Final Results

11 August 2017

PHSC PLC
(the “Company” or the “Group”)

Final Results for the year ended 31 March 2017

Financial Highlights

• Underlying EBITDA* loss of £0.1m, down from a profit of £0.368m last year

• Group revenue rose to £7.16m compared with £7.04m last year

• Cash reserves of £0.207m at year end compared to £0.256m last year

• Write-down of £0.625m (compared to £0.609m last year) due to impaired goodwill

• Group net assets fell to £5.52m from £6.09m after goodwill impairment

• Loss per share of 4.92p compared with last year’s loss per share of 3.23p

• Loss after tax of £0.691m compared with a loss of £0.414m last year

• No final dividend proposed but interim dividend may be considered if progress continues

*Underlying EBITDA is calculated as earnings before interest, tax, depreciation, amortisation and acquisition costs and fair value movements on contingent consideration.

	2017 £		2016 £
Profit before tax	(720,693)		(377,723)
Less: interest received	(471)		(1,052)
Add: interest paid	2,117		8
Add: depreciation	44,089		47,712
Add: impaired ALS goodwill	625,191		608,936
Acquisition costs	-		50,000
Fair value movement on  contingent consideration	(50,000)		-
Underlying EBITDA	(99,767)		367,881

Operational highlights

• 56% of revenues were in security-related technology services compared with 40% last year
• Ongoing rationalisation and cost reduction programme

This announcement contains inside information.

Contact information

For further information please contact:

PHSC plc	Stephen King	01622 717700
	[e-mail]
Northland Capital Partners Limited (Nominated Adviser)	Edward Hutton David Hignell	0203 861 6625
Beaufort Securities Limited (Broker)	Elliot Hance	020 7382 8300

Chief Executive’s Review

I present my review of the Group's performance over the year, and provide an update to shareholders on the improving picture emerging over recent months.

Key developments and outlook

PHSC plc, through its trading subsidiaries, is a leading provider of health, safety, hygiene and environmental consultancy services and security solutions to the public and private sectors. From the time of incorporation and up until the end of the 2015-16 financial year, the majority of the Group’s revenue had always been generated by its health and safety businesses. In 2016-17, for the first time in the Group’s history, more revenues arose from the security-related technology revenues in the form of installations, consumables and services than from health and safety services.

The legacy health and safety businesses continue to bring valuable income to the Group. Education, leisure, public transport and the care sector represent a large proportion of the clients to whom health and safety consultancy and training is provided. A wide range of general commercial and industrial organisations complete the client portfolio. In addition, the Group carries out statutory examination of lifting equipment, pressure systems and other plant and machinery via insurance brokers or directly for clients.

Our Scottish-based subsidiary specialising in quality systems management goes from strength to strength and further commentary is given later in this report. Conversely, our subsidiary engaged in asbestos management solutions has continued to encounter challenging market conditions and there is ongoing action to eliminate the losses arising there.

In recognition of the need to reduce reliance on traditional health and safety businesses, the Group moved into the security technology sector in 2012.  This process continued with two further acquisitions in December 2015. The larger of those acquisitions, SG Systems (UK) Limited (SG), involved a two-year earn-out period whereby part of the consideration was based on performance. Due to this provision, the Company was restricted in the steps that could be taken in terms of integrating the businesses but agreement has recently been reached with the sellers that allows this process to commence. This is expected to result in savings where roles and functions can be combined, and economies of scale can be better exploited. This will enable us to bring forward the commitment given in last year’s report where we stated that, after the earn-out timetable had been completed, we would formally consolidate B to B Links Limited and SG into a security division.

We also stated that in due course we would look to form a safety division to run parallel with the security division.  This remains our strategy. The goodwill associated with Adamson’s Laboratory Services Limited (ALS) was fully impaired during the year as a result of an impairment review.

Acquisition payments

Under the terms of the acquisition of SG, a cash payment of £200,000 fell due on the first anniversary of the purchase, in December 2016. This amount has been paid in full. A final payment becomes due in December 2017 and under the terms of the sale, this could have been an amount from £25,000 to £375,000 as determined by a formula that relates to performance over the period.  Based on the expected results, for the purposes of the accounts, a fair value of £75,000 was initially provided for. However, the business has not performed in line with the targets that would have triggered a payment of that amount and we are confident that the final payment will be limited to £25,000. This has enabled us to release £50,000 of the initial estimated value back to the income statement.

Net asset value

As at 31 March 2017, the Company had consolidated net assets of £5.52m. There were 14,677,257 ordinary shares in issue at that date which equates to a net asset value per share of 38p. The ordinary shares of the company continue to trade at a discount to the net asset value, even after allowing for the goodwill impairment. Nevertheless, a large proportion of the Company’s assets relate to goodwill associated with acquisitions and this is reviewed annually to make sure that values in the group statement of financial position can be justified. For the second year, we have found it necessary to impair ALS in accordance with requirements of accounting standards. We are writing down the carrying value of that business and this represents a reduction of approximately 11% in the consolidated net assets of the Group. The board is satisfied that all other goodwill valuations can presently be justified.

Outlook

Ongoing political uncertainty and the weaker sterling exchange rate continue to adversely affect the Group, and in particular the security-related subsidiaries that import materials priced in euros or US dollars.

It is encouraging that the Group saw a material improvement in underlying EBITDA in the second half of 2016-17. Our legacy health and safety businesses generally continue to enjoy a large amount of repeat business and have a very loyal client base. Losses at our asbestos-related business have bottomed out and management are seeing stabilisation of prices after a period of heavy discounting. There may be further costs associated with restructuring the business but the board anticipates that the large trading losses are a thing of the past.

Proposed restructuring of our security-related companies into a single division will ultimately result in cost savings. In addition, there continue to be good prospects for increased sales and opportunities for technological innovation of the products supplied.  Significant new contracts can take a considerable amount of time to materialise and various trials and talks are underway with a number of existing and prospective clients.

Based on the latest management accounts (unaudited), the Group had total revenues of £1.82m for the first quarter of 2017-18. This is an increase of around 5% on the first three months of last year. Based on those revenues, EBITDA for the first quarter is showing as around £120k. This compares very favourably to the loss of £40k that was reflected over the corresponding period last year.

Aside from the final payment expected to be £25,000 under the terms of the purchase agreement for SG, no other acquisition payments are due and the Group is presently not considering any further acquisitions.

Performance by trading subsidiary

A review of the activities of each trading subsidiary is provided below. The profit figures stated are before tax and central management charges.

Adamson’s Laboratory Services Limited (ALS)

• 2017: sales of £823,200 resulting in a loss of £194,600
• 2016: sales of £1,825,600 yielding a profit of £76,800

Competition within the sector continues to adversely affect revenues and has led to a situation where ALS along with several of its peers is trading at a loss. A number of loss-making competitors entered administration during the year.

The business had a very disappointing year with sales materially down and a resulting loss of £194,600. In response, ALS made significant cost reductions in both cost of sales and expenditure to compensate for the loss of revenue and negative margins. As part of the cost reduction, several members of staff were made redundant and the trading loss includes around £30,000 of severance pay.

The company has been supported by the Group and has recently seen some areas for optimism. It continues to win repeat business with blue chip clients and local government and has seen a growth in the education sector.

The health and safety department’s turnover increased and the volume of occupational hygiene consultancy showed some growth.

ALS has successfully maintained its accreditation with UKAS ISO 17020, 17025, ISO 9001 and ISO14001.

B to B Links Limited (B to B)

• 2017: sales of £2,594,900 yielding a profit of £52,500
• 2016: sales of £2,551,800 yielding a profit of £134,200

During 2016-17 B to B generated revenues of £2,594,900 consistent with the previous three years.  The majority of sales in 2016-17 came from national accounts, primarily in the department store, fashion retail, builders’ merchants and DIY sectors.  Independent retail sales were flat during the year compared with 2015-16.  Non-retail CCTV sales activities contributed £254,400 to company revenues in 2016-17, the first full year of integration of the business of Camerascan CCTV Limited.  Profits for the year fell by £81,700 due to a combination of  trade cost increases caused by the depreciation of sterling following the June 2016 EU Referendum and a bad debt of around £40,000 incurred after a client went into administration.

Despite the headwinds faced in 2016-17 the outlook for B to B remains strong. B to B’s retail customer base has performed well in the new financial year and existing key accounts all have clear plans to invest in property projects and associated CCTV and security tagging hardware during 2017-18. Global restructuring of key competitors in both radio frequency and acousto-magnetic security tagging technologies may also provide opportunities to grow market share.

Closer operational links have developed with SG during the year and these will deepen further during the 2017-18 financial year. Key priorities for 2017-18 are to grow B to B sales by further developing existing accounts, achieving stronger growth in independent sales, both retail and non-retail and to improve efficiency in technical delivery and stock management.

Inspection Services (UK) Limited (ISL)

• 2017: sales of £227,600 yielding a profit of £44,200
• 2016: sales of £219,600 yielding a profit of £40,300

Health and safety legislation requires employers to ensure that relevant equipment is examined at an appropriate frequency by a competent person to ensure it remains safe to use. Many organisations rely upon external agencies to assist them to comply with their duties in this regard.

The main business of ISL is to carry out statutory examinations and inspections of lifting plant and equipment, and of pressure systems, through contracts placed by insurance brokers.  Commissions are paid to brokers for placing this work with ISL. Approximately 75% of revenue is derived through the insurance sector, with the remaining 25% from business placed directly by clients.

ISL’s revenues rose by 3.5%, or £7k, from around £220k to £228k over the period. The increase was because the volume of new business outweighed the number of clients who did not renew the service with ISL. Costs rose as a consequence of the delivery of a greater number of services, and because sub-contractor fees rose in the second half of the year due to a need to cover for the medical-related absence of a member of staff. Despite the higher costs incurred, pre-tax and management charge profit rose to a little over £44k, an improvement of around £3.9k or 10%.

Personnel Health & Safety Consultants Limited (PHSCL)

• 2017: sales of £666,900 yielding a profit of £218,900
• 2016: sales of £703,300 yielding a profit of £276,100

The principal activity of PHSCL in the year under review continues to be that of providing general health and safety consultancy and training services to public and private sector clients. In addition, consultants provide expert witness reports in connection with criminal and legal cases, and some editorial content for safety publications.

Turnover decreased by around 5% with gross margins down to 59%.  Higher staff salaries and the effects of pension auto-enrolment, combined with an inability to pass on our extra costs to clients were responsible for lower profits.

Most of PHSCL’s revenue is obtained under a retainer service, with these clients’ often purchasing additional consultancy or training days.

During the year an agreement was made with PHSCL’s largest client to transfer a consultant from the payroll onto the client’s headcount. Although a compensatory payment was received, this has led to a net loss of recurring revenues.

The company continues to be a net provider of resources to other members of the Group, with policy dictating that no cross-charges are applied to reflect this contribution.

QCS International Limited (QCS)

•     2017: sales of £624,000 yielding a profit of £210,800
•     2016: sales of £528,000 yielding a profit of £122,700

QCS’s turnover and operational profit both exceeded management expectations.  It was hoped that the company would benefit from changes to ISO standards, which experience has shown leads to greater demand for both training and consultancy services.  This proved to be the case and the company increased sales significantly in the year, while keeping a close control on costs. 

Sales increased by £96k (18%) compared to 2015-16 and the corresponding profit increased by £88k (72%) to £211k.  This considerable increase in profit reflects the improved utilisation of assets/resources. 

QCS continues to be a leader in the design, marketing and delivery of training courses and consultancy in respect of the ISO standards, which can be seen in the high number of training courses (public and in-house) and new consultancies delivered.  QCS is highly regarded within its locale and has a considerable share of the ISO training market for southern and central Scotland.

The changes in 2015 to the standards ISO 9001 and ISO 14001 continue to underpin new sales.  This is likely to continue until autumn 2018, by which point transition must be complete.  QCS has presented plans to find new markets for 2018 onwards should the demand for services linked to the new standards decline.

QCS decided to retain full approved training partner status with our main professional body, IRCA.  During the year IRCA adjusted their relationship with their training partners, causing some of QCS’s competitors to decide to leave the group.

QCS continues to demonstrate high levels of customer retention; 70% of consultancy clients were retained while achieving a steady growth of 15% in new clients to the consultancy portfolio. 

QCS’s medical device consultancy service has been in place for over a year.  Medical device consultancy sales were not as high as hoped in the first half of the financial year but new clients have been secured in early 2017. QCS are using their new website and marketing initiatives to focus on generating further work in this area which can be charged at a premium. Concerns are being raised amongst clients about the potential impact of Brexit in this sector which relies heavily upon EU cooperation in respect of regulations.  This uncertainty may generate opportunities as clients seek reassurance and guidance once the new regulatory framework is established.

It was hoped that the British standard OHSAS 18001 for health and safety would have been replaced by a new international standard ISO 45001 in 2016-17.  This did not happen and the latest indications are that this may not occur until late 2017.  This will provide us with an opportunity to assist clients with the transition process, albeit at a lower rate than for work associated with ISO 9001 and ISO 14001.

Quality Leisure Management Limited (QLM)

• 2017: sales of £437,100 yielding a profit of £74,300
• 2016: sales of £506,290 yielding a profit of £95,900

The business continued to develop and diversify in 2016-17 but the company’s core business functions will be the focus as QLM continues to adapt to the changing business environment and client base. 

QLM saw a 14% fall in turnover from £506,290 in 2015-16 to £437,100 in 2016-17.  This was largely due to staffing issues; a significant period of sickness absence in the second quarter and the loss of the equivalent of one full time member of staff in December 2016.

Auditing income declined by 22% from £108,900 in 2015/16 to £84,300 in 2016-17.  The number of audits undertaken has decreased and lighter, more general topics or activity specific reviews have taken precedence over QLM Leisuresafeâ„¢ audits.

Staffing and subcontractor’s costs varied significantly in the latter part of 2016-17 with two part-time consultants retiring and another member of staff leaving the payroll and moving to a sub-contractor role to provide both parties with more flexible working arrangements.  Savings and efficiencies should continue to be seen as sub-contractors are increasingly used in 2017-18.

Accident investigation income, although slightly down year on year plays a significant role in publicly demonstrating QLM’s competence and level of expertise.  QLM continues to provide expert witness testimony for civil and criminal cases and has been engaged by the Health and Safety Executive, environmental health departments, solicitors and insurance companies in support of swimming, leisure and service industry cases. 

Publications generated £6,200 of income in the year ended 31 March 2017.  The CIMSPA publications, Risk Assessment Manual and Best Practice Health & Safety Operating Procedures were published later than expected by the Institute and sales suffered accordingly.

QLM continues to update its technology, including website development, server replacement and the utilisation of cloud based systems.  This expenditure is essential for the development of the business and to gain efficiencies within it. Investment in this area will continue to be a priority in 2017-18.

RSA Environmental Health Limited (RSA)

• 2017: sales of £374,100 yielding a profit of £65,100
• 2016: sales of £413,100 yielding a profit of £72,900

The principal activities of the company in the year under review were the provision of health and safety consultancy services and training, together with the sale of associated health and safety products.

Income has fallen year on year, as RSA continues its transition away from the provision of low-margin services to the public sector to higher margin private sector services. The benefit of this strategy is seen in the higher gross profit margins despite lower revenues.

Over the past year RSA has focused on adapting the company to one that no longer relies upon the previous strategy that was geared towards Local Authority contracts. This has allowed the business to concentrate its effort on supporting schools with their management of health and safety via the SafetyMARK service core offering.  This area has seen an increase in growth from 2015-16 with the highest turnover achieved since the company moved into the schools market.

Indications show that there is a continuing demand despite cost pressures being placed on the mainstream schools sector. The SafetyMARK service is proving cost effective and is finding favour within its target market. The company seeks further growth through provision of services to multi academy trusts to build on revenues and increase the client base. Several multi-school partnerships have increased the number of schools under contract and this has brought in additional revenues.

The independent schools sector is another area where RSA has seen an uplift in clients using the SafetyMARK scheme. Cost pressures are less evident in this sector and the more complex nature of the schools concerned means that generally a higher premium can be commanded. Further marketing and attendance at the Independent Schools Bursars Association conference in May 2017 will aim to increase revenues from this part of the market.

One London borough council has continued to promote SafetyMARK as an alternative safety support service to that previously provided by the local authority. The business has seen modest growth in this area in the past year with the continued provision of audits and support as well as providing health and safety training within the borough. Currently there are 17 schools within the borough signed up to the scheme.  Some schools are currently operating with no support and free training seminars were provided to increase awareness of the SafetyMARK brand. This resulted in new enquiries and an additional school signing up.

SG Systems (UK) Limited (SG)

• 2017: sales of £1,414,500 yielding a loss of £113,500
• 2016: sales of £256,700 yielding a loss of £68,900 (3.5 months)

In its first full year since joining the Group, SG generated sales of £1,414,500.  Sales were lower than forecast due to a hiatus in store openings and refits from a major grocery customer following its acquisition of another retailer.  This, combined with pressure on gross margins caused by the depreciation of sterling following the June 2016 EU referendum, has meant that the company made a loss for the year.

SG’s traditional core customer base of national retail chains in the department store, fashion, grocery, stationery and electronics sectors has generally continued to trade well during 2016-17.  The significant efforts made by the SG sales team during 2016-17 have seen a number of new retail accounts and a number of new product lines being launched in response to customer demand which will provide a strong platform for growth in 2017-18 and beyond.  Sectorally the customer base has also diversified with a series of projects implemented in a range of non-retail sectors, including construction, school libraries, prisons/secure units, tourist attractions and hotels.

During the year closer operational links have developed with B to B and these will deepen further during the 2017-18 financial year. SG’s key priorities for 2017-18 are to grow sales through the introduction of new products in existing accounts and new accounts and to improve efficiency of stock management and technical delivery.

PHSC plc

• 2017: net loss of £501,100 before management charges, exceptional costs and dividends received
• 2016: net loss of £479,600 before management charges, exceptional costs and dividends received

The parent company incurs costs on behalf of the group and does not generate any income. The costs incurred by PHSC plc represent the costs of running an AIM listed group and are consistent with the previous year.

On behalf of the board

Stephen King
Group Chief Executive

11 August 2017

Group Statement of Financial Position

As at 31 March 2017

			2017 £		2016 £
Non-Current Assets
Property, plant and equipment			626,224		675,345
Goodwill			3,878,463		4,503,654
Deferred tax asset			21,693		497
			4,526,380		5,179,496

Current Assets
Inventories			487,367		416,371
Trade and other receivables			1,447,493		1,894,875
Cash and cash equivalents			206,719		256,558
			2,141,579		2,567,804

Total Assets

6,667,959

7,747,300

Current Liabilities
Trade and other payables			1,064,358		1,221,599
Current corporation tax payable			-		103,403
Deferred consideration			-		200,000
Contingent consideration			25,000		-
			1,089,358		1,525,002

Non-Current Liabilities
Deferred tax liabilities			57,800		62,755
Deferred consideration			-		75,000
					-
			57,800		137,755

Total Liabilities

1,147,158

1,662,757

Net Assets

5,520,801

6,084,543

Capital and reserves attributable to equity holders of the Company
Called up share capital			1,467,726		1,308,634
Share premium account			1,916,017		1,751,358
Capital redemption reserve			143,628		143,628
Merger relief reserve			133,836		133,836
Retained earnings			1,859,594		2,747,087
			5,520,801		6,084,543

Group Statement of Comprehensive Income

For the year ended 31 March 2017

			2017 £		2016 £
Continuing operations:
Revenue			7,162,299		7,004,340
Cost of sales			(3,988,623)		(3,803,240)
Gross profit			3,173,676		3,201,100
Administrative expenses			(3,319,092)		(2,930,931)
Administrative expenses - exceptional			(625,191)		(608,936)
Other income			1,560		-
Other income - exceptional			50,000		-
Loss from operations			(719,047)		(338,767)
Finance income			471		1,052
Finance costs			(2,117)		(8)
Loss before taxation			(720,693)		(337,723)
Corporation tax credit			29,495		(75,920)
Loss for the year after tax attributable to owners
of the parent			(691,198)		(413,643)
Other comprehensive income			-		-
Total comprehensive income attributable to owners of
the parent			(691,198)		(413,643)
Basic and diluted Earnings per Share from continuing operations			(4.92)p		(3.23)p

Group Statement of Changes in Equity

For the year ended 31 March 2017

Share Capital £

Share Premium £

Merger relief reserve £

Capital Redemption Reserve £

Retained Earnings £

Total £

Balance at 1 April 2015	1,268,634	1,751,358	79,836	143,628	3,355,410	6,598,866
Loss for year attributable to equity holders	-	-	-	-	(413,643)	(413,643)
Issue of shares on acquisition	40,000	-	54,000	-	(4,385)	89,615
Dividends	-	-	-	-	(190,295)	(190,295)
Balance at 31 March 2016	1,308,634	1,751,358	133,836	143,628	2,747,087	6,084,543

Balance at 1 April 2016	1,308,634	1,751,358	133,836	143,628	2,747,087	6,084,543
Loss for year attributable to equity holders	-	-	-	-	(691,198)	(691,198)
Issue of shares on acquisition	159,092	164,659	-	-	-	323,751
Dividends	-	-	-	-	(196,295)	(196,295)
Balance at 31 March 2017	1,467,726	1,916,017	133,836	143,628	1,859,594	5,520,801

Group Statement of Cash Flows

For the year ended 31 March 2017

	Note		2017 £		2016 £
Cash flows from operating activities:
Cash generated from operations	I		124,925		414,062
Interest paid			(2,117)		(8)
Tax paid			(100,061)		(83,041)
Net cash generated from operating activities			22,747		331,013
Cash flows used in investing activities
Purchase of property, plant and equipment			(2,087)		(35,654)
Payments in relation to acquisitions (net of cash acquired)			-		(262,674)
Disposal of fixed assets			1,574		724
Interest received			471		1,052
Net cash used in investing activities			(42)		(296,552)
Cash flows used by financing activities
Payment of deferred consideration			(200,000)		(50,000)
Proceeds from placement of shares			323,751		-
Dividends paid to Group shareholders			(196,295)		(190,295)
Net cash used by financing activities			(72,544)		(240,295)
Net decrease in cash and cash equivalents			(49,839)		(205,834)
Cash and cash equivalents at beginning of year			256,558		462,392
Cash and cash equivalents at end of year			206,719		256,558

Notes to the Group Statement of Cash Flows

			2017 £		2016 £
I. CASH GENERATED FROM OPERATIONS
Operating loss – continuing operations			(719,047)		(338,767)
Depreciation charge			44,089		46,882
Goodwill impairment			625,191		608,936
Fair value movement in contingent consideration			(50,000)		-
Loss on sale of fixed assets			5,545		2,298
Increase in inventories			(70,996)		(28,179)
Decrease/(increase) in trade and other receivables			447,384		381,937
(Decrease)/increase in trade and other payables			(157,241)		(259,045)
Cash generated from operations			124,925		414,062

Notes to the results announcement of PHSC plc

The financial information set out above does not constitute the Group's financial statements for the years ended 31 March 2017 or 31 March 2016, but is derived from those financial statements. Statutory financial statements for 2016 have been delivered to the Registrar of Companies and those for 2017 have been approved by the board and will be delivered after dispatch to shareholders. The auditors have reported on the 2016 and 2017 financial statements which carried an unqualified audit report, did not include a reference to any matters to which the auditor drew attention by way of emphasis and did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006.

While the financial information included in this announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not in itself contain sufficient information to comply with IFRS. The accounting policies used in preparation of this announcement are consistent with those in the full financial statements that have yet to be published.

Annual General Meeting

This year’s annual general meeting (“AGM”) will be held at 10.00am on Monday 11 September 2017 at The Old Church, 31 Rochester Road, Aylesford, Kent ME20 7PR.

The report and accounts and notice of the AGM will be posted to shareholders on or around 15 August 2017 and will be available to view on the Company’s website at www.phsc.plc.uk

Dividend

No final dividend is proposed but an interim dividend may be considered if progress continues