, the Group had net current assets of £1.3 million (2015: £0.5 million).

Scott Dickinson

GROUP FINANCE DIRECTOR

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2016

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2016

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2016

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2016

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2016

1. Basis of preparation

Financial statements

The full year results for the year ended 31 December 2016 have been extracted from the draft consolidated financial statements. The financial information set out in this preliminary announcement does not constitute statutory accounts but is derived from those draft accounts. 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 draft financial statements for the year ended 31 December 2016. As at the date of this announcement the audit is as at an advanced stage but the auditors have yet to conclude their work and the audit report in respect of the draft financial statements has not been signed. The Group will publish its Annual Report and Accounts for the year ended 31 December 2016 on its website www.paragonent.com once the audit has been concluded.

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:

2016

2015

Information about geographical areas

Major customer

Revenues from the largest customer of the Group's Design and Build segment represents £7,062,000 (2015: £1,408,000) 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 earnings per share are:

Weighted average number of ordinary shares in issue:

There are 2.5 million employee EMI options (2015: 3.1 million) and further Management Preference Options that vary in number and have been excluded in the calculation of diluted EPS. The Marwyn Participation Option expired in December 2016 and has therefore also been excluded.

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 2016 and 2015 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 2016 and 2015 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. The bank 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. The company has met the loan covenants for the years to 31 December 2016 and 31 December 2015. However, under the reporting requirements set out in IAS 1, the whole value of the loan has been classified as due within one year. The maturity of all hire purchase liabilities is 2018 - 2022. The future minimum payments, are payable 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 next review date is July 2017 and the bank has indicated that they will renew for another year.

7. Cash generated/(used) in operations

Non-cash transactions

There are no significant non-cash transactions