Report and Accounts 2016 Report and Financial Statements For the year ended Friday 31 December 2016 Officers and professional advisers Chairman’s review Chief Executive review and strategic report Directors’ report Corporate governance Independent Auditor’s report Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Company statement of comprehensive income Company statement of changes in equity Company statement of financial position Company statement of cash flows Contents 3 4-5 6-9 11-13 15-16 17 19 20 21 22-23 24 25-51 52 53 54 55 Notes to the company financial statements 57-60 Pennant International Group PLC Officers and Professional Advisors Director S Moore P Walker FCA C Powell FCA T Rice C Snook (Chairman) (Chief Executive Officer) (Appointed 26 September 2016) (Stepped down 21 February 2017) Secretary P H Walker Registered office Pennant Court Staverton Technology Park Cheltenham Gloucestershire GL51 6TL Company number 3187528 Auditor Bankers Nominated Adviser and Broker Mazars LLP 45 Church Street Birmingham B3 2RT Barclays Bank Plc Bridgewater House Finzels Reach Counterslip Bristol BS1 6BX W H Ireland Ltd 4 Colston Avenue Bristol BS1 4ST 3 Pennant International Group PLC Chairman’s Review This followed the earlier announcement in June that the Company had secured work on two major new contracts, both with Middle East customers, which have an aggregate value in excess of £13 million. The success of the share issue and the award of the major contract wins, together with a robust Order Book, positions the Group well for the medium and longer term. Key financials For the year ended 31 December 2016, the Group delivered consolidated revenues of £17.21 million (2015: £9.89 million), driven by the commencement of work on the two new major contract awards highlighted above. The Group posted consolidated operating profit of £1.90 million (2015: operating loss of £2.36 million), reflecting the significant turn-around in trading. This much improved trading performance, combined with the fundraising, has resulted in a near doubling of the Group’s consolidated net assets to £11.82 million (2015: £6.26 million). Gross profit margin for the period also improved substantially to 40% (2015: 23%) as a result of previously implemented cost controls and changes to the sales mix. Basic earnings per share of 6.48p also compares very favourably to the reported loss per share of 8.71p for the same period last year. ‘‘ a year of strategic change for Pennant, supported by our shareholders, customers and staff, restoring profitability ‘‘ On behalf of the Board of Directors I am pleased to Cash used in operations amounted to £0.25 million (2015: cash present to shareholders my first annual results statement as generated £1.1 million), reflecting the phase of production on Chairman. In the Trading Update published in June 2016 the several major programmes. The Group continues to have nil Board stated that, following modest pre-tax profit in the first borrowings with a healthy year-end cash balance of £3.52 half, an improvement in trading was expected in the second million (2015: £1.12 million). half of the financial year. I am pleased to confirm that this improvement materialised, delivering a strong result across The Group’s tax position shows a small tax credit of £17,691 for the full year. (2015: £72,445), which relates to a refund received by an overseas subsidiary. The Group’s effective tax rate is NIL% During the period under review, a number of significant (2015: NIL%). Profits generated from operations utilised operational and strategic objectives were achieved, most £2.2m of UK tax losses and the Group has unrelieved tax notably the Company’s first equity fund-raising since 2001 by losses carried forward of £2.5m (2015: £4.7m). There were way of an oversubscribed Institutional Placing which raised no Research and Development tax credits claimed in the UK over £3.5million of new share capital before expenses. during the year (2015: £0.5m). 4 Pennant International Group PLC Chairman’s Review The year-end order book stood at £38 million (2015: £38 I would also like to take this opportunity to thank all million) of which £18 million (2015: £10 million) is deliverable staff across the Group for their hard work and dedication within one year. Of the total order book, 70% (2015: 70%) is throughout this transitional year. Their commitment and denominated in sterling and 25% (2015: 25%) is drive to ensure that the business continues to deliver the denominated in Canadian dollars. Delivery achieved in the high quality solutions that our customers require and second half together with a strong closing order book expect, operating under tight timescales, are key factors to provides a firm platform for future performance. maintaining and enhancing the ongoing and longstanding Dividends The Board fully appreciates the importance of maintaining a progressive dividend. However, notwithstanding the much improved trading performance and outlook, positive cash generation and nil net borrowings, the Directors have concluded that it is in the Company’s and shareholders’ current best interests to retain cash for working capital and investment. The Board will therefore not be recommending the payment of a final dividend for the year ended 31 December 2016. Governance relationships we have with our customers. Outlook Prospects remain positive, taking into the account the contracted order book valued at more than £38 million which underpins the forward visibility of revenues well into 2019. The Board is confident that it can continue to increase revenues through organic growth but it will also consider complementary strategic acquisitions which can both increase the depth and range of the Group’s offering and enhance underlying revenues. We are experiencing an encouraging start to 2017 and anticipate a healthy first half outcome and further good The Board believes in robust corporate governance. We have progress for the year as a whole. worked closely with our advisors and have reviewed our governance frameworks to ensure that the business Approved by the Board on 9 March 2017 continues to establish strong Governance throughout the And signed on its behalf Group, appropriate for a company of its size. Our risk management procedures continue to be reviewed and tightened where necessary. Our people S A Moore Chairman On 21 February 2017 Chris Snook stepped down from the company as CEO. The Board has appointed Philip Walker as Chief Executive Officer to succeed him having been identified as a potential successor in 2014. This is a key appointment which provides fundamental continuity with the brand, knowledge base and strategy of the business. I am delighted that Philip has agreed to step up to assume the leadership of the Group. He has moved quickly to build a leadership team around him and will be making more key appointments over the coming months. 5 Pennant International Group PLC Chief Executive Review & Strategic Report The Board is confident that the underlying strengths of Pennant – our long-term customer relationships, our specialist services and our quality-assured reputation - remain the solid foundation of our offerings across the Group. Operational changes The Group has recently formed a Management Committee under the leadership of Philip Walker, Chief Executive Officer. The committee comprises the senior managers and heads of departments across the Group. It will meet monthly to discuss operational matters and will be responsible for supporting the Chief Executive run the Company day-to-day. Gary Barnes has been appointed Head of Finance. Gary has over 17 years’ experience as Group Finance Controller and will be responsible for all day-to-day financial functions in the Group. The Company has made a formal offer to an individual to join the Group as Company Secretary and in-house legal counsel, which has been accepted. The new Company Secretary will be responsible for ensuring compliance with all regulatory and legal matters. The appointment will add greater depth to our risk management and commercial functions. Restructuring of Group Throughout the period under review the Group has operated three trading divisions, namely Training Systems, Software Services and Data Services, with offices in the UK, Canada and Australia. The Board is always seeking to enhance and improve the strength and operating efficiency of the Group and has taken the opportunity to refine the existing Group structure. Post year-end, Pennant Information Services Limited has been renamed Pennant Support & Development Services Limited (“PSDSL”). The Board’s intention is to integrate the Support Services Division with the existing Information Services Division. The practical effect of this will be to consolidate in one operating unit the contract support functions currently spread across the Group and is expected to transfer approximately £2 million of revenue to PSDSL. This will result in the Group operating three focused divisions, Training, Software and Support and Development. Strengthening the balance sheet On 15 August, 2016, the Company announced its first equity fund-raising since 2001. This followed the earlier returning to profitability was our number one priority ‘‘ ‘‘ Pennant The Group has a diverse portfolio of capabilities enabling it to offer services that cover training equipment hardware and related support, including simulation, virtual reality and computer based training, plus technical documentation, media development, software development and related consultancy. It operates principally in the defence, rail, power and aerospace sectors and with government departments. A challenging year behind us – back on track Following a disappointing first half, brought about largely by contract delays beyond our control, our highest priority was to get back on track during the second half of the year in order to demonstrate that the Group’s businesses are fundamentally strong and that they could recover quickly. We remained confident that the contract delays would be resolved and that the Group would deliver a strong performance during the second half of the year, which it did. 6 Pennant International Group PLC Chief Executive Review & Strategic Report announcement in June that it had secured work on two major new contracts. These contracts, both with Middle East customers, have an aggregate value in excess of £13 million. Having considered the working capital requirements of the contracts and to ensure sufficient headroom to cover commitments to other existing and potential work, the Directors believed it prudent to supplement the Company’s existing working capital resources by way of an equity fundraising. This was successfully concluded with an oversubscribed institutional placing of 1,527,739 treasury shares and 4,943,533 new ordinary shares at 55 pence per share which raised in aggregate £3.56 million for the Company before expenses. Investment for the future During the year the Company also announced that it had taken possession of three commercial premises at Staverton Connection Business Park, Cheltenham, adjacent to the Group’s Head Office, representing a total investment of over £1 million in new facilities. Post period end, the Company took possession of two additional new commercial premises at the same location, investing a further £500,000 in new facilities. Together these new premises increase the Groups production capacity to over 30,000 sq. ft. (2015: 12,000 sq. ft.) and will facilitate significant expansion and growth. The Division delivers and supports specialist training systems based on software emulation, hardware simulation, virtual reality and computer based training, principally within the defence sector. It has a strong portfolio of proven training devices ranging from simple hand skill trainers to sophisticated simulators. It also has a track record of successfully designing and manufacturing bespoke new devices for specific applications. The Division has significant ongoing orders that will provide work through 2017 and beyond and there are further prospects with both existing and new customers regarding a number of opportunities. Although the timing of major contract awards has proved to be both difficult to predict and beyond the Group’s control, the Board considers that a number of factors point towards significant potential for further growth: • new capital equipment platforms are becoming more sophisticated and complex thereby increasing the requirement for training; • the use of ‘real’ equipment for training has safety implications, is expensive and often impractical; • there is a continuing trend for defence forces to outsource training services, including updating their training devices; and • increase in global defence expenditure. Divisional performance New contract awards and operational achievements during the year are set out below: The Group delivered a very solid performance during the second half of the year, demonstrating an ability to convert major contract wins into both revenue and profit. Most positively we have been able to meet contractual milestones, delivering on time and securing payment. Training Systems Division The Training Systems Division continues to be the main driver within the Group. Revenues for the year were strong at £12.1 million (2015: £4.9 million) as a direct result of key contract awards highlighted above. Revenue Gross margin contribution Divisional contribution 2016 £m 12.08 4.99 1.69 2015 £m 4.85 0.55 (2.66) • Secured second phase contract with undisclosed Middle East customer worth in excess of £7 million for the supply of a range of equipment, hardware and software, and maintenance support to an aeronautical engineering training college in the Middle East. The equipment supplied includes Part Task Trainers, mechanical and avionics systems for practicing maintenance activities and a virtual reality procedure trainer for aircraft marshalling and ground handling activities; • Secured the first phase of a supply contract with a new strategic Middle East customer worth £6 million for the supply of a range of equipment, hardware and software, and maintenance support to aeronautical engineering training college in the Middle East. The equipment supplied includes Part Task Trainers and mechanical and avionics systems for practicing maintenance activities; 7 Pennant International Group PLC Chief Executive Review & Strategic Report • Awarded a landmark contract with Lockheed Martin Corporation MST (LMC) with a potential value of £2.2m over 18 months. The contract is for the development of computer-based training for aircrew and engineering staff. • Secured second contract with LMC to provide Rotary Wing Rear Crew Winch Trainer (RCWT) in support of Rear Crew Training for the United Kingdom Military Flight Training System (UKMFTS). The RCWT is a representative cabin of the Maritime Advanced Rotary Training Aircraft and will support all aspects of Winch Operator training. • Successful completion of contract with an Indian customer for the provision of software based training capability. Software Services Division The Division has offices in Canada, Australia and the UK. It owns the rights to the market leading OmegaPS suite of Logistics Support Analysis software which is sold and used worldwide by major defence contractors and exclusively by the defence authorities in Canada and Australia to maximize efficient logistics support to complex long-life equipment asset fleets. Revenues are generated from the sale of licences, associated maintenance agreements, software training course and consultant services in support of the product implementation. The product is regularly updated to enhance functionality, keep in line with emerging industry standards and changing technology. Regular updates are issued to users. The Division achieved revenues of £4.3 million (2015: £4.0 million), an increase of 7.5% on the prior year. This increase has been driven by strong growth in consultancy revenues, in particular by the use of OmegaPS on some major long term capital programmes and the recent re-profiling of the CAN$19.7 million Canadian Department of Defence special- ist consultant support contract which is now fully operational and expected to grow through 2017 and beyond. The contribution to Group operating profit increased to £205,288 (2015: £149,110). This growth has been driven by increased consultant activity. The main contracts and operational highlights contributing to trading during the year were: • Re-profiling of strategic single source contract due to run rate progressing ahead of expected levels. Early discussions commenced to renew the contract and increase its value; • Sale of new licenses for the use of the Group’s Integrated Logistics Support Software product, OmegaPS, to Oshkosh Truck Corporation, USA and Fleetway Incorporated, Canada in support of major defence programmes. Support & Development Division As mentioned above, the Board is committed to enhancing the strengths and capabilities of the Group and has taken the opportunity to refine the Group structure. On 6th January 2017 Pennant Information Services Limited (“PISL”) was renamed Pennant Support & Development Services Limited (“PSDSL”). The intention is to integrate the Support Services Division with the existing Information Services Division. The practical effect of this will be to consolidate in one operating unit the contract support functions currently spread across the Group and is expected to transfer approximately £2 million of revenue to PSDSL. This will result in the Group operating three divisions, Software, Support and Development, and Training. The Support area of the division provides bespoke service support solutions in the form of integrated logistical hardware, software and post design services support to its customers through long term contract agreements. The Development element of division represents the historic PISL business which provides high quality media, graphics, virtual reality software and technical documentation to the defence, rail, power and government sectors. Revenues for the year were lower at £1.8 million (2015: £2.0 million) which resulted in an operating loss of £94,759 (2015: £138,138 loss). This was largely the result of a delay in the award of a rail contract which is expected to be secured during the first half of the current year and which will contribute to current year performance. 2016 £m 4.33 1.42 0.21 2015 £m 4.00 1.13 0.15 Revenue Gross margin contribution Divisional contribution 2016 £m 1.78 0.56 (0.10) 2015 £m 2.04 0.62 (0.14) Revenue Gross margin contribution Divisional contribution 8 Pennant International Group PLC Chief Executive Review & Strategic Report The main contracts and operational highlights contributing to trading during the year were: Innovation • An on-going contract to provide all Operation, Maintenance and Training Documentation for the R188 Rail Car Project currently being built by Kawasaki Rail Car Inc. for New York City Transit Department; • An continuing contract with Capgemini UK PLC for the development for Her Majesty’s Revenue and Customs (HMRC) of a Basic PAYE Tools (BPT) product as a multi-platform, client side application that operates in unison with HMRC’s Real Time Initiative for PAYE; and • A new contract with Network Rail to produce five Electrical Control Room (ECR) simulators to train Electrical Control Room Operators (ECO’s). The Division has many years’ experience in the rail sector and is actively involved with a number of significant opportunities in USA and the Far East. Our people and recruitment Our employees remain core to our future business success. During 2016 we saw growth in the size of our teams in our UK, Canadian and Australian operations attracting talented and specialist skills across the Group. The Group’s employees have diverse experience and educational, professional and cultural backgrounds. They have responded exceptionally well to the challenges presented during the year and the Group’s strong reputation and longstanding relationships with many of its customers are the measure of their success. Diversification Developing new capabilities by applying newly developed and existing, proven technologies and continually updating existing products and services to meet market demands, current standards and new technologies. Pursuing opportunities in closely related sectors and in particular those with potential long term revenue streams. It is the Board’s intention to augment organic growth by taking advantage of potential opportunities which may arise for complementary, earnings enhancing acquisitions. This strategy continued to be implemented throughout 2016 and generated considerable tendering activity, particularly for Training Systems, and regular involvement with customers in respect of a strong pipeline of opportunities. New growth initiatives have been launched with the aim of extending sales penetration beyond traditional territories and significant investment is planned in developing new product offerings, exploiting gaps in the market wherever possible. We will continue to monitor currency fluctuations however notwithstanding current economic uncertainty surrounding the formal commencement of the UK’s exit from the EU, the Group has not yet detected any loss of confidence from its global customer base. At the same time we will look to complement our organic growth strategy by pursuing opportunities for strategic acquisitions, carefully considering expanding our capabilities and service offering. Approved by the Board on 9 March 2017 and signed on its behalf Future strategy Our core strategic objective remains largely unchanged; consistently applying a strategy across the Group of increasing shareholder value primarily through organic growth. This strategy is built upon: P. H. Walker Director Customer focus Building relationships with existing and potential new customers, understanding their requirements, being flexible and delivering on time and to budget. 9 Pennant International Group PLC Directors’ Report The directors present their report and the audited financial statements for the year ended 31 December 2016. Principal activities The principal activity of the Company is the provision of management services to the Group. The principal activity of Group companies during the year was the delivery of integrated support solutions. These comprise simulation, virtual reality and computer based training systems, technical documentation, software solutions and Logistic Support Analysis Software to customers worldwide; principally those in defence and aerospace, but also in rail transport, oil and gas, power, information technology and to government departments. Dividends No dividends were paid during the year (2015: £794,168). As highlighted in the Chairman’s Statement the Board is not recommending the payment of a final dividend in respect of the year ended 31 December 2016. Going concern The directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. In reaching this conclusion the directors have considered the financial position of the Group, its cash, liquidity position and borrowing facilities together with its forecasts and projections for 18 months from the reporting date that take into account reasonably possible changes in trading performance. The going concern basis of accounting has therefore continued to be adopted in preparing the financial statements. Post Balance sheet events The Group’s principal financial instrument is cash, the main purpose of which is to provide finance for the Group’s operations. In addition the Group has various other financial assets and liabilities such as trade receivables and trade payables arising directly from its operations. In accordance with the Group’s treasury policy, derivative instruments are not entered into for speculative purposes. The Group’s exposure and approach to capital and financial risk, and approach to managing these is set out in note 35 to the Consolidated Financial Statements. Employee engagement The Group engages with its employees regularly through various media including emails, intranet, newsletters, employee opinion surveys, team briefings and twice yearly financial results presentations to all staff. Details of the Group performance are shared with all employees at appropriate times using these methods. Employee policies The Group has established employment policies to ensure compliance with current legislation and codes of practice, including equal opportunities. The Group is an equal opportunities employer and applications from disabled persons are fully and fairly considered, having regard to the aptitudes of the applicant. In the event of disability, every effort is made to ensure that employment continues and appropriate training, career development and promotion of disabled people should, as far as possible, be identical to that of other employees. Policy on payment of suppliers The Group’s policy during the year was to pay suppliers in accordance with agreed terms. There are no post balance sheet events to report. Authority for company to purchase its own shares Treasury operations and financial instruments The Group operates a centralised treasury function which is responsible for managing liquidity, interest and foreign currency risks associated with the Group’s activities. Under a shareholders’ resolution of 20 April 2016, the directors were granted authority to purchase through the market 3,970,839 of the Company’s ordinary shares, at a maximum price equal to 105% of the average of the middle market quotations for an ordinary share taken from the Daily Official List of the London Stock Exchange for the 11 Pennant International Group PLC Directors’ Report five business days immediately preceding the purchase. Since 20 April 2016 the directors have purchased through the market NIL ordinary shares for Treasury and have remaining authority to purchase 3,970,839 ordinary shares. A proposal to renew the authority will be made at the 2017 AGM. One third of the Directors are subject to re-election every year. Accordingly, Mr P Walker retires by rotation at the Annual General Meeting and, being eligible, offers himself for re-election. The Board During the year the Group has seen a number of changes to the composition of the Board. On 3 March 2016, Jennifer Powell stepped down as a Non-Executive Director. The Board would like to thank Jennifer for her contribution during her time on the Board. On 18 May 2016 Mr S A Moore was appointed Chairman. On 18 May 2016, Christopher Powell stepped down as Chairman to become a Non-Executive Director. I take this opportunity on behalf of the Board and the Group’s shareholders to thank Christopher for his contribution during his time as Chairman. Responsibilities of the directors The Directors are responsible for preparing the Chairman’s Review and Strategic Report, the Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union and applicable law. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and Company for that period. On 26 September 2016 Mr T Rice was appointed to the Board as a Non-Executive Director and is a member of the Remuneration Committee. In preparing these financial statements, the directors are required to: On 21 February 2017, Chris Snook stepped down from the Board as Chief Executive Officer. The Board has appointed Philip Walker as Chief Executive Officer. This appointment provides fundamental continuity with the brand, knowledge base and strategy of the business. The Board comprises the Chairman, the Chief Executive and the Non-Executive Directors. It meets ten times a year and relevant information is distributed to directors in advance of the meetings. The Directors have access to all information and if required, external advice at the expense of the Company and access to the Company Secretary. The Board makes decisions on all material matters including long term and commercial strategy, annual operating and capital budgets, capital structure and financial and internal controls without having a formal schedule of reserved matters. The Board attaches a high priority to communication with shareholders. The Group’s annual and half yearly reports are sent to all shareholders. The Group liaises regularly with major shareholders and there is an opportunity for individual shareholders to question the Chairman at the Annual General Meeting. • select suitable accounting policies and then apply them consistently; • make judgments and accounting estimates that are reasonable and prudent; • state whether IFRS as adopted by the European Union have been followed subject to any material departures disclosed and explained in the financial statements; • provide additional disclosures when compliance with specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and Company, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 12 Pennant International Group PLC Directors’ Report The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.. Political donations The Group has not made any political donations during the current or prior year. Directors’ indemnity The Company’s Articles of Association provide, subject to the provisions of UK legislation, an indemnity for directors and officers of the Company in respect of liabilities they may incur in the discharge of their duties or in the exercise of their powers, including any liabilities relating to the defence of any proceedings brought against them which relate to anything done or omitted, or alleged to have been done or omitted, by them as officers or employees of the Company. Appropriate directors’ and officers’ liability insurance cover is in place in respect of all the Company’s directors. Directors’ conflicts of interest The Company has procedures in place for managing conflicts of interest. Should a Director become aware that they, or their connected parties, have an interest in an existing or proposed transaction with Pennant, they should notify the Board in writing or at the next Board meeting. Directors have an ongoing duty to update the Board in relation to any changes to these conflicts. Significant shareholdings As at 31 December 2016 the Group has been notified, in accordance with Chapter 5 of the Disclosure and Transparency Rules, of the voting rights held as a shareholder of the Company as shown in the table below. Investor Number of % interest in the total shares held voting rights of Pennant Powell C C Esq Hargreave Hale & Co Business Growth Fund Plc 6,301,533 4,292,305 3,636,364 Liontrust Asset Management 3,224,485 Downing LLP Seal D J Esq 2,408,172 1,300,000 Barclays Stockbrokers Limited 1,129,951 19.13 13.03 11.04 9.79 7.31 3.95 3.43 Matters covered in the Chairman’s Statement and Financial Statements As permitted by paragraph 1A of schedule 7 to the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 certain matters which are required to be disclosed in the Directors Report have been omitted as they are included in the Chairman’s Statement on pages 4 and 5, the CEO review & Strategic Report on pages 6 to 9 and in notes 35 and 37 of the Finance Statements. Annual General Meeting The Company’s Annual General Meeting will be held at its offices located at Pennant Court, Staverton Technology Park, Cheltenham, GL51 6TL on Wednesday 19th April 2017 at 10:30am. The Notice convening the Annual General Meeting and an explanation of the business to be put to the meeting is contained in the separate notice sent to shareholders and is also available on the website at www.pennant.co.uk by following the links under “News & Events” on the home page. Statement as to disclosure of information to auditor As far as the directors are aware they have taken all necessary steps to make the auditor aware, of any relevant audit information and to establish that the auditor is aware of that information. As far as the directors are aware, there is no relevant audit information of which the Company and Group’s auditor is unaware. Auditor Mazars LLP have signified their willingness to continue in office and a resolution to reappoint Mazars LLP as auditor to the Company will be proposed at the 2017 AGM. Approved by the Board on 9 March 2017 and signed on its behalf P H Walker Director 13 Pennant International Group PLC Corporate Governance Introduction As an AIM listed company, Pennant International Group PLC (the “Company”) is not required to comply with the Financial Reporting Council’s UK Corporate Governance Code (the “Code”). Nevertheless Pennant International Group Plc Board (the “Board”) recognises the importance of good corporate governance and embraces the principles set out in the Code. The Board seeks to achieve compliance with the Code wherever appropriate and proportionate, having regard to the size of the Company and its subsidiaries (the “Group”) and the resources available to it. The Board is providing the following sections to further its commitment to high standards of corporate governance and effective board practice. The Audit Committee The Audit Committee’s role is to determine and apply policy on behalf of the Board to the financial reporting and internal control principles of the Company and for maintaining an appropriate relationship with the Company’s auditors. The audit committee consists of the Chairman and the Non-executive directors. It meets at least two times a year at appropriate times in the reporting and audit cycle and otherwise as required. During the year the Audit Committee, operating under its new terms of reference adopted on 15 November 2016, discharged its responsibilities, including reviewing and monitoring: • the consistency of, and any changes to, accounting policies both on a year-on-year basis and across the Company/Group; • the methods used to account for significant or unusual transactions; • whether the Company has followed appropriate accounting standards and made appropriate estimates and judgements, taking into account the views of the external auditor; • the clarity of disclosure in the Company’s financial reports and the context in which statements are made, and; • all material information presented with the financial statements, such as the operating and financial review and the corporate governance statement (insofar as it relates to the audit and risk management); Given the nature of the Group’s business, the Audit Committee pays particularly close attention to reviewing and discussing with the external auditors, the management’s judgments on the application of revenue recognition policies in relation to material projects. Internal Control and Risk Management Systems The Board has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. The purpose of the system of internal control is to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, but not absolute, assurance against misstatement or loss. During the year, operating under its revised terms of reference the Audit Committee has the responsibility to: • keep under review the effectiveness of the Company’s internal controls and risk management systems; and • review and approve the statements to be included in the Annual Report concerning internal controls and risk management. The Directors have established an organisational structure with clear operating procedures, lines of responsibility and delegated authority. The Remuneration Committee The Remuneration Committee’s role is to determine and apply policy on behalf of the Board to the remuneration and benefits of executive directors and to ensure compliance with best practice (including reporting to shareholders). The Company’s remuneration committee comprises the Chairman and the Non-Executive Directors. During the year, the Remuneration Committee, operating under its new terms of reference adopted on 15 November 2016, discharged its responsibilities, including determining and agreeing with the Board the framework or broad policy for the remuneration of the Company’s Chief Executive, Chairman, the executive directors, the Company Secretary and such other members of the executive management as it is designated to consider. The full Terms of Reference for all Board Committees are available on the Company website www.pennantplc.co.uk/ investors/corporate_governance.php 15 Pennant International Group PLC Corporate Governance Directors’ remuneration Fees for services Salary Bonus Benefits and car allowance Pension Total 2016 2015 C C Powell C Snook J K Powell P H Walker S A Moore T J Rice J Waller £ 125,000 - - - - - - £ 35,000 200,364 23,333 £ - 78,325 - £ 18,000 26,460 - £ - 20,000 - £ 178,000 325,149 23,333 148,902 108,325 19,899 15,000 292,126 54,385 10,769 - - - - - - - - - - 54,385 10,769 - - 14,154 £ 149,000 288,070 35,000 167,349 7,500 125,000 472,753 186,650 64,359 35,000 883,762 661,073 Pension contributions shown above are pension payments into the Pennant International Group plc Pension Scheme, a defined contribution scheme. There were 297,619 (2015: 297,619) share options held by the Directors at the year-end. Service contracts There are no directors’ service contracts or contracts for services with notice periods in excess of one year. Directors and their interests The following directors have held office since 1 January 2016 except where indicated otherwise and their beneficial interests in the ordinary shares of the Company were as stated below: C C Powell C Snook (stepped down 21 February 2017) P H Walker S A Moore T Rice (appointed 26 September 2016) 31 December 2016 5p ordinary shares 31 December 2015 5p ordinary shares Number 6,301,533 487,500 - 18,183 - Number 10,301,533 1,487,500 - - - Mr P Walker has a beneficial interest in 700,000 C shares of £0.001 each (2015: 700,000). Mr C Snook has a beneficial interest in 1,400,000 B shares of £0.001 each (2015: 1,400,000). There have been no movements between the year-end and the date of this report. 16 C C Powell C Snook J K Powell P H Walker S A Moore T J Rice J Waller 125,000 78,325 20,000 18,000 26,460 £ - - - - - - £ 35,000 200,364 23,333 54,385 10,769 - £ - - - - - £ - - - - £ - - - - - £ 178,000 325,149 23,333 54,385 10,769 - £ 149,000 288,070 35,000 167,349 7,500 - 14,154 148,902 108,325 19,899 15,000 292,126 125,000 472,753 186,650 64,359 35,000 883,762 661,073 Pennant International Group PLC Independent auditor’s report to the members of Pennant International Group Plc We have audited the financial statements of Pennant International Group Plc for the year ended 31 December 2016 which comprise the Consolidated Income Statement, Consolidated and Parent Company Statements of Comprehensive Income, the Consolidated and Parent Company Statements of Financial Position, the Consolidated and Parent Company Statement of Cash Flows, the Consolidated and Parent Company Statements of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on pages 15 - 16, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report is made solely to the company’s members, as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body for our audit work, for this report, or for the opinions we have formed. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s web-site at www.frc.org.uk/auditscopeukprivate. Opinion on the financial statements • the financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the Chairman’s Review and Strategic Report or the Directors’ Report. We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. In our opinion: • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2016 and of the group’s and the parent company’s profit for the year then ended; Louis Burns (Senior Statutory Auditor) for and on behalf of Mazars LLP Chartered Accountants and Statutory Auditor 45 Church Street, Birmingham B3 2RT 9 March 2017 17 Pennant International Group PLC Consolidated Income Statement For the year ended 31 December 2016 Continuing operations £ £ Notes 2016 2015 Revenue Cost of sales Gross profit Administrative expenses Operating profit/(loss) Finance costs Finance income Profit/(loss) before taxation Taxation credit Profit/(loss) for the year attributable to the equity holders of the parent Earnings per share Basic Diluted 5 17,211,455 9,892,685 (10,249,472) (7,591,942) 6,961,983 2,300,743 (5,057,374) (4,658,145) 1,904,609 (2,357,402) (9,051) 7,781 (25,682) 4,905 1,903,339 (2,378,179) 17,691 72,445 1,921,030 (2,305,734) 6.48p 6.06p (8.71)p (8.71)p 8 10 11 12 14 19 Pennant International Group PLC Consolidated Statement of Comprehensive Income For the year ended 31 December 2016 Profit/(loss) for the year attributable to the equity holders of the parent Other comprehensive income: Items that will not be reclassified to profit and loss Property impairment Deferred tax Notes 2016 2015 £ £ 1,921,030 (2,305,734) 17 (276,212) - 46,956 - Items that may be reclassified to profit or loss Exchange differences on translation of foreign operations Total comprehensive income for the period attributable to the equity holders of the parent 413,469 (132,558) 2,105,243 (2,438,292) 20 Pennant International Group PLC Consolidated Statement of Financial Position For the year ended 31 December 2016 Notes 2016 2015 Non-current assets Goodwill Other intangible assets Property, plant and equipment Available-for-sale investments Deferred tax assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Asset held for sales Total current assets Total assets Current liabilities Trade and other payables Current tax liabilities Obligations under finance leases Deferred revenue Total current liabilities Net current assets Non-current liabilities Obligations under finance leases Deferred revenue Deferred tax liabilities Warranty provisions Total non-current liabilities Total liabilities Net assets Equity Share capital Share premium account Capital redemption reserve Treasury shares Retained earnings Translation reserve Revaluation reserve Total equity Approved by the Board and authorised for issue on 9 March 2017 P H Walker Director 15 16 17 18 27 19 21 22 17 23 24 26 24 26 27 28 29 30 £ £ 964,159 295,780 2,642,448 - 482,989 4,385,376 - 7,820,128 3,517,541 575,000 - 11,912,669 16,298,045 3,824,925 1,610 4,070 162,500 3,993,105 7,919,564 31,957 18,403 - 287,625 150,000 - 487,985 4,481,090 11,816,955 1,649,277 2,685,971 200,000 - 6,347,343 417,067 517,297 11,816,955 929,606 566,822 2,707,326 3,700 530,622 4,738,076 29,854 3,743,435 1,123,456 4,896,745 9,634,821 2,657,910 123,465 13,761 174,168 2,969,304 1,927,441 8,424 391,857 400,281 3,369,585 6,265,236 1,402,100 8,400 200,000 (418,225) 4,230,206 3,598 839,157 6,265,236 21 Pennant International Group PLC Consolidated Statement of Changes in Equity For the year ended 31 December 2016 Share Capital Share Premium (see below) Capital Redemption Reserve (see below) Treasury Shares (Note 29) Retained Earnings Translation Reserve (see below) Revaluation Reserve (see below) Total Equity £ £ £ £ £ £ £ £ At 1 January 2015 1,401,400 5,600 200,000 (418,225) 7,207,603 136,156 884,805 9,417,339 Loss for the year Other comprehensive income - - - - - - - (2,305,734) - - (2,305,734) - - (132,558) - (132,558) Total comprehensive income 1,401,400 5,600 200,000 (418,225) 4,901,869 3,598 884,805 6,979,047 Issue of C shares 700 2,800 Recognition of share based payment Transfer from revaluation reserve Dividends paid - - - - - - - - - - - - - - - 76,857 45,648 (794,168) - - - - - - 3,500 76,857 (45,648) - - (794,168) At 1 January 2016 1,402,100 8,400 200,000 (418,225) 4,230,206 3,598 839,157 6,265,236 Profit for the year Other comprehensive income - - - - - - - 1,921,030 - - 1,921,030 - - 413,469 (276,212) 137,257 Total comprehensive income 1,402,100 8,400 200,000 (418,225) 6,151,236 417,067 562,945 8,323,523 Issue of ordinary shares 247,177 2,677,571 Recognition of share based payment Deferred tax on revaluation loss Transfer from revaluation reserve - - - - - - - - - - 418,225 - - - - 103,503 46,956 45,648 - - - - - 3,342,973 - - 103,503 46,956 (45,648) - At 31 December 2016 1,649,277 2,685,971 200,000 - 6,347,343 417,067 517,297 11,816,955 22 Pennant International Group PLC Consolidated Statement of Changes in Equity For the year ended 31 December 2016 (Continued) Share premium account Translation reserve Represents the amount by which shares have been issued at a price greater than nominal value less issue costs. Capital redemption reserve Exchange differences relating to the translation of the net assets of the Group’s foreign subsidiaries from their functional currency to the presentational currency of the Group, being sterling, are recognised directly in the translation reserve. This represents the amount by which the Company’s share capital has been diminished by the cancellation of shares held in treasury. Revaluation reserve Retained earnings This represents the extent to which the revaluation of such land and buildings at fair value exceed the carrying amount. This represents the accumulated realised earnings from the prior and current periods. Treasury shares Treasury shares represent the cost of shares purchased in the market and held by Pennant Employee Benefit Trust to satisfy options under the group’s share options schemes. 23 Pennant International Group PLC Consolidated Statement of Cash Flows For the year ended 31 December 2016 Net cash from operations Investing activities Interest received Purchase of intangible assets Purchase of property, plant and equipment Proceeds from sale of motor vehicles Proceeds from sale of available-for-sale investments Notes 2016 2015 £ 31 £ (249,248) 7,781 (28,438) (1,086,896) 12,491 - 4,314 - 1,097,287 4,905 (30,413) (18,367) Net cash used in investing activities (1,090,748) (43,875) Financing activities Issue of C shares Dividends paid Proceeds from sale of ordinary shares Net funds from obligations under finance leases Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rates - - 3,342,973 - 13,842 3,356,815 2,016,819 1,123,456 377,266 Cash and cash equivalents at end of year 22 3,517,541 3,500 (794,168) (11,600) (802,268) 251,144 1,068,632 (196,320) 1,123,456 24 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 1 General information Pennant International Group plc is a company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered office is Pennant Court, Staverton Technology Park, Cheltenham, GL51 6TL. The principal activity of the Group during the year was the delivery of integrated logistic support solutions. These comprise Logistic Support Analysis Report software, technical documentation, simulation and computer based training systems to customers worldwide; principally those in defence and aerospace, but also in rail transport, oil and gas, petro-chemical, power, customer goods retail, information technology and telecommunications industries. These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with the policies set out in note 3. 2 Adoption of new and revised standards The adoption of the following mentioned standards, amendments and interpretations in the current year have not had a material impact on the Group’s financial statements for the year ended 31 December 2016: Endorsed Effective for periods beginning on or after: Amendment to IAS 1 Presentation of Financial Statements: Disclosure initiative 1 January 2016 Amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets: Clarification of acceptable methods of depreciation and amortisation 1 January 2016 Amendments to IAS 16 Property, Plant and Equipment and IAS 41 Agriculture: Bearer plants 1 January 2016 Amendment to IAS 19 Employee Benefits: Defined benefit plans - Employee contributions 1 February 2015 Amendment to IAS 27 Separate Financial Statements: Equity method in separate financial statements 1 January 2016 Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures: Investment entities - Applying the consolidation exception 1 January 2016 Amendment to IFRS 11 Joint Arrangements: Accounting for acquisitions of interests in joint operations 1 January 2016 Annual Improvements to IFRSs (2010 - 2012) Annual Improvements to IFRSs (2012 - 2014) 1 February 2015 1 January 2016 25 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 2 Adoption of new and revised standards (continued) The following standards and interpretations are available for early adoption but have not been applied by the Group in these financial statements: Endorsed Amendment to IAS 7 Statement of Cash Flows: Disclosure initiative Amendment to IAS 12 Income Taxes: Recognition of deferred tax assets for unrealised losses Amendment to IAS 40 Investment Property: Transfers of investment property Amendment to IFRS 2 Share-based Payment: Classification and measurement of share-based payment transactions Amendment to IFRS 4 Insurance Contracts: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts IFRS 9 Financial Instruments IFRS 15 Revenue from Contracts with Customers Clarifications to IFRS 15 Revenue from Contracts with Customers IFRS 16 Leases Annual Improvements to IFRSs (2014 - 2016) IFRIC 22 Foreign Currency Transactions and Advance Consideration 26 Effective for periods beginning on or after: Expected to be endorsed Q2 2017 Expected to be endorsed Q2 2017 Expected to be endorsed Q3 2017 Expected to be endorsed Q3 2017 Expected to be endorsed Q3 2017 1 January 2018 1 January 2018 Expected to be endorsed Q1 2017 Expected to be endorsed Q4 2017 Expected to be endorsed Q3 2017 Expected to be endorsed Q3 2017 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 2 Adoption of new and revised standards Going concern (continued) The adoption of the above mentioned standards, amendments and interpretations in future years are not expected to have a material impact except in the case of the following: IFRS 15 - Revenue from Contracts with Customers Support, Development & Consultancy Services - revenue is recognised over time in line with the customer receiving and consuming the benefits provided by the performance of the service. The directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. In reaching this conclusion the directors have considered the financial position of the Group, its cash, liquidity position and borrowing facilities together with its forecasts and projections for 18 months from the reporting date that take into account reasonably possible changes in trading performance. The going concern basis of accounting has therefore continued to be adopted in preparing the financial statements. Engineered solutions - revenue is recognised over time in accordance with the contracted performance obligations. Basis of consolidation Generic or COTS products - contracts will be reviewed on a case by case basis to determine the underlying performance obligation. Revenue will be recognised at a point in time in line with achievement of contracted performance obligations. IFRS 16 - Leases We anticipate that the standard will impact almost all commonly used financial metrics including gearing ratio, current ratio, asset turnover, EBITA, operating profit, EPS and operating cash flows. The Board continues to assess the impact of the above standard on the Groups arrangements, in particular with stakeholders such as banks, investors and analysts. It is anticipated that the adoption of the above standard will create an asset and an equal liability on the balance sheet, thereafter the amortisation profile of the asset and liability will be different. 3 Accounting policies The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial statements have been prepared on the historical cost basis or a revaluation basis where indicated. The principal accounting policies set out below have been consistently applied to all periods presented. The financial statements incorporate the results of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has power to govern the financial and operating policies of the investee entity so as to obtain benefits from its activities. Where necessary, adjustments are made to the results of subsidiaries to bring accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Business combinations and goodwill Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The assets and liabilities and contingent liabilities of the subsidiaries are measured at their fair value at the date of acquisition. Any excess of cost of acquisition over fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of cost of acquisition below the fair value of the identified net assets acquired (i.e. discount on acquisition) is credited in profit or loss in the period of acquisition. Goodwill arising on consolidation is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss account and is not subsequently reversed. Acquisition related costs are recognised in the income statement as incurred. 27 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 3 Accounting policies (continued) Leases Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes. Sales of goods are recognised when goods are delivered and title has passed. Rendering of consultancy services relates to the services of contractors provided to customers on a time basis. It is invoiced and recognised as revenue on a time basis. Revenues arising from the software maintenance programme provided to customers are invoiced in advance but recognised as revenue across the period to which the maintenance agreements relate. Amounts not taken to revenue at a period end are shown in the statement of financial position as deferred revenue. Revenue from construction contracts is recognised in accordance with the Group’s accounting policy on construction contracts (see below). Construction contracts Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the reporting date. This is normally measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred where it is probable they will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance expenses and a reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Foreign currency The individual financial statements of each group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each group company are expressed in pound sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements. In preparing the financial statements of the individual companies, transactions in currencies other than the Group Company’s functional currency (foreign currencies) are recorded at rates of exchange prevailing on the dates of the transactions. At the reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the reporting date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in foreign currency are not retranslated. total contract revenue, the expected loss is recognised as an expense immediately. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary 28 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of the gain or loss is also recognised directly in equity. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the reporting date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of transactions are used. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income and expense in the period in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rates. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from the net profits as reported on the income statement because it excludes items of income and expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all temporary differences and deferred tax assets are recognised to the extent that it is probable that the taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for temporary differences arising on investments in subsidiaries and interest in joint ventures, except where the Group is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or at least realised based on the tax rates that have been enacted or substantively enacted at the reporting date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt within equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Provisions Provisions are made in respect of contractual obligations and warranties based on the judgement of management taking into account the nature of the claim or contractual obligation, the range of possible outcomes, past experience and any mitigation. Share-based payment The Group issues equity-settled share based payments to certain employees. Equity-settled share based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the date of grant is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non market-based vesting conditions. 29 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 3 Accounting policies (continued) Fair value is measured by use of an option pricing model. The model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural conditions. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged to write off the cost of assets over their estimated useful lives on the following bases: Freehold land Nil Freehold buildings Net book value at 1 January 2007 being written off over 35 years Short leasehold buildings on a straight line basis or Long leasehold buildings over the life of the lease if shorter Plant and equipment 10% to 25% of cost per annum Computers Motor vehicle 33.33% of cost per annum 25% of cost per annum Land and buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated in the balance sheet at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. Any revaluation increase arising on the revaluation of such land and buildings is credited to the properties revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense, in which case the increase is credited to the income statement to the extent of the decrease previously expensed. A decrease in carrying value amount arising on the revaluation of such land and buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset. An annual transfer from the asset revaluation reserve to retained earnings is made for the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost. Additionally, accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. Internally-generated intangible assets An internally-generated intangible asset arising from the Group’s development activities is capitalised and held as an intangible asset in the statement of financial position when the costs relate to a clearly defined project; the costs are separately identifiable; the outcome of such a project has been assessed with reasonable certainty as to its technical feasibility and its ultimate commercial viability; the aggregate of the defined costs plus all future expected costs in bringing the product to market is exceeded by the future expected sales revenue; and adequate resources are expected to exist to enable the project to be completed. Internally-generated intangible assets are amortised over their useful lives, normally three years, from completion of development. Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the income statement in the period in which it is incurred. Intangible assets Intangible assets are stated at cost less accumulated amortisation and any recognised impairment loss. Amortisation is charged to write off intangible assets on a straight line basis over their estimated useful lives on the following basis: Computer software 33.33% of cost per annum Inventories Inventories are stated at the lower of cost and net realisable value. Costs comprise direct materials and, where applicable, direct labour costs and overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. 30 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 Financial instruments Trade and other receivables Trade and other receivables are measured at initial recognition at fair value, and subsequently measured at amortised cost. A provision is established when there is objective evidence that the Group will not be able to collect all amounts due. The amount of any provision is recognised in profit or loss. Cash and cash equivalents Cash and cash equivalents are recognised as financial assets. They comprise cash held by the Group and short term bank deposits with an original maturity date of three months or less. Available-for-sale investments Available-for-sale investments are recognised as financial assets and are initially measured at fair value, including transaction costs. At subsequent reporting dates available-for-sale investments are measured at fair value where material or cost where fair value is not readily ascertainable. Gains and losses arising from changes in fair value are recognised directly in equity until the investment is disposed of or is determined to be impaired, at which time the cumulative gain or loss recognised previously in equity is included in profit or loss for the period. Dividends are recognised in the income statement when the right to receive payment has been established. 4 Critical accounting judgements and key sources of estimation uncertainty Critical accounting judgements Revenue recognition A significant proportion of the Group’s revenue derives from construction contracts. The directors are satisfied that revenue is recognised when, and to the extent that, the group obtains the right to consideration which is derived on a contract-by-contract basis from the stage of completion of the contract activity at the reporting date. This is measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract cost. Judgement has been required in the estimation of the total costs of each contract. Recoverability of internally-generated intangible asset During the year, management reconsidered the recoverability of its internally-generated intangible asset which is included in its balance sheet at £252,000 (2015: £504,000). The project continues to progress in a very satisfactory manner, and customer reaction has reconfirmed management’s previous estimates of anticipated revenues from the project. Trade payables Key source of estimation uncertainty Trade payables are initially recognised as financial liabilities measured at fair value, and subsequent to initial recognition measured at amortised cost. Bank borrowings Interest bearing bank loans, overdrafts and other loans are recognised as financial liabilities and recorded at fair value, net of direct issue costs. Finance costs are accounted for on an amortised cost basis in the income statement using the effective interest rate. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deduction of all its liabilities. Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation, as described in note 15, requires estimates of the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. The carrying amount of goodwill at the balance sheet date was £964,159 (2015: £929,606) and the review carried out has shown no impairment. 31 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 5 Revenue An analysis of the Group’s revenue is as follows: 2016 2015 Sale of goods Rendering of services Revenue from construction contracts Software maintenance programmes Investment income 6 Segment information £ £ 153,133 2,948,960 13,412,304 697,058 17,211,455 7,781 101,512 2,379,283 6,803,194 608,696 9,892,685 4,905 17,219,236 9,897,590 The operating segments that are regularly reviewed by the chief operating decision maker (the Chief Executive) in order to allocate resources to segments and to assess performance are Training Systems, Data Services and Software as these represent the way the Group organises its products and services. The accounting policies of the reporting segments are the same as those adopted by the Group and set out in note 3. 6.1 Segment revenues and results Training Systems Data Services Software Inter-segment sales Training Systems Data Services Software External sales Segment Revenue Segment Profit 2016 2015 2016 2015 £ 12,080,290 1,782,516 4,331,681 £ 4,852,576 2,045,418 4,002,977 £ £ 1,693,501 (2,654,828) (98,103) 221,637 (138,138) 149,110 18,194,487 10,900,971 1,817,035 (2,643,856) - - (450,502) (532,530) (94,800) (913,486) 17,211,455 9,892,685 Net unallocated corporate receipts Net finance costs Profit/(loss) before tax Inter-segment sales are made on an arm’s length basis. 87,574 (1,270) 286,454 (20,777) 1,903,339 (2,378,179) 32 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 6.2 Segment assets and liabilities Sale of goods Rendering of services Revenue from construction contracts Software maintenance programmes Investment income £ £ 153,133 2,948,960 13,412,304 697,058 17,211,455 7,781 101,512 2,379,283 6,803,194 608,696 9,892,685 4,905 Segment assets Training Systems Data Services Software Eliminations on consolidation Unallocated £ £ 10,111,893 1,574,163 4,401,754 16,087,810 (2,603,448) 2,813,683 7,560,224 1,704,114 3,788,688 13,053,026 (3,392,563) (25,642) 17,219,236 9,897,590 Consolidated assets 16,298,045 9,634,821 An analysis of the Group’s revenue is as follows: 2016 2015 Segment liabilities Training Systems Data Services Software Unallocated Consolidated liabilities 6.3 Other segment information Training Systems Data Services Software 3,531,488 207,161 547,438 4,286,087 195,003 2,396,568 294,796 615,248 3,306,612 62,973 4,481,090 3,369,585 Depreciation and amortisation Additions to non-current assets 2016 2015 2016 2015 £ 508,499 44,174 31,447 584,120 £ 517,957 53,489 48,074 619,520 £ £ 1,046,812 5,302 63,220 1,115,334 11,788 6,792 30,200 48,780 33 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 6 Segment information (continued) 6.4 Geographical information The Group operates in four geographical areas – United Kingdom, USA, Canada and Australia. The Group’s revenue from external customers and information about its non-current assets by geographical location are detailed below. United Kingdom USA Canada Australia Revenue from external customers Non-current assets* 2016 2015 2016 2015 £ 13,650,129 12,029 3,229,943 319,354 £ 7,009,006 11,979 2,576,451 295,249 £ £ 3,617,519 3,956,265 - - 7,513 277,355 6,577 240,912 17,211,455 9,892,685 3,902,387 4,203,754 * Non-current assets excluding financial instruments and deferred tax assets. 6.5 Information about major customers Included in the revenues of each segment are the following sales to individual external customers amounting to 10% or more of the Group’s revenues. Training Systems Customer 1 Customer 2 Customer 3 Customer 4 Software services Customer 3 34 £ 2016 2015 £ - - 4,254,480 - 2,065,140 - 1,333,141 1,742,575 3,199,160 2,442,329 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 7 Staff costs Wages and salaries Social security costs Pension costs £ 2016 2015 £ 5,392,158 539,555 284,701 5,011,498 622,232 281,148 6,216,414 5,914,878 The average number of persons, including executive directors employed by the Group during the year was: Office and management Production Selling Number Number 14 85 8 8 107 14 89 111 Training Systems Customer 1 Customer 2 Customer 3 Customer 4 Software services Customer 3 £ - - 4,254,480 - 2,065,140 - 1,333,141 1,742,575 3,199,160 2,442,329 8 Operating profit/(loss) for the year £ Operating profit/(loss) for the year has been arrived at after charging: Net foreign exchange losses Research and development costs Amortisation of intangible assets Depreciation of property, plant and equipment Loss on disposal of motor vehicles Share-based payment (note 33) Redundancy cost 2016 2015 £ £ 139,759 - 299,801 284,319 16,877 - 103,503 42,345 15,510 509,682 313,580 305,940 76,857 148,291 35 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 9 Auditor remuneration 2016 2015 £ £ Fees payable to the company’s auditor for: - The audit of the annual financial statements - The audit of the company’s group undertakings Total audit fees Fees payable to the company’s auditor and its associates for other services to the Group: - Tax compliance services - Other services relating to tax Total non-audit fees 10 Finance costs Interest expense for financial lease arrangements Interest expense for bank overdraft Other interest expense 11 Finance income Income from bank deposits Dividends receivable from available-for-sale investments Other interest receivable £ £ 36 17,000 33,000 50,000 - - - - 50,000 14,000 31,000 45,000 10,537 10,537 55,537 2016 2015 £ 834 57 8,160 9,051 1,943 22,830 909 25,682 2016 2015 £ 3,772 25 - 3,984 7,781 464 4,441 4,905 £ £ Fees payable to the company’s auditor for: - The audit of the annual financial statements - The audit of the company’s group undertakings Total audit fees services to the Group: - Tax compliance services - Other services relating to tax Total non-audit fees Fees payable to the company’s auditor and its associates for other Interest expense for financial lease arrangements Interest expense for bank overdraft Other interest expense Income from bank deposits Other interest receivable Dividends receivable from available-for-sale investments £ £ Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 12 Taxation 2016 2015 2016 2015 17,000 33,000 50,000 - - - - 50,000 £ 834 57 8,160 9,051 £ 3,772 25 - 3,984 7,781 2016 2015 2016 2015 14,000 31,000 45,000 10,537 10,537 55,537 1,943 22,830 909 25,682 464 4,441 4,905 Recognised in the income statement Current UK tax expense Foreign tax In respect of prior years Deferred tax expense relating to origination and reversal of temporary differences Effect of tax rate change on opening balance Total tax expense Reconciliation of effective tax rate Profit/(loss) before tax Tax at the applicable rate of 20% (2015: 20.25%) Tax effect of expenses not deductible in determining taxable profit Additional deduction for R&D expenditure Tax effect of utilisation of losses not previously recognised Foreign tax credits Effect of different tax rates of subsidiaries operating in other jurisdictions Effect of change of deferred tax rate Losses arising not recognised in deferred tax Utilisation of unrecognised deferred tax Effect of adjustments for prior years Other differences Total tax expense £ £ 3,511 64,657 (82,156) (13,988) 17,720 (21,423) (17,691) - 113,334 107,959 221,293 (256,627) (37,111) (72,445) 1,903,339 (2,378,179) 380,666 57,418 - - 29,265 4,437 (33,529) - (367,922) (82,156) (5,870) (481,582) 48,897 (152,405) (1,423) 76,500 7,770 53,217 287,222 - 101,068 (11,709) (17,691) (72,445) 13 Dividends No dividends were paid during the year (2015: 3.00p). No final dividend will be proposed at the Annual General Meeting (2015: NIL). 37 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 14 Earnings per share Earnings per share has been calculated by dividing the net profit attributable to equity holders by the weighted average number of ordinary shares in issue during the year as follows: Profit / (loss) after tax attributable to equity holders 1,921,030 (2,305,734) 2016 2015 £ £ Weighted average number of ordinary shares in issue during the year Diluting effect of share options Diluted average number of ordinary shares Number Number 29,647,844 2,026,786 26,472,261 1,610,714 31,674,630 28,082,975 15 Goodwill Carrying amount At 1 January 2015 Currency translation At 1 January 2016 Currency translation At 31 December 2016 £ 941,457 (11,851) 929,606 34,553 964,159 Goodwill acquired in a business combination is allocated, at acquisition, to cash generating units (CGUs) that are expected to benefit from that business combination. The carrying amount of goodwill has been allocated as follows: Cash generating unit Data Services division Software division 38 £ 2016 2015 £ 583,900 380,259 964,159 583,900 345,706 929,606 Profit / (loss) after tax attributable to equity holders 1,921,030 (2,305,734) Weighted average number of ordinary shares in issue during the year Diluting effect of share options Diluted average number of ordinary shares 2016 2015 £ £ Number Number 29,647,844 2,026,786 26,472,261 1,610,714 31,674,630 28,082,975 £ £ 941,457 (11,851) 929,606 34,553 964,159 2016 2015 £ 583,900 380,259 964,159 583,900 345,706 929,606 Carrying amount At 1 January 2015 Currency translation At 1 January 2016 Currency translation At 31 December 2016 Cash generating unit Data Services division Software division Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 15 Goodwill (continued) The Group tests goodwill annually for impairment. The recoverable amounts of the CGU’s are determined from value in use calculations. The Group prepares cash flow forecasts for the following 12 months derived from the most recent annual financial budgets approved by the management and extrapolates cash flows for a further 3 years based on a growth rate of 3.0% (2015: 3.0%). These forecast cash flows are discounted at 10% per annum (2015: 7.5% per annum) to provide the value in use for each CGU. Key assumptions are based on past experience and external sources. No impairment of goodwill has been recorded in previous years and the most recent tests confirm no impairment. The Directors have assessed the sensitivity of the assumptions detailed above and consider that it would require significant adverse variance in any of the assumptions to reduce fair value to a level where it matched the carrying value. 16 Other intangible assets Software Development Costs Total £ Cost At 1 January 2015 Currency translation Additions At 1 January 2016 Currency translation Additions Disposals At 31 December 2016 Amortisation At 1 January 2015 Currency translation Charge for the year At 1 January 2016 Currency translation Charge for the year Disposals At 31 December 2016 Carrying amount At 31 December 2016 At 31 December 2015 358,415 (2,849) 30,413 385,979 6,488 28,438 (358,548) 62,357 263,929 (2,352) 61,580 323,157 6,167 47,801 (358,548) 18,577 43,780 62,822 £ £ 907,753 1,266,168 - - (2,849) 30,413 907,753 1,293,732 - - - 907,753 151,753 - 252,000 403,753 - 252,000 - 655,753 252,000 504,000 6,488 28,438 (358,548) 970,110 415,682 (2,352) 313,580 726,910 6,167 299,801 (358,548) 674,330 295,780 566,822 39 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 17 Property, plant and equipment Land and Buildings Fixtures and Equipment Motor Vehicles Total £ £ £ £ 2,320,000 - - - 2,320,000 - 827,398 (276,212) (643,788) - 2,096,098 (13,477) 18,367 (14,681) 2,086,307 32,994 230,100 - - 54,740 (2,900) - - 51,840 9,477 29,398 - - (408,712) (48,058) 4,470,838 (16,377) 18,367 (14,681) 4,458,147 42,471 1,086,896 (276,212) (643,788) (456,770) Cost / Valuation At 1 January 2015 Currency translation Additions Disposal At 1 January 2016 Currency translation Additions Impairment Assets held for sale Disposals At 31 December 2016 2,227,398 1,940,689 42,657 4,210,744 Depreciation At 1 January 2015 Currency translation Charge for year Disposal At 1 January 2016 Currency translation Charge for year Assets held for sale Disposals At 31 December 2016 Carrying amount At 31 December 2016 At 31 December 2015 - - 91,704 - 91,704 - 97,282 (68,788) - 120,198 1,454,515 (11,555) 207,447 (14,681) 1,635,726 28,237 182,594 - (408,712) 16,723 (121) 6,789 - 23,391 1,109 4,443 - (18,690) 1,471,238 (11,676) 305,940 (14,681) 1,750,821 29,346 284,319 (68,788) (427,402) 1,437,845 10,253 1,568,296 2,107,200 2,228,296 502,844 450,581 32,404 28,449 2,642,448 2,707,326 Included within land and buildings is land valued at £575,000 (2015: £575,000). 40 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 Land and buildings were revalued at 31 December 2014 to £2,320,000 by ETP Property Consultants, independent valuers not connected with the group, on the basis of market value. The valuation conforms to International Valuation Standards and was based on recent market transactions on arm’s lengths terms and rental yields for similar properties. At 31 December 2016, had the land and buildings of the group been carried at historical cost less accumulated depreciation and accumulated impairment losses, their carrying amount would have been approximately £1.16 million (2015: £1.21 million; 2014: £1.26 million). The revaluation surplus is disclosed in the Statement of Changes in Equity. The revaluation surplus arises in a subsidiary and cannot be distributed to the parent due to legal restrictions in the country of incorporation. All of the Group’s properties are categorised as Level 2 in the fair value hierarchy as defined by IFRS 13 Fair Value Management. There are no transfers of properties between Levels 1, 2 and 3 during the year ended 31 December 2016. In January 2017 an offer of £575,000 was accepted on Land and buildings with a year-end carrying value of £851,212 and therefore an impairment loss of £276,212 has been recognised at 31 December 2016. 18 Available-for-sale investments The Group owned a non-controlling interest of less than 1% in Synectics plc. The shares are not held for trading and accordingly are classified as available for sale. The shares were sold in June 2016. 19 Inventories Raw materials and consumables 20 Construction contracts £ £ Contracts in progress: Amounts due from contract customers included in trade and other receivables (note 21) Amounts due to contract customers included in trade and other payables (note 23) 2016 2015 £ - 29,854 2016 2015 £ 4,942,292 (1,728,759) 1,260,534 (972,899) 3,213,533 287,635 Contract costs incurred plus recognised profits less recognised losses to date 27,626,304 34,767,715 Less: progress billings (24,412,771) (34,480,080) 3,213,533 287,635 41 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 21 Trade and other receivables 2016 2015 Trade receivables Amounts due from construction customers (note 20) Other debtors Prepayments and accrued income £ 2,511,789 4,942,292 50,745 315,302 £ 2,058,363 1,260,534 151,556 272,982 7,820,128 3,743,435 There are no unimpaired trade receivables that are past due as at the reporting date. No receivables have been written off as uncollectible during the year (2015: nil) and it has not been necessary to recognise any impairment loss. The directors consider that the carrying amount of trade and other receivables approximates their fair value. 22 Cash and cash equivalents Bank Petty cash £ 2016 2015 £ 3,514,253 1,120,780 3,288 2,676 3,517,541 1,123,456 Cash and cash equivalents comprise cash held by the Group and short term deposits with an original maturity date of three months or less. The carrying amount approximates their fair value. 23 Trade and other payables 2016 2015 Amounts due to construction contract customers (note 20) £ Trade payables Taxes and social security costs Accruals 1,728,759 1,552,710 23,265 520,191 £ 972,899 567,881 849,560 267,570 3,824,925 2,657,910 The directors consider that the carrying amount of trade and other payables approximates their fair value. 42 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 24 Obligations under finance leases Amounts payable Within 1 year Within 2 to 5 years inclusive Less: future finance charges Minimum payments Present value of minimum payments 2016 2015 2016 2015 £ £ £ £ 8,183 39,130 (11,286) 36,027 14,098 8,603 (516) 22,185 4,070 31,957 - - 13,761 8,424 36,027 22,185 Carrying amount of assets subject to finance lease: Property, plant and equipment 27,621 29,913 The Group’s obligations under finance leases are secured by the lessor’s rights to the leased assets. 25 Borrowings The Group has available unused bank overdraft facilities of £1,500,000 (2015: £1,500,000). Any overdraft arising from the facility is repayable on demand and carries interest at 2.00% (2015: 2.00%) plus the bank’s base rate. Any facilities used are secured by fixed and floating charges over the assets of Pennant International Group plc, Pennant Training Systems Limited, Pennant Software Services Limited and Pennant Support & Development Services Limited (formerly known as Pennant Information Services Limited) and by cross-guarantees between those companies. 2016 2015 26 Deferred revenue 2016 2015 Amounts due to construction contract customers (note 20) Deferred revenue arises in respect of prepaid software maintenance contracts £ Trade payables Taxes and social security costs Accruals and is shown as: Revenue that can be recognised within 1 year included in current liabilities. Revenue that can be recognised after 1 year included in non-current liabilities. £ 174,168 - 174,168 162,500 18,403 180,903 The directors consider that the carrying amount of trade and other payables approximates their fair value. The directors consider that the carrying amount of trade and other payables approximates their fair value. 43 Trade receivables Amounts due from construction customers (note 20) Other debtors Prepayments and accrued income There are no unimpaired trade receivables that are past due as at the reporting date. No receivables have been written off as uncollectible during the year (2015: nil) and it has not been necessary to recognise any impairment loss. The directors consider that the carrying amount of trade and other receivables approximates their fair value. Bank Petty cash Cash and cash equivalents comprise cash held by the Group and short term deposits with an original maturity date of three months or less. The carrying amount approximates their fair value. £ £ £ 2016 2015 2,511,789 4,942,292 50,745 315,302 £ 2,058,363 1,260,534 151,556 272,982 7,820,128 3,743,435 2016 2015 £ 3,514,253 1,120,780 3,288 2,676 3,517,541 1,123,456 1,728,759 1,552,710 23,265 520,191 £ 972,899 567,881 849,560 267,570 3,824,925 2,657,910 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 27 Deferred tax At 1 January 2015 Change in rate Credit/(charge) to income Exchange differences At 1 January 2016 Change in rate Credit/(charge) to income Exchange differences At 31 December 2016 Accelerated tax depreciation Other temporary differences Tax losses Total £ (373,672) 37,367 (51,239) - (387,544) 21,530 82,747 - (283,267) £ 31,592 (256) 3,629 (1,660) 33,305 8,986 10,058 (21,327) 31,022 £ 188,767 - 304,237 - 493,004 - (45,395) - 447,609 £ (153,313) 37,111 256,627 (1,660) 138,765 30,516 47,410 (21,327) 195,364 Included in the movement above was £46,956 that was accounted for in the Consolidated Statement of Comprehensive Income. In the statement of financial position deferred assets and liabilities are shown without any set off as follows: £ Deferred tax assets Deferred tax liabilities 2016 2015 2014 482,989 (287,625) 195,364 £ 530,622 (391,857) 138,765 £ 226,639 (379,952) (153,313) Deferred tax has been provided at 17% (2015: 18%), the corporation tax rate that will be effective from 1 April 2016. At the reporting date the Group had unused tax losses of approximately £2,500,000 (2015: £4,650,000) available for set-off against future profits. No deferred tax asset has been recognised in respect of some of these available losses due to the unpredictability of future profit streams in some of the subsidiaries in which they arise. The tax losses are available indefinitely for offsetting against future taxable profits. 44 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 28 Warranty provisions Warranty provisions £ 2016 2015 150,000 £ - The Group has recognised warranty provisions in respect of contractual obligations on two major programmes. The Group expects the provision to be utilised within the next three years. 29 Share capital 2016 2015 Authorised, issued and fully paid 32,943,533 ordinary shares of 5p each (2015: 28,000,000) 1,400,000 B shares of 0.1p each 700,000 C shares of 0.1p each £ £ 1,647,177 1,400,000 1,400 700 1,400 700 1,649,277 1,402,100 The ordinary shares carry no right to fixed income. The shares have a right to receive notice of, or to attend or vote at, any general meeting. The shares are traded on AIM. 2016 2015 2014 The rights and obligations attaching to the B and C shares are, in summary: £ Deferred tax assets Deferred tax liabilities 482,989 (287,625) 195,364 £ 530,622 (391,857) 138,765 £ 226,639 (379,952) (153,313) Deferred tax has been provided at 17% (2015: 18%), the corporation tax rate that will be effective from 1 April 2016. At the reporting date the Group had unused tax losses of approximately £2,500,000 (2015: £4,650,000) available for set-off against future profits. No deferred tax asset has been recognised in respect of some of these available losses due to the unpredictability of future profit streams in some of the subsidiaries in which they arise. The tax losses are available indefinitely for offsetting against future taxable profits. 1 2 3 4 No right to receive any dividend or other distribution of an income nature; No right to receive notice of, or to attend or vote at, any general meeting; No right to transfer any C share save upon an offer for the ordinary shares becoming unconditional in all respects; Conditional upon the ordinary shares having traded on AIM at a price of 100p or more for 10 business days within a 20 day period: a. The right upon an offer for all the ordinary shares being declared unconditional in all respects or upon a scheme of arrangement to effect such an offer becoming effective, to sell each C share to the offeror at a price equal to the amount by which the price offered for each ordinary share exceeds 91p and otherwise upon such terms as are the same as those applying to the offer for ordinary shares; and In the event of a capital distribution following the sale of the Company’s assets and business, whether upon a liquidation or otherwise, the right to rank pari passu with each ordinary share after 91p has been paid on each ordinary share; b. 5 The obligation for the C shares to be redeemed by the Company, at the price at which the C shares were issued, at any time following Mr Walker ceasing for any reason whatsoever to be a director and full time employee of the Company or any of its subsidiaries. No application will be made for the B or C shares to be admitted to trading on AIM or any other public market. 45 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 30 Treasury shares As at 1 January 2015 Shares sold to satisfy placing As at 31 December 2016 Number £ 1,527,739 (1,527,739) 418,225 (418,225) - - 31 Note to consolidated statement of cash flows 2016 2015 Cash generated from operations Profit/(loss) for the year Finance income Finance costs Income tax (credit) /expense Depreciation of property, plant and equipment Amortisation of other intangible assets Profit on disposal of property, plant and equipment Profit on disposal of available-for-sale investments Share-based payment Operating cash flows before movement in working capital (Increase) / decrease in receivables Decrease / (increase) in inventories Increase in payables and provisions (Increase) / decrease in deferred revenue Cash generated from operations Tax refund / (paid) Interest paid £ £ 1,921,030 (2,305,734) (7,781) 9,051 (17,691) 284,319 299,801 16,877 (614) 103,503 2,608,495 (4,076,693) 29,854 1,317,015 6,735 (114,594) (125,603) (9,051) (4,905) 25,682 (72,445) 305,940 313,580 - - 76,857 (1,661,025) 1,639,691 (854) 478,900 (54,511) 402,201 720,768 (25,682) Net cash (used) / generated from operations (249,248) 1,097,287 46 As at 1 January 2015 Shares sold to satisfy placing As at 31 December 2016 £ Cash generated from operations Profit/(loss) for the year Finance income Finance costs Income tax (credit) / expense Depreciation of property, plant and equipment Amortisation of other intangible assets Profit on disposal of property, plant and equipment Profit on disposal of available-for-sale investments Share-based payment Operating cash flows before movement in working capital (Increase) / decrease in receivables Decrease / (increase) in inventories Increase in payables and provisions (Increase) / decrease in deferred revenue Cash generated from operations Tax refund / (paid) Interest paid Number 1,527,739 (1,527,739) - 418,225 (418,225) 2016 2015 1,921,030 (2,305,734) £ - £ - - (4,905) 25,682 (72,445) 305,940 313,580 76,857 (1,661,025) 1,639,691 (854) 478,900 (54,511) 402,201 720,768 (25,682) (7,781) 9,051 (17,691) 284,319 299,801 16,877 (614) 103,503 2,608,495 (4,076,693) 29,854 1,317,015 6,735 (114,594) (125,603) (9,051) Net cash (used) / generated from operations (249,248) 1,097,287 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 32 Operating lease arrangements 2016 2015 Lease payments under operating leases recognised as an expense in the year 232,724 240,338 £ £ The Group had commitments under non-cancellable operating leases as follows: Within one year In the second to fifth years In the sixth to tenth years After ten years Land and Buildings Other 2016 2015 2016 2015 £ 147,204 265,521 32,750 236,788 682,263 £ 106,001 241,444 32,750 236,788 616,983 £ £ 58,991 72,873 - - - - 56,576 65,999 131,864 122,575 Commitments after ten years relate to ground rents on long leasehold properties that run until 2098. 47 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 33 Share-based payment The Company operates a share option scheme for certain employees of the Group. Options are exercisable at the price equal to the quoted mid-market price at the close of business on the date of grant. Exercise is subject to non-market conditions as options are forfeited if the employee leaves the Group before the options vest. Details of the share options outstanding during the year are as follows: 2016 2015 Number of share options 2,077,619 - (70,000) 2,007,619 530,000 Weighted average exercise price 64.38p - 38.79p 65.58p 36.06p Number of share options 1,070,000 1,047,619 (40,000) 2,077,619 410,000 Weighted average exercise price 59.21p 70.50p 86.00p 64.38p 25.85p Outstanding at 1 January 2016 Granted during the year Exercised during the year Outstanding at 31 December 2016 Exercisable at 31 December 2016 The options outstanding at 31 December 2016 had a weighted average remaining contractual life of 7.40 years (2015: 8.36 years). No new options were granted during the period. The Group recognised total expenses related to equity-settled share-based payment transactions of £103,503 (2015: £76,857). Any share based payment in respect of B and C shares is not material. 34 Employee benefits Defined contribution The Group operates defined contribution pension schemes. The assets of the schemes are held separately from those of the Group in independently administered funds. The pension cost charge represents contributions payable by the Group to the funds. Contributions payable by the Group for the year 284,701 281,148 2016 2015 £ £ 48 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 35 Financial instruments 35.1 Capital risk management The Group manages its capital to ensure that it will be able to continue as a going concern while maximising the return to shareholders. The capital structure of the Group consists of cash and cash equivalents and equity comprising issued share capital, reserves and retained earnings. The Group is not subject to any externally imposed capital requirements. 35.2 Categories of financial instruments 2016 2015 £ £ Financial assets Available-for-sale financial assets Loans and receivables Trade and other receivables Asset held for sale Cash and cash equivalents Financial liabilities Measured at amortised cost Trade and other payables - 3,700 2,877,836 575,000 3,517,541 2,482,901 - 1,123,456 6,970,377 3,610,057 2,096,166 1,685,021 35.3 Financial risk management Financial risks include market risk (principally foreign currency risk), credit risk, liquidity risk and interest risk. The Group seeks to minimise the effect of these risks by developing and applying policies and procedures which are regularly reviewed for appropriateness and effectiveness. The Group’s principal financial instruments comprise cash held in current accounts, trade receivables, amounts due from and to construction contract customers, trade payables, other payables and borrowings that arise directly from its operations. Contributions payable by the Group for the year 284,701 281,148 £ £ The Group operates internationally giving rise to exposure from changes in foreign exchange rates. The Group’s policy permits but does not demand that these exposures are hedged in order to fix their cost in sterling. Forward foreign exchange contracts are entered into in respect of forecast foreign exchange transactions when the amount and timing of such transactions becomes reasonably certain. At 31 December 2016 and 31 December 2015 the Group had no commitments under forward exchange contracts. 2016 2015 35.4 Foreign currency risk 49 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 35 Financial instruments (continued) 35.4 Foreign currency risk (continued) The Canadian dollar, the Australian dollar and the American dollar are the main foreign currencies in which the Group operates. The carrying amounts of the Group’s monetary assets and liabilities denominated in these currencies expressed in sterling at the reporting date are as follows: Canadian $ American $ Australian $ Total Liabilities Assets 2016 2015 2016 2015 £ 172,589 9,766 80,516 £ 181,128 482 168,041 £ £ 1,677,967 224,575 239,500 826,539 11,850 231,337 262,871 349,651 2,142,042 1,069,726 The following table details the Group’s sensitivity to a 5% increase in Sterling against the relevant foreign currencies. The analysis includes outstanding foreign currency denominated monetary items where denominated in a currency other than the functional currency of the debtor or creditor. A positive number indicates an increase in profits and a negative number a decrease in profit. A 5% weakening of Sterling against the relevant currencies would have an equal and opposite effect on profit. Canadian $ American $ Australian $ 35.5 Credit risk £ Impact on profit 2016 2015 75,269 10,740 7,949 £ 32,271 568 3,165 Credit risk refers to the risk that a customer or counterparty to a financial instrument fails to meet its contractual obligations, resulting in financial loss to the Group, and arises principally from the Group’s receivables from customers and bank current accounts. Major customers that wish to trade on credit terms are subject to credit verification procedures and receivable balances are monitored on an on-going basis. The credit risk on bank current account balances is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. No significant impairments for bad or doubtful debts have made. At the end of the financial year there are no material debts that are deemed to be past due. At 31 December 2016 and 31 December 2015 there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the statement of financial position. 50 Pennant International Group PLC Notes to the Consolidated Financial Statements For the year ended 31 December 2016 35 Financial instruments (continued) 35.6 Liquidity risk Liquidity risk is the risk that the Group does not have sufficient cash to meet its financial obligations as they fall due. The Group ensures that sufficient cash and undrawn facilities are available to fund ongoing operations and to meet its medium term capital and funding obligations. At the year end the Group had net cash funds of £3,517,541 (2015: £1,123,456) and undrawn facilities of £1,500,000 (2015: £1,500,000). The level of the Group’s overdraft facility is reviewed annually. The Groups financial obligations consist of trade and other payables and obligations under finance leases which are all payable within 12 months with the exception of the non-current obligations under finance leases set out in note 24. Trade and other payables are all payable within three months. 35.7 Interest risk The Group has no liabilities subject to interest rate risk at the balance sheet date. However, the Group is from time to time exposed to interest rate risk on bank overdraft. Interest is paid on bank overdraft at 2.00% (2015: 2.00%) over base rate. 1% rise/fall in interest rates would have decreased / increased profit for the year by an immaterial amount (2015: immaterial). 36 Capital commitments At 31 December 2016 and 31 December 2015 the Group had no capital commitments. 37 Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Barclays Bank Plc have given performance guarantees of £769,938 (2015: £179,000), in the normal course of business, to a customer of Pennant Training Systems Limited. These are secured by fixed and floating charges over the assets of the Company Remuneration of key management personnel Amounts paid to Group directors who are the only key management personnel of the Group are set out in the Corporate Governance Report. Dividends paid to Directors Dividends totalling £NIL (2015: £353,671) were paid in the year in respect of ordinary shares in which the Company’s Directors had a beneficial interest. Employee Benefit Trust Included in Trade and Other Receivables is a loan to Mr C Snook of £47,665. As at 1 January 2016 balance of £148,012 remained outstanding. On 15 November 2016 a loan of £100,347 was repaid. A loan of £47,665 remains outstanding. The loans were made in accordance with the purposes of the Pennant Employee Benefit Trust to purchase shares in the Company. The outstanding loan to Mr C Snook is interest free and secured by a charge on the shares and is repayable when the shares are sold. 51 Canadian $ American $ Australian $ £ 2016 2015 75,269 10,740 7,949 £ 32,271 568 3,165 Pennant International Group PLC Company Statement of Comprehensive Income For the year ended 31 December 2016 Continuing operations Management charges receivable Administrative expenses Operating profit Finance costs Finance income Profit before tax Tax charge Total comprehensive income attributable to equity holders Notes 2016 2015 £ £ 2,314,430 (2,226,856) 87,574 (28) 25 - 87,571 (37,638) 49,933 1,779,591 (1,493,136) 286,455 (5,638) 280,817 (79,755) 201,062 3 4 5 52 Pennant International Group PLC Company Statement of Changes in Equity For the year ended 31 December 2016 Share capital Share premium Capital redemption reserve Treasury shares Retained earnings Total equity £ £ £ £ £ £ At 1 January 2015 1,401,400 5,600 200,000 (418,225) 3,751,833 4,940,608 Total comprehensive income for the year Issue of C shares Recognition of share-based payment Dividends paid At 1 January 2016 - 700 - - - 2,800 - - - - - - - - - - 201,062 - 76,857 201,062 3,500 76,857 (794,168) (794,168) 1,402,100 8,400 200,000 (418,225) 3,235,584 4,427,859 Total comprehensive income for the year - - Issue of new ordinary shares 247,177 2,677,571 Recognition of share-based payment - - - - - At 31 December 2016 1,649,277 2,685,971 200,000 - 49,933 49,933 418,225 - 3,342,973 - - 103,503 103,503 3,389,020 7,924,268 53 Pennant International Group PLC Company Statement of Financial Position For the year ended 31 December 2016 Notes 2016 2015 £ 6 11 7 8 10 £ 7,909,037 - - 7,909,037 5,129 743,179 2,760,889 - 3,509,197 7,909,037 3,700 37,638 7,950,375 22,054 148,012 170,066 11,418,234 8,120,441 195,003 3,298,963 - 3,493,966 62,973 3,392,563 237,046 3,692,582 15,231 (3,522,516) 3,493,966 7,924,268 1,649,277 2,685,971 200,000 - 3,389,020 7,924,268 3,692,582 4,427,859 1,402,100 8,400 200,000 (418,225) 3,235,584 4,427,859 Non-current assets Investment in subsidiaries Available-for-sale investments Deferred tax asset Total non-current assets Current assets Trade and other receivables Amounts due from subsidiaries Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Amounts due to subsidiaries Bank overdraft Total current liabilities Net current liabilities Total liabilities Net assets Equity Share capital Share premium account Capital redemption reserve Treasury shares Retained earnings Total equity Approved by the Board and authorised for issue on 9 March 2017 P H Walker Director 54 Pennant International Group PLC Company Statement of Cash Flows For the year ended 31 December 2016 Net cash from operations Investing activities Dividend received Proceeds from sale of available-for-sale investments Net cash from investing activities Financing activities Issue of C Shares Dividends paid Proceeds from sale of ordinary shares Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Notes 2016 2015 £ 12 £ (349,377) 449,033 25 - 4,314 - 4,339 - - 3,342,973 - 3,342,973 2,997,935 (237,046) 2,760,889 - 3,500 (794,168) (790,668) (341,635) 104,589 (237,046) 55 Pennant International Group PLC Notes to the Company Financial Statements For the year ended 31 December 2016 1 Accounting policies The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by the Act the separate financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The principal accounting policies adopted are the same as those set out in note 3 to the consolidated financial statements except as noted below: • Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment. 2 Operating profit The auditor remuneration for audit and other services is disclosed in note 9 to the consolidated financial statements. 3 Finance costs Interest expense for bank overdraft 4 Finance income Dividend from available-for-sale financial asset 5 Tax Deferred tax charge for the period Deferred tax credit in respect of previous period Tax charge for the year Reconciliation of effective tax rate Profit before tax Tax at applicable rate 20.00% (2015: 20.25%) Tax effect of: Expenses that are not deductible for tax Changes in rate on deferred tax Group relief Total tax charge £ £ £ 2016 28 2015 £ 5,638 2016 2015 25 £ - 2016 2015 37,638 - 37,638 87,571 17,514 23,823 (4,186) 487 37,638 £ 79,755 - 79,755 280,817 56,865 19,650 3,240 - 79,755 57 Pennant International Group PLC Notes to the Company Financial Statements For the year ended 31 December 2016 6 Subsidiaries Details of the Company’s subsidiaries at 31 December 2016 are as follows: Pennant Training Systems Limited Pennant Information Services Limited Pennant Software Services Limited Pennant Canada Limited Pennant Australasia Pty Limited Pennant Information Services Inc. Pennant EBT Trustee Limited The investments in subsidiaries are all stated at cost. 7 Cash and cash equivalents Place of incorporation Proposition of ownership England England England Canada Australia U.S.A England 100% 100% 100% 100% 100% 100% 100% These comprise cash held by the company and short-term bank deposits with an original maturity of three months or less. 8 Trade and other payables Trade payables principally comprise amounts outstanding for services and ongoing costs. The carrying amount approximates their fair value. 9 Borrowings Details of the Group overdraft arrangements are set out in note 25 to the consolidated financial statements. 10 Share capital Details are set out in note 29 to the consolidated financial statements. 11 Deferred tax Tax losses Total At 1 January 2015 Credit to income At 31 December 2015 Charge to income At 31 December 2016 58 £ 117,393 (79,755) 37,638 (37,638) - £ 17,393 (79,755) 37,638 ( 37,638) - Pennant International Group PLC Notes to the Company Financial Statements For the year ended 31 December 2016 12 Note to statement of cash flows 2016 2015 £ Cash generated from operations Profit before tax Tax charge Finance costs Finance income Profit on available-for-sale investments Share-based payment Operating cash flows before movement in working capital (Increase) in receivables Increase in payables Cash generated from operations Interest paid Net cash generated from operations 13 Financial instruments £ 280,817 - 5,638 - - 76,857 363,312 (20,542) 111,901 454,671 (5,638) 449,033 87,571 - 28 (25) (614) 103,503 190,463 (578,242) 38,430 (349,349) (28) (349,377) The Company’s approach to the management of capital and market risks is set out in note 35 to the consolidated financial statements. To address its liquidity risk the Company ensures that sufficient cash and undrawn facilities are available to fund ongoing operations and to meet its medium term capital and funding obligations. The Company is from time to time exposed to interest rate risk on a bank overdraft. Interest is paid on its bank overdraft at 2.00% (2015: 2.00%) over base rate. 1% rise/fall in interest rates would have decreased/ increased profit for the year by an immaterial amount (2015: immaterial). The Company is not exposed to foreign currency risks. Tax losses Total 59 Pennant International Group PLC Notes to the Company Financial Statements For the year ended 31 December 2016 Categories of financial instruments 2016 2015 £ £ Financial assets Available for sale financial assets Loans and receivables Trade and other receivables Amounts due from subsidiaries Cash and cash equivalents Financial liabilities Measured at amortised cost Trade and other payables Amounts due to subsidiaries Bank overdraft - 3,700 5,129 743,179 2,760,889 22,054 - - 3,509,197 25,754 195,003 3,298,963 - 62,973 3,244,551 237,046 3,493,966 3,544,570 14 Contingent liabilities The Company is party to a group registration for the purposes of Value Added Tax (VAT). Members of the group are jointly and severally liable for the total tax due. The total amount of VAT payable by the group registration and not accrued in the statement of financial position was £NIL (2015: £436,475). 15 Related party transactions The Company has provided guarantees to the bank in respect of its bank borrowings and any bank borrowings of its subsidiaries as set out in note 25 to the consolidated financial statements. The Company has guaranteed the payment of rent under a lease agreement for office premises occupied by a subsidiary company. The lease runs for five years from 1 February 2015 at an annual rental of £51,135. Other transactions with related parties consist of management charges for services provided to and by subsidiary companies as disclosed on the face of the statement of comprehensive income. 60 2016 2015 Pennant Court Staverton Technology Park Cheltenham Gloucestershire GL51 6TL Designed and printed by Gemini West www.gemini-west.co.uk
Continue reading text version or see original annual report in PDF format above