PipeHawk plc
Annual Report 2016

Plain-text annual report

2016 PipeHawk plc is a dynamic business offering advanced engineering solutions to challenging technical requirements across many industries. We are the global market leader in ground probing radar technology with many applications including civil engineering and land mine detection. Our technology provides a superior detection of hidden underground objects and features, dramatically reducing risk, improving safety and saving substantial time and money during identification and excavation. Adien Limited, a wholly owned subsidiary, is a leader in the field of utility detection and mapping. Its survey teams provide information that is critical in the design processes of almost all construction projects that involve breaking the ground. QM Systems, a division of PipeHawk PLC, is a market leader in providing solutions and services for electronic system design and manufacture, test equipment, transfer systems and automation and assembly solutions to the automotive, aerospace, rail and other related industries. Powered by excellent people our reputation is built on exceeding our customers’ expectations in delivering innovative, cost effective quality solutions in all aspects of our business. Through our energetic, innovative and dynamic approach together with our significant investment in R&D we will continue to strengthen our market leading positions. Contents Company information ......................................................1 Consolidated statement of comprehensive income ......12 Chairman’s statement ......................................................2 Consolidated statement of financial position ................13 Strategic report..................................................................4 Parent company statement of financial position ..........14 Report of the directors ......................................................5 Consolidated statement of cash flow ..............................15 Corporate governance ......................................................7 Parent company statement of cash flow ........................16 Directors’ biographies ......................................................8 Statement of changes in equity ......................................17 Statement of directors’ responsibilities for the annual report ....................................................................9 Independent auditor’s report to the shareholders of PipeHawk plc ..................................................................10 Notes to the financial statements ..................................18 Notice of annual general meeting ..................................40 Company Information Directors Gordon G Watt (Executive Chairman) Soumitra P Padmanathan (Finance Director) Robert Randal MacDonnell (Non Executive) Robert G Tallentire (Non Executive) Secretary Soumitra P Padmanathan Nominated Adviser Allenby Capital Limited and Broker 3 St Helen’s Place London EC3A 6AB Registered number 3995041 Registered office Manor Park Industrial Estate Wyndham Street Aldershot Hampshire GU12 4NZ Auditor Crowe Clark Whitehill LLP St Bride’s House 10 Salisbury Square London EC4Y 8EH Solicitors Gowling WLG 4 More London Riverside London SE1 2AU PipeHawk plc Annual Report and Accounts 2016 1 Chairman’s Statement “We enter next year with a very healthy order book” “Significant step change in reducing service strikes” 2 PipeHawk plc Annual Report and Accounts 2016 Technology Division Our marketing of the e-Safe family of products at a number of prestigious industry events across Europe is beginning to bear fruit with a number of new PipeHawk Resellers covering Germany, Austria, Spain, Italy and Slovenia all placing orders. At the No-Dig Show in Poland PipeHawk was awarded “Certificate of Distinction” by the Polish Foundation for Trenchless Technology for outstanding innovation shown in development of e-Safe which was recognised as a significant step change in the approach to reducing service strikes during both trenchless and traditional excavation works. In the UK the number of e-Safe units sold continues to grow as major players in the construction and utilities sectors begin to adopt its use into their standard practices. Trials have commenced with a number of Tier 1 companies such as National Grid Gas, Anglian Water and Morrison Utility Services which are progressing with positive results. In addition two major equipment hire companies are now listing the e-Safe+ and the new e-SafeLOG. With renewed interest in alternative methods for assessing the compliance of Highway reinstatements against standards; this year has also seen a marked increase in enquiries for our e-Spott & e-SpottHF system. The application for the Phase 2 H2020 funding was submitted in October 2016, which was later than expected with the extra time used for further European marketing to enhance the application. A response is expected before the end of 2016. The increased presence of PipeHawk across the European GPR market has also led to a number of enquiries for development of other GPR based products, further work on which is expected to open new opportunities, allowing us to further enhance our provision of user friendly GPR based systems. I can report that turnover for the year ended 30 June 2016 was £4.8 million (2015: £4.6 million). The Group incurred a loss before taxation for the year of £1,017,000 (2015: loss £753,000). The loss per share was 2.28p (2015: 1.52p). QM Systems 2015/16 has proved challenging on a number of levels. Low order intake during the second quarter, delayed receipt of expected orders during the latter part of the third quarter and early part of the fourth quarter which I can only assume related to the uncertainty around Brexit. Despite this QM Systems still managed to achieve an order intake of approximately £3 million during the last six months of the financial year (approx. £800k for the first six months of the financial year). Order intake for our usually quieter period of the first quarter of the current financial year is approximately £1.25 million representing an excellent start to this year. This seems to support the theory that orders were delayed due to uncertainty around Brexit. Our expected order base continues to look buoyant with a substantial amount of significant orders under discussion. The fragmented way in which orders arrived throughout 2015/16 resulted in an inefficient utilisation of resources. In addition we experienced a substantial deficit on budget on one of our key projects. Despite this we put our client’s interests first, ensuring that the project was delivered on time and the close relationship was maintained. Although QM Systems incurred a loss on the project, it assisted in winning a substantial order for an additional project with the client at more advantageous terms for QM Systems. Looking forwards for the remainder of the current financial year we enter the period with a very healthy orderbook, and the enquiry pipeline continues to look buoyant. QM Systems has recruited an additional experienced sales manager to the business to continue growing the orderbook. We have successfully put the project challenges faced within the previous year and our utilisation of resources across the business is now far more efficient. In addition to the loans I have provided to the Company in previous years, my fellow directors and I have deferred a certain proportion of our fees and the interest due to us until the Company is in a suitably strong position to make the full payments. Further fees and interest, amounting to £71,000 were deferred in the year ended 30 June 2016. At 30 June 2016, these deferred fees and interest amounted to approximately £1.6 million in total, all of which have been recognised as a liability in the Company’s accounts. Strategy & Outlook The PipeHawk Group remains committed to creating sustainable earnings-based growth and focusing on the expansion of its business with forward-looking products and services. PipeHawk acts responsibly towards its shareholders, business partners, employees, society and the environment – in each of its business areas. PipeHawk is committed to technologies and products that unite the goals of customer value and sustainable development. Despite the very challenging year just endured, I remain optimistic in my outlook for the Group. Gordon Watt Chairman 14 November 2016 Adien Following a reasonable first half of the year showing a small profit, Adien encountered some very difficult trading during the second six months largely due to the deferment of any sort of decision being taken by clients in the run up to the Brexit referendum. Nevertheless Adien are now experiencing an increase in volumes of both work in progress and enquiries from all its key clients; in the Water sector all of its major frameworks are fully engaged; in addition the Airport and Rail sectors are increasing activity with significant contracts in place with all the main Contractors involved both north and south of the border. In Scotland the Power sector has started a new phase of funding for Substation upgrades with an initial batch of 35 sites starting in December 2016. The Highlands Railway refurbishment is underway and Adien have frameworks agreements in place with all the major contractors. The next six months is forecast to be very busy. SUMO SUMO has also had a challenging year. It made a small loss in the first half, then a good profit in the third quarter and another loss in the fourth quarter. Turnover for the year ended 30 June 2016 was £4,664,000 (2015: £4,464,000) and the profit before tax was £22,000 (2015: loss £136,000). PipeHawk owns 28.4% of SUMO and accounts for it as a joint venture – for this reason the turnover of SUMO has not been accounted for in the group financial statements. Financial position The continuing losses mean that the group continues to be in a net liability position and reliant on my continuing financial support. My letter of support dated 7 December 2015 was renewed on 14 November 2016 for a further year. Loans, other than those covered by the CULS agreement, are unsecured and accrue interest at an annual rate of Bank of England base rate plus 2.15%. Chairman’s Statement PipeHawk plc Annual Report and Accounts 2016 3 Strategic Report for the year ended 30 June 2016 Financial results Turnover for the year ended 30 June 2016 was £4.8 million (2015: £4.6 million). The Group incurred a loss after taxation for the year of £753,000 (2015: loss £503,000). The loss per share was 2.28p (2015: loss per share 1.52p). A detailed review of business as well as future developments is included in the Chairman’s statement. Key performance indicators The Group’s key financial performance indicators are turnover, profit before tax, earnings per share and cash generation. An analysis of key performance indicators for turnover, profit before tax and earnings per share is disclosed in the statement of comprehensive income within the financial statements. An analysis of the cash generated by the Group is disclosed in the consolidated statement of cash flow within the financial statements which show that the Group is cash generative from operations. Non-financial key performance indicators are the strength of the order book and the ability of the company to generate turnover from the PipeHawk III technology. Principal risks and uncertainties The principal risks and uncertainties facing the business are the level of repeat business from clients and the Group’s ability to attract and retain new customers together with the management of working capital, compliance, legal and operational issues. When undertaking research and development activities, the principal risks and uncertainties are the novelty of the product, the actions of competitors during the development process and the ability to attract new customers for the developed product. A key risk for the business is the continuing availability of the financial support arrangements provided by the Executive Chairman described in the Report of the Directors and in note 1, which have been received fo a further 12 months. The Group’s financial risks and policies to minimise these are set out in note 18. Current trading Current trading is satisfactory and in line with the directors’ expectations. The Strategic Report was approved by the Board on 14 November 2016 and signed on its behalf by: Soumitra P Padmanathan Finance Director 4 PipeHawk plc Annual Report and Accounts 2016 Report of the Directors The directors present the annual report for the year ended 30 June 2016 The directors present the annual report on the affairs of the Group together with the financial statements for the year ended 30 June 2016. Principal activities and review of business The principal activities of the Group during the year were the development, assembly and sale of test system solutions and ground probing radar (GPR) equipment; the provision of GPR based services and the undertaking of complementary Research and Development assignments. Future developments A review of the operations of the Group during the financial year and expected future developments are included in the Chairman’s statement on page 2. Results and dividends The results for the Group for the year are set out in the consolidated statement of comprehensive income on page 12. The directors do not recommend the payment of a dividend for the year (2015: £nil). Directors The directors who served during the year are set out below: Gordon G Watt (Executive Chairman) Soumitra P Padmanathan (Finance Director) – appointed 23 March 2016 Robert Randal MacDonnell (Non-Executive) Robert G Tallentire (Non-Executive) – resigned as finance director and appointed as non-executive director 23 March 2016 The directors’ beneficial interests in the share capital of the company were as follows: 14 November 2016 30 June 2016 30 June 2015 Ordinary % of issued Ordinary % of issued Ordinary % of issued Shares of 1p share capital Shares of 1p share capital Shares of 1p share capital G G Watt 5,721,500 17.3% 5,721,500 17.3% 5,721,500 17.3% R MacDonnell 931,436 3.1% 931,436 3.1% 1,031,436 3.1% R G Tallentire - - - - - - S P Padmanathan - - - - - - The directors are also interested in unissued Ordinary Shares granted to them by the Company under share options held by them pursuant to individual option schemes as set out in note 6. Substantial share interests Other than directors, the Company has been notified of the following persons being interested in more than 3% of the issued share capital of the company at the date of this report. Ordinary % of issued Shares of 1p share capital S Hamilton 4,583,334 13.9% P Lobbenberg 3,100,000 9.4% R J Chignell 2,204,200 6.7% J Cresswell 1,700,000 5.2% J T Twigg 1,054,830 3.2% N G Wood 1,054,830 3.2% Research and development The Group continues to undertake research and development activities at its sites in Worcester and Aldershot. This will enable the Group to expand its activity in technology and innovation that will help us greatly in developing new products that will begin directly generating revenue in the future. The Group has undertaken research and development activities in the areas of ground probing radar and test & measurement related equipment. PipeHawk plc Annual Report and Accounts 2016 5 Report of the Directors Auditor and disclosure of information to auditor Each of the persons who are directors at the time when this report is approved has confirmed that: (a) so far as each director is aware, there is no relevant audit information of which the company’s auditor is unaware; and (b) each director has taken all the steps that ought to have been taken as a director in order to be aware of any information needed by the company’s auditor in connection with preparing their report and to establish that the company’s auditor is aware of that information. Auditor The reappointment of Crowe Clark Whitehill LLP will be proposed at the forthcoming Annual General Meeting, in accordance with section 489 of the Companies Act 2006. Future developments The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman’s statement and the summary of significant accounting policies – “critical judgements in applying accounting policies and key sources of estimation uncertainty”. Financial instruments Note 18 to the financial statements describe the policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and its exposure to credit risk and liquidity risk. Going concern As described in the Chairman’s report, the current economic environment is improving for the Group’s trading subsidiaries in their respective markets as evidences by healthy order books however the directors consider that the outlook presents challenges in terms of sales volumes and in terms of bringing R&D developments to commercialisation. The directors have instituted measures to preserve cash and secure additional finance but these circumstances create uncertainties over future trading results and cashflows. The directors have furthermore obtained a renewed pledge from GG Watt to provide ongoing financial support for a period of at least twelve months from the approval date of the group statement of financial position. Nevertheless, in addition to the continuing support of the Directors, after making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. A material uncertainty exists regarding the ability of the Group to remain a going concern without the continuing financial support of the Executive Chairman. Approval The report of the directors was approved by the Board on 14 November 2016 and signed on its behalf by: Soumitra P Padmanathan Director 6 PipeHawk plc Annual Report and Accounts 2016 Corporate Governance The Company is not subject to the Listing Rules of the Financial Conduct Authority which require listed companies to disclose how they have applied the principles set out in the UK Corporate Governance Code and whether they have complied with its provisions throughout the period. The Company considers these principles to be best practice, subject to their appropriateness given the size of the Company and the composition of the Board. The following report summarises the current corporate governance processes that are in place. Directors The Board currently comprises the executive chairman, one executive director and two non-executive directors. Executive directors’ normal retirement age is 65 and non-executive directors’ normal retirement age is 80. Both are subject to periodic reappointment by shareholders. The requirements of the Company’s articles result in each director being reappointed every three years. The full Board meets formally six times each year. There is a formal schedule of matters reserved for the Board’s decision. All directors have access to the advice and services of the company secretary, who is also responsible for ensuring that Board procedures are followed. There is also a procedure in place for any director to take independent professional advice, if necessary, at the company’s expense. Internal controls The directors have overall responsibility for ensuring that the Group maintains a system of internal control, and for reviewing its effectiveness, to provide them with reasonable assurance that the assets of the Group are safeguarded and that the shareholders’ investments are protected. The system includes internal controls covering financial, operational and compliance areas, and risk management. There are limitations in any system of internal control, which are designed to manage rather than eliminate risk and can provide reasonable but not absolute assurance against material misstatement or loss. The Board has undertaken an assessment of the major risk areas for the business and methods used to monitor and control them. In addition to financial risk, this covered operational, commercial, marketing and research and development risks. This risk review has become an ongoing process of identifying, evaluating and managing the significant risks faced by the Group, with regular review by the Board. The additional key procedures designed to provide an effective system of internal control are that: • There is an organisational structure with clearly defined lines of responsibility and delegation of authority. • Annual budgets are prepared and updated as necessary. • Management accounts are prepared on a quarterly basis and compared to budgets and forecasts to identify any significant variances. • The Group appoints staff of the required calibre to fulfil their allotted responsibilities. The Board has considered it inappropriate to establish an internal audit function. However, this decision will be reviewed as the operations of the Group develop. Identification of business risk Regular assessments of ongoing risks facing the business are undertaken as part of the regular Group management meetings in the key areas such as management of working capital, compliance, legal and operational issues. This risk management framework is applied to major initiatives such as acquisitions as well as operational risks within the business including operational health and safety risks. Remuneration Basic salaries are set having regard to each director’s responsibilities and pay levels for comparable positions. In framing its remuneration policy the committee aims to attract and retain directors to run the company successfully without making excessive payments. Details of individual directors’ share options are included in the notes to the financial statements and details of their remuneration including long term incentive schemes are included in note 6 to the audited financial statements. The notice period in all the directors’ service contracts is one year. Shareholder relationships The Board attaches a high priority to communications with shareholders. Presentations are made to shareholders, institutions and analysts once a year to coincide with the announcement of the final results. Additional dialogue with institutional shareholders is entered into as necessary. The annual general meeting is to be held on 15 December 2016. The resolutions to be proposed at the annual general meeting, together with explanatory notes, appear in the separate Notice of Annual General Meeting on page 40. Other information about the Company is available on the Company’s web site. PipeHawk plc Annual Report and Accounts 2016 7 Directors’ Biographies Gordon Watt BA, FCA, FRSA Chairman (63) Gordon is a chartered accountant having been a partner at RSM Robson Rhodes and then Finance Director/Deputy Chief Executive of British Bus Plc until it was sold to Arriva Plc. He is non-executive chairman of a number of private companies, he became a non-executive director of the Group in 1998, became finance director in December 2001 and Chairman in January 2003. Soumitra P Padmanathan BSc, FCA, CTA Finance Director (52) Soumitra (Mithi) was appointed as Group Finance Director on 23 March 2016. Having qualified with RSM Robson Rhodes, Mithi has gained extensive experience in several Global multi-national businesses. R Randal MacDonnell Non-executive Director (76) Randal joined the Group in February 2006. He was previously a director of Kleinwort Benson Securities, Laing & Cruickshank Securities and Chase Manhattan Securities Limited. Prior to that he was a partner in stockbrokers Laurie Milbank & Co. Robert Tallentire ACA MBA Non-executive Director (57) Bob joined PipeHawk in 2003 and has been both Managing Director of Adien and Group Finance Director. He is now a Non-executive Director of the company since 11 April 2016. Bob is a chartered accountant having been a partner at RSM Robson Rhodes. He has extensive consulting and management experience. 8 PipeHawk plc Annual Report and Accounts 2016 Statement of Directors’ Responsibilities for the Annual Report The directors are responsible for preparing the 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 (IFRSs) as adopted by the EU 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 company and the group and of the profit or loss of the group for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and accounting estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; • 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 company and group’s transactions and disclose with reasonable accuracy at any time the financial position of the company and group 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 Company and Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. They are further responsible for ensuring that the Strategic Report and the Report of the Directors and other information included in the Annual Report and Financial Statements is prepared in accordance with applicable law in the United Kingdom. The maintenance and integrity of the PipeHawk plc web site is the responsibility of the directors; the work carried out by the auditors does not involve the consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred in the accounts since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of the accounts and the other information included in annual reports may differ from legislation in other jurisdictions. PipeHawk plc Annual Report and Accounts 2016 9 Independent Auditor’s Report to the Members of PipeHawk plc We have audited the financial statements of PipeHawk plc for the year ended 30 June 2016 which comprise the Group Statement of Comprehensive Income, the Group and Parent Company Statement of Financial Position, the Group and Parent Company Statements of Cash Flow, the Group and Parent Company Statements of Changes in Equity and the related notes numbered 1 to 21. 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 and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. 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. Respective responsibilities of directors and auditor As explained more fully in the Statement of Directors’ Responsibilities, 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. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Strategic Report and the Directors’ Report and any other surround information to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion: •(cid:0) 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 30 June 2016 and of the group’s loss for the year then ended; •(cid:0) the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; •(cid:0) the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 2006; and •(cid:0) the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Emphasis of matter – Going concern Without qualifying our opinion we draw attention to the basis of preparation on going concern in note 1 to the financial statements. This explains that a material uncertainty exists regarding the group’s ability to continue as a going concern without the continuing financial support of the Executive Chairman. The financial statements do not include any adjustments that would result if the group was unable to continue as a going concern. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. 10 PipeHawk plc Annual Report and Accounts 2016 Independent Auditor’s Report to the Members of PipeHawk plc Matters on which we are required to report by exception 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: •(cid:0) 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 •(cid:0) the parent company financial statements are not in agreement with the accounting records and returns; or •(cid:0) certain disclosures of directors’ remuneration specified by law are not made; or •(cid:0) we have not received all the information and explanations we require for our audit. Stephen Bullock Senior Statutory Auditor for and on behalf of Crowe Clark Whitehill LLP Chartered Accountants Statutory Auditor St Bride’s House 10 Salisbury Square London EC4Y 8EH United Kingdom 14 November 2016 PipeHawk plc Annual Report and Accounts 2016 11 Consolidated Statement of Comprehensive Income For the year ended 30 June 2016 Note 30 June 2016 30 June 2015 £’000 £’000 Revenue 2 4,813 4,628 Staff costs 5 (2,866) (2,575) Operating costs (2,805) (2,617) ––––––––––––– ––––––––––––– Operating loss (858) (564) Share of post-tax profits/(losses) of equity accounted joint venture 11 6 (39) ––––––––––––– ––––––––––––– Loss before interest and taxation (852) (603) Finance costs 3 (165) (150) ––––––––––––– ––––––––––––– Loss before taxation (1,017) (753) Taxation 7 264 250 ––––––––––––– ––––––––––––– Loss for the year attributable to equity holders of the parent (753) (503) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Other comprehensive income - - ––––––––––––– ––––––––––––– Total comprehensive loss for the year attributable to equity holders of the parent (753) (503) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Loss per share (pence) – basic 8 (2.28) (1.52) Loss per share (pence) – diluted 8 (2.28) (1.52) The notes on pages 18 to 39 form an integral part of these financial statements. 12 PipeHawk plc Annual Report and Accounts 2016 Consolidated Statement of Financial Position at 30 June 2016 Assets Note 30 June 2016 30 June 2015 £’000 £’000 Non-current assets Property, plant and equipment 9 227 235 Goodwill 10 1,061 1,061 Investment in joint venture 11 53 47 ––––––––––––– ––––––––––––– 1,341 1,343 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Current assets Inventories 13 105 86 Current tax assets 181 127 Trade and other receivables 14 1,224 1,276 Cash and cash equivalents 24 43 ––––––––––––– ––––––––––––– 1,534 1,532 ––––––––––––– ––––––––––––– Total assets 2,875 2,875 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Equity and liabilities Equity Share capital 19 330 330 Share premium 5,151 5,151 Retained earnings (9,236) (8,483) ––––––––––––– ––––––––––––– (3,755) (3,002) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Non-current liabilities Borrowings 15 2,301 2,242 Trade and other payables 16 - 1,848 ––––––––––––– ––––––––––––– 2,301 4,090 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Current liabilities Trade and other payables 16 3,895 1,569 Borrowings 17 434 218 ––––––––––––– ––––––––––––– 4,329 1,787 ––––––––––––– ––––––––––––– Total equity and liabilities 2,875 2,875 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The notes on pages 18 to 39 form an integral part of these financial statements. The financial statements were approved by the board and authorised for issue on 14 November 2016 and signed on its behalf by: Gordon G Watt Director Company No: 3995041 PipeHawk plc Annual Report and Accounts 2016 13 Parent Company Statement of Financial Position at 30 June 2016 Assets Note 30 June 2016 30 June 2015 £’000 £’000 Non-current assets Investment in subsidiaries 12 1,197 1,197 Investment in joint venture 11 198 198 ––––––––––––– ––––––––––––– 1,395 1,395 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Current assets Inventories 13 97 72 Current tax assets 82 50 Trade and other receivables 14 316 680 Cash and cash equivalents - 9 ––––––––––––– ––––––––––––– 495 811 ––––––––––––– ––––––––––––– Total assets 1,890 2,206 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Equity and liabilities Equity Share capital 19 330 330 Share premium 5,151 5,151 Retained earnings (9,145) (8,773) ––––––––––––– ––––––––––––– (3,664) (3,292) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Non-current liabilities Borrowings 15 2,225 2,225 Trade and other payables 16 1,261 3,142 ––––––––––––– ––––––––––––– 3,486 5,367 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Current liabilities Trade and other payables 16 2,068 131 ––––––––––––– ––––––––––––– 2,068 131 ––––––––––––– ––––––––––––– Total equity and liabilities 1,890 2,206 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The notes on pages 18 to 39 form an integral part of these financial statements. The financial statements were approved by the board and authorised for issue on 14 November 2016 and signed on its behalf by: Gordon G Watt Director Company No: 3995041 14 PipeHawk plc Annual Report and Accounts 2016 Consolidated Statement of Cash Flow For the year ended 30 June 2016 30 June 2016 30 June 2015 £’000 £’000 Cash flows from operating activities Loss from operations (858) (564) Adjustments for: Profit on disposal of assets (1) - Depreciation 112 138 ––––––––––––– ––––––––––––– (747) (426) (Increase)/decrease in inventories (19) 24 Decrease/(increase) in receivables 53 (198) Increase in liabilities 328 454 ––––––––––––– ––––––––––––– Cash used in operations (385) (146) Interest paid (18) (12) Corporation tax received 212 195 ––––––––––––– ––––––––––––– Net cash (used in)/generated from operating activities (191) 37 ––––––––––––– ––––––––––––– Cash flows from investing activities Proceeds from sale of assets 2 - Purchase of plant and equipment (105) (133) ––––––––––––– ––––––––––––– Net cash used in investing activities (103) (133) ––––––––––––– ––––––––––––– Cash flows from financing activities Proceeds from borrowings 361 221 Repayment of loan - (160) Repayment of finance leases (86) (42) ––––––––––––– ––––––––––––– Net cash generated from/(used in) financing activities 275 19 ––––––––––––– ––––––––––––– Net decrease in cash and cash equivalents (19) (77) Cash and cash equivalents at beginning of year 43 120 ––––––––––––– ––––––––––––– Cash and cash equivalents at end of year 24 43 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The notes on pages 18 to 39 form an integral part of these financial statements. PipeHawk plc Annual Report and Accounts 2016 15 Parent Company Statement of Cash Flow For the year ended 30 June 2016 30 June 2016 30 June 2015 £’000 £’000 Cash flows from operating activities Loss from operations (353) (232) Decrease in inventories (25) 14 Increase in receivables 364 (60) Increase in liabilities (80) 329 ––––––––––––– ––––––––––––– Cash generated by operations (94) 51 Interest paid (2) - Corporation tax received 87 110 ––––––––––––– ––––––––––––– Net cash generated by operating activities (9) 161 ––––––––––––– ––––––––––––– Cash flows from investing activities Repayment of loan - (160) ––––––––––––– ––––––––––––– Net cash used in financing activities - (160) ––––––––––––– ––––––––––––– Net increase in cash and cash equivalents (9) 1 Cash and cash equivalents at beginning of year 9 8 ––––––––––––– ––––––––––––– Cash and cash equivalents at end of year - 9 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The notes on pages 18 to 39 form an integral part of these financial statements. 16 PipeHawk plc Annual Report and Accounts 2016 Statement of Changes in Equity For the year ended 30 June 2016 Consolidated Share Share premium Retained capital account earnings Total £’000 £’000 £’000 £’000 As at 1 July 2014 330 5,151 (7,980) (2,499) Loss for the year - - (503) (503) Other comprehensive income - - - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Total comprehensive income - - (503) (503) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– As 30 June 2015 330 5,151 (8,483) (3,002) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Loss for the year - - (753) (753) Other comprehensive income - - - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Total comprehensive income - - (753) (753) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– As 30 June 2016 330 5,151 (9,236) (3,755) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Parent Share Share premium Retained capital account earnings Total £’000 £’000 £’000 £’000 As at 1 July 2014 330 5,151 (8,498) (3,017) Loss for the year - - (275) (275) Other comprehensive income - - - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Total comprehensive income - - (275) (275) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– As 30 June 2015 330 5,151 (8,773) (3,292) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Loss for the year - - (372) (372) Other comprehensive income - - - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Total comprehensive income - - (372) (372) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– As 30 June 2016 330 5,151 (9,145) (3,664) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The share premium account reserve arises on the issuing of shares. Where shares are issued at a value that exceeds their nominal value, a sum equal to the difference between the issue value and the nominal value is transferred to the share premium account reserve. The notes on pages 18 to 39 form an integral part of these financial statements. PipeHawk plc Annual Report and Accounts 2016 17 Notes to the Financial Statements For the year ended 30 June 2016 1. Summary of Significant Accounting Policies General information PipeHawk plc (the Company) is a limited company incorporated in the United Kingdom under the Companies Act 2006. The addresses of its registered office and principal place of business are disclosed in the company information at page 1. The principal activities of the Company and its subsidiaries (the Group) are described on page 5. The financial statements are presented in pounds sterling, the functional currency of all companies in the Group. In accordance with section 408 of the Companies Act 2006 a separate statement of comprehensive income for the Company has not been presented. For the year to 30 June 2016 the Company recorded a net loss after taxation of £372,000 (2015: £275,000). Basis of preparation The financial statements have been prepared in accordance with international financial reporting standards as adopted by the EU and under the historical cost convention. The principal accounting policies are set out below. A number of new standards and amendments to standards and interpretations have been issued but are not yet effective and in some cases have not yet been adopted by the EU. The directors do not expect that the adoption of these standards will have a material impact on the financial statements of the Group in future periods, except that IFRS 9 will impact both the measurement and disclosures of financial instruments and IFRS 15 may have an impact on revenue recognition and related disclosures. At this point it is not practicable for the directors to provide a reasonable estimate of the effect of IFRS 9 and IFRS 15 as their detailed review of these standards is still ongoing. In addition the directors are in the process of considering the potential changes that may occur to the financial statements under IFRS 16 “Leases”. This is expected to apply to periods commencing on or after 1 January 2019 and the assessment will be made over the next year and reported in future financial information. Basis of preparation – Going concern The directors have reviewed the Group’s funding requirements for the next twelve months which show positive anticipated cash flow generation, prior to any repayment of loans from the Executive Chairman. The directors therefore have a reasonable expectation that the entity has adequate resources to continue in its operational exercises for the foreseeable future. The directors have furthermore obtained a renewed pledge from GG Watt to provide ongoing financial support for a period of at least twelve months from the approval date of the group statement of financial position. It is on this basis that the directors consider it appropriate to adopt the going concern basis of preparation within these financial statements. A material uncertainty exists regarding the ability of the Group to remain a going concern without the continuing financial support of the Executive Chairman. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Business combinations Acquisitions of subsidiaries and businesses are accounted for using the purchase method. The cost of the business combination is measured as the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations (revised) are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. 18 PipeHawk plc Annual Report and Accounts 2016 Notes to the Financial Statements For the year ended 30 June 2016 1. Summary of Significant Accounting Policies (continued) Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. Goodwill Goodwill arising on the acquisition of a subsidiary or a jointly controlled entity represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or jointly controlled entity recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Investments in joint ventures A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control that is when the strategic financial and operating policy decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control. The results and assets and liabilities of joint venture are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, investments in joint ventures are carried in the consolidated statement of financial position at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the joint venture, less any impairment in the value of individual investments. Losses of a joint venture in excess of the Group’s interest in that joint venture (which includes any long-term interests that, in substance, form part of the Group’s net investment in the joint venture) are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture. Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the joint venture recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. Where a group entity transacts with a joint venture of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant joint venture. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. PipeHawk plc Annual Report and Accounts 2016 19 Notes to the Financial Statements For the year ended 30 June 2016 1. Summary of Significant Accounting Policies (continued) Sale of goods Revenue from the sale of goods is recognised when all the following conditions are satisfied: • the Group has transferred to the buyer the significant risks and rewards of ownership of the goods; • • • • the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the entity; and the costs incurred or to be incurred in respect of the transaction can be measured reliably. For PipeHawk products this is generally at the point of delivery. Rendering of services In relation to the design and manufacture of complete software and hardware test solutions and the provision of specialist surveying, revenue is recognised through a review of the man-hours completed on the project at the year-end compared to the total man-hours required to complete the projects. Provision is made for all foreseeable losses if a contract is assessed as unprofitable. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is charged so as to write off the cost of assets over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. The principal annual rates used to depreciate property, plant and equipment are: Equipment, fixtures and fittings Motor vehicles 25% 25% Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within the Statement of Comprehensive Income. Inventories and work in progress Inventories are stated at the lower of cost and net realisable value. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to inventories by the method most appropriate to the particular class of inventory, with the majority being valued on a first-in-first-out basis. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Work in progress is valued at cost, which includes outlays incurred on behalf of clients and an appropriate proportion of directly attributable costs on incomplete assignments. Provision is made for irrecoverable costs where appropriate. Financial assets Financial assets are recognised and derecognised on trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value. Loans and receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. 20 PipeHawk plc Annual Report and Accounts 2016 Notes to the Financial Statements For the year ended 30 June 2016 1. Summary of Significant Accounting Policies (continued) Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period. Income is recognised on an effective interest basis. Impairment of financial assets Financial assets are assessed for indicators of impairment at each statement of financial position date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset. Financial liabilities and equity instruments issued by the Group Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Financial liabilities Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Derecognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. Intangible assets Intangible assets acquired separately Intangible assets acquired separately are reported at cost less accumulated amortisation and accumulated impairment losses. Amortisation is charged on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. PipeHawk plc Annual Report and Accounts 2016 21 Notes to the Financial Statements For the year ended 30 June 2016 1. Summary of Significant Accounting Policies (continued) Internally-generated intangible assets – research and development expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally-generated intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following have been demonstrated: • • • • • • the technical feasibility of completing the intangible asset so that it will be available for use or sale; the intention to complete the intangible asset and use or sell it; the ability to use or sell the intangible asset; how the intangible asset will generate probable future economic benefits; the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and the ability to measure reliably the expenditure attributable to the intangible asset during its development. The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognised, development expenditure is charged to profit or loss in the period in which it is incurred. Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets acquired separately. Intangible assets acquired in a business combination Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the acquisition date. Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets acquired separately. Finance leases Assets held under finance leases are initially recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss. Contingent rentals are recognised as expenses in the periods in which they are incurred. Operating leases Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Pension scheme contributions Pension contributions are charged to the statement of comprehensive income in the period in which they fall due. All pension costs are in relation to defined contribution schemes. 22 PipeHawk plc Annual Report and Accounts 2016 Notes to the Financial Statements For the year ended 30 June 2016 1. Summary of Significant Accounting Policies (continued) Share based payments Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 19. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest. At each statement of financial position date, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss over the remaining vesting period, with a corresponding adjustment to reserves. Foreign currencies Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at 30 June. Transactions in foreign currencies are recorded at the rates ruling at the date of the transactions. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of comprehensive income because it excludes items of income or 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 year end date. Deferred tax Deferred tax is recognised 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 statement of financial position liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each statement of financial position 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 assets and liabilities are measured at the tax rates that are expected to apply in the year in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the year end date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. 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. PipeHawk plc Annual Report and Accounts 2016 23 Notes to the Financial Statements For the year ended 30 June 2016 1. Summary of Significant Accounting Policies (continued) Current and deferred tax for the year Current and deferred tax are recognised as an expense or income in the statement of comprehensive income, except when they relate to items credited or debited directly to equity, in which case the tax is also recognised directly in equity, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is taken into account in calculating goodwill or in determining the excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of the business combination. Impairment of property, plant and equipment and intangible assets At each year end date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in the statement of comprehensive income, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Any impairment made to the goodwill cannot be subsequently reversed. Critical judgements in applying accounting policies and key sources of estimation uncertainty The following are the critical judgements and key sources of estimation uncertainty that the directors have made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in these financial statements. Impairment of goodwill and investment in subsidiaries Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. A similar exercise acquired in respect of investment and long term loans in subsidiary. The value in use calculation requires the directors to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value, see note 10 for further details. The carrying amount of goodwill at the year end date was £1,061,000 (2015: £1,061,000). The investment in subsidiaries at the year end was £1,197,000 (2015: £1,197,000). 24 PipeHawk plc Annual Report and Accounts 2016 Notes to the Financial Statements For the year ended 30 June 2016 2. Segmental analysis 2016 2015 £’000 £’000 Turnover by geographical market United Kingdom 4,745 4,529 Europe 68 9 Other - 90 ––––––––––––– ––––––––––––– 4,813 4,628 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The group operates out of one geographical location being the UK. Accordingly the primary segmental disclosure is based on activity. Per IFRS 8 operating segments are based on internal reports about components of the group, which are regularly reviewed and used by Chief Operating Decision Maker (“CODM”) for strategic decision making and resource allocation, in order to allocate resources to the segment and to assess its performance. The Group’s reportable operating segments are as follows: • • • Adien – Utility detection and mapping services Technology Division – Development, assembly and sale of GPR equipment QM Systems – Test system solutions The CODM monitors the operating results of each segment for the purpose of performance assessments and making decisions on resource allocation. Performance is based on external and internal revenue generations and profit before tax, which the CODM believes are the most relevant in evaluating the results relative to other entities in the industry. Segment assets and liabilities are presented inclusive of inter segment balances, as inter-segment pricing. In utility detection and mapping services one customer accounted for 11% of revenue in 2016 and 12% in 2015. In development, assembly and sale of GPR equipment one customer accounted for 10% of revenue in 2016 and 24% in 2015. In automation and test system solutions one customer accounted for 15.5% of revenue and 8.5% in 2015. Information regarding each of the operations of each reportable segments is included below, all non-current assets owned by the group are held in the UK . Utility Development, detection assembly and and sale Automation and mapping of GPR test system services equipment solutions Total £’000 £’000 £’000 £’000 Year ended 30 June 2016 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Total segmental revenue 1,241 151 3,421 4,813 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Segmental result (156) (354) (348) (858) Finance costs (7) (137) (21) (165) Share of operating profit in Joint venture 6 ––––––––––––– Loss before taxation (1,017) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Segment assets 521 1,334 1,019 2,874 Segment liabilities 510 4,293 1,827 6,630 Non-current asset additions 95 - 10 105 Depreciation and amortisation 72 - 40 112 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– PipeHawk plc Annual Report and Accounts 2016 25 Notes to the Financial Statements For the year ended 30 June 2016 2. Segmental analysis (continued) Utility Development, detection assembly and and sale Automation and mapping of GPR test system services equipment solutions Total £’000 £’000 £’000 £’000 Year ended 30 June 2015 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Total segmental revenue 1,295 210 3,123 4,628 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Segmental result (91) (232) (241) (564) Finance costs (8) (138) (4) (150) Share of operating loss in joint venture (39) ––––––––––––– Loss before taxation (753) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Segment assets 511 1,432 932 2,875 Segment liabilities 833 3,822 1,222 5,877 Non current asset additions 85 - 49 134 Depreciation and amortisation 80 - 59 139 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The majority of the Group’s revenue is earned via the rendering of services. 3. Finance costs 2016 2015 £’000 £’000 Interest payable 165 150 ––––––––––––– ––––––––––––– 165 150 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Interest payable comprises interest on: Finance leases 23 12 Directors’ loans 136 138 Other 6 - ––––––––––––– ––––––––––––– 165 150 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 26 PipeHawk plc Annual Report and Accounts 2016 Notes to the Financial Statements For the year ended 30 June 2016 4. Operating loss for the year This is arrived at after charging for the Group: 2016 2015 £’000 £’000 Research and development costs not capitalised 978 751 Depreciation of wholly owned property, plant and equipment 109 102 Depreciation of property, plant and equipment held under finance leases 29 36 Auditor’s remuneration - Fees payable to the company’s auditor for the audit of the group’s financial statements 24 23 - Fees payable to the company’s auditor and its subsidiaries for the provision of tax services 4 4 Operating lease rentals: - other including land and buildings 114 141 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The company audit fee is £8,500 (2015: £8,500). 5. Staff costs 2016 2015 No. No. Average monthly number of employees, including directors: Production and research 63 55 Selling and research 11 10 Administration 7 7 ––––––––––––– ––––––––––––– 81 72 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 2016 2015 £’000 £’000 Staff costs, including directors: Wages and salaries 2,641 2,328 Social security costs 209 232 Other pension costs 16 15 ––––––––––––– ––––––––––––– 2,866 2,575 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– PipeHawk plc Annual Report and Accounts 2016 27 Notes to the Financial Statements For the year ended 30 June 2016 6. Directors’ Remuneration Salary Benefits 2016 2015 and fees in kind Total Total £’000 £’000 £’000 £’000 G G Watt 71 - 71 71 R G Tallentire 24 - 24 24 S P Padmanathan 4 - 4 - R MacDonnell - - - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Aggregate emoluments 99 - 99 95 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Directors’ pensions 2016 2015 No. No. The number of directors who are accruing retirement benefits under: - defined contributions policies - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The directors above represent key management personnel. Directors’ share options No. of options Granted Date from At start during At end Exercise which of year year of year price exercisable R MacDonnell 500,000 - 500,000 3.0p 6-Mar-15 R G Tallentire 1,000,000 - 1,000,000 3.0p 6-Mar-15 The Company’s share price at 30 June 2016 was 3.625p. The high and low during the period under review were 2.875p and 7.75p respectively. In addition to the above, in consideration of loans made to the Company, G G Watt has warrants over 3,703,703 ordinary shares at an exercise price of 13.5p and a further 6,000,000 ordinary shares at an exercise price of 3.0p. In consideration of loans made to the Company R G Tallentire has warrants over 2,120,000 ordinary shares at an exercise price of 3.0p. 28 PipeHawk plc Annual Report and Accounts 2016 Notes to the Financial Statements For the year ended 30 June 2016 7. Taxation 2016 2015 £’000 £’000 United Kingdom Corporation Tax Current taxation (264) (204) Adjustments in respect of prior years - (46) ––––––––––––– ––––––––––––– (264) (250) Deferred taxation - - ––––––––––––– ––––––––––––– Tax on loss (264) (250) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Current tax reconciliation 2016 2015 £’000 £’000 Taxable (loss) for the year (1,023) (713) ––––––––––––– ––––––––––––– Theoretical tax at UK corporation tax rate 20.75% (2015: 20.75%) (205) (148) Effects of: - R&D tax credit adjustments (162) (108) - other expenditure that is not tax deductible 4 6 - adjustments in respect of prior years 36 (46) - accelerated capital allowances - 5 - losses carried forward 61 21 - short term timing differences 2 20 ––––––––––––– ––––––––––––– Total income tax expense (264) (250) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The Group has tax losses amounting to approximately £2,492,000 (2015: £2,176,000), available for carry forward to set off against future trading profits. No deferred tax assets have been recognised in these financial statements due to the uncertainty regarding future taxable profits. Potential deferred tax assets not recognised are approximately £490,000 (2015: £435,000) 8. Loss per share Group Basic This has been calculated on a loss of £753,000 (2015: loss £503,000) and the number of shares used was 33,020,515 (2015: 33,020,515) being the weighted average number of shares in issue during the year. Diluted This has been calculated on a loss of £753,000 (2015: loss £503,000) and the number of shares used was 67,111,718 (2015:67,111,718) being the diluted weighted average number of shares in issue during the year. The potential ordinary shares included in the weighted average number of shares are anti-dilutive and therefore diluted earnings per share is equal to basic earnings per share. PipeHawk plc Annual Report and Accounts 2016 29 Notes to the Financial Statements For the year ended 30 June 2016 9. Property, plant and equipment Group Equipment, fixtures and Leasehold Motor fittings improvements vehicles Total £’000 £’000 £’000 £’000 Cost At 1 July 2015 1,311 223 346 1,880 Additions 78 - 27 105 Disposals - - (27) (27) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– At 30 June 2016 1,389 223 346 1,958 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Depreciation At 1 July 2015 1,176 159 310 1,645 Charged in year 64 23 25 112 Disposals - - (26) (26) ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– At 30 June 2016 1,240 182 309 1,731 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Net book value At 30 June 2016 149 41 37 227 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– At 30 June 2015 135 64 36 235 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The net book value of the property, plant and equipment includes £116,965 (2015: £ 60,796) in respect of assets held under finance lease agreements. These assets have been offered as security in respect of these finance lease agreements. Depreciation charged in the period on those assets amounted to £28,842 (2015: £36,319). Company Equipment, fixtures and Leasehold fittings improvements Total £’000 £’000 £’000 Cost At 1 July 2015 and 30 June 2016 196 45 241 ––––––––––––– ––––––––––––– ––––––––––––– Depreciation At 1 July 2015 and 30 June 2016 196 45 241 ––––––––––––– ––––––––––––– ––––––––––––– Net book value At 30 June 2016 - - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– At 30 June 2015 - - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 30 PipeHawk plc Annual Report and Accounts 2016 Notes to the Financial Statements For the year ended 30 June 2016 10. Goodwill Group Goodwill Total £’000 £’000 Cost: At 1 July 2015 and 30 June 2016 1,121 1,121 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Impairment At 1 July 2015 and 30 June 2016 60 60 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Net book value At 30 June 2016 1,061 1,061 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– At 30 June 2015 1,061 1,061 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The goodwill carried in the statement of financial position of £1,061,000 arose on the acquisition of Adien Limited in 2002 (£212,000) and the acquisition of QM Systems Limited in 2006 (£849,000). Adien Limited represents the segment utility detection and mapping services and QM Systems Limited represents the segment test system solutions. QM Systems Limited is involved in projects surrounding: • The creation of innovative automated assembly systems for the manufacturing, food and pharmaceutical sectors. • The provision of inspection systems for the automotive, aerospace rail and pharmaceutical sectors. • Automated test systems. The group tests goodwill annually for impairment or more frequently if there are indicators that it might be impaired. The recoverable amounts are determined from value in use calculations which use cash flow projections based on financial budgets approved by the directors covering a five year period. The key assumptions are those regarding the discount rates, growth rates and expected changes to sales and direct costs during the period. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the business. This has been estimated at 10% per annum reflecting the prevailing pre-tax cost of capital in the company. The growth rates are based on forecasts and historic margins achieved in both Adien Limited and QM Systems Limited and are 2.5% and 5% respectively, no terminal growth rate was applied. The directors believe that any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount of goodwill attributed to Adien Limited and QM Systems Limited to exceed the recoverable amount. Assumptions made are consistent with the prior year. PipeHawk plc Annual Report and Accounts 2016 31 Notes to the Financial Statements For the year ended 30 June 2016 11. Investment in Joint Venture Group Investment in shares £’000 Cost: At 1 July 2015 and 30 June 2016 198 ––––––––––––– Share of losses At 1 July 2015 151 Share of profit for the year (6) ––––––––––––– At 30 June 2016 145 ––––––––––––– Net investment At 30 June 2016 53 ––––––––––––– ––––––––––––– At 30 June 2015 47 ––––––––––––– ––––––––––––– The investment in joint venture relates to a 28.4% shareholding in the ordinary share capital of SUMO Limited. SUMO Limited is engaged in the development of a GPR franchise operation and has a year end of 31 December. For the purpose of preparing this consolidation, financial information has been prepared for the year ended 30 June 2016. SUMO Limited’s principal place of business is Havant, Hampshire. Summarised financial information in respect of the Group’s joint venture is set out below: 30 June 2016 30 June 2015 £’000 £’000 Cash 12 34 Current assets 3,072 1,668 Non-current assets 965 853 ––––––––––––– ––––––––––––– Total assets 4,049 2,555 Total liabilities (all current) 3,862 2,390 Net assets 187 165 Group’s share of net assets of joint venture 53 47 Year ended Year ended 30 June 2016 30 June 2015 £’000 £’000 Total revenue 4,664 4,464 Interest expense 63 95 Depreciation/amortisation 117 139 Total profit/(loss) for the period 22 (136) Group’s share of profit/(loss) of joint venture 6 (39) 32 PipeHawk plc Annual Report and Accounts 2016 Notes to the Financial Statements For the year ended 30 June 2016 12. Non-current investments Company Investments in Investments in joint ventures subsidiaries Total £’000 £’000 £’000 (note 11) Cost 1 July 2015 198 1,197 1,395 ––––––––––––– ––––––––––––– ––––––––––––– At 30 June 2016 198 1,197 1,395 ––––––––––––– ––––––––––––– ––––––––––––– Impairment At 1 July 2015 and 30 June 2016 - - - ––––––––––––– ––––––––––––– ––––––––––––– Net book value At 30 June 2016 198 1,197 1,395 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– At 30 June 2015 198 1,197 1,395 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Parent and group interest in ordinary shares and voting Country of Subsidiary rights incorporation Principal activity Adien Limited 100% England & Wales Specialist surveying QM Systems Limited 100% England & Wales Test solutions Tech Sales Services Limited 100% England & Wales Dormant Minehawk Limited 100% England & Wales Dormant An impairment assessment was performed in line with the assessment of goodwill, see note 10 for further details. On the basis of this assessment no impairment of the investment was required at 30 June 2016. 13. Inventories Group Company 2016 2015 2016 2015 £’000 £’000 £’000 £’000 Raw materials 97 82 89 68 Finished goods 8 4 8 4 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 105 86 97 72 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– The replacement cost of the above inventories would not be significantly different from the values stated. The cost of inventories recognised as an expense and included within cost of sales amounted to £1,598,000 (2015: £1,699,000). PipeHawk plc Annual Report and Accounts 2016 33 Notes to the Financial Statements For the year ended 30 June 2016 14. Trade and other receivables Group Company 2016 2015 2016 2015 £’000 £’000 £’000 £’000 Current Trade receivables 1,126 1,199 7 - Amounts owed by group undertakings - - 263 670 Other receivables 49 41 44 8 Prepayments and accrued income 49 36 2 2 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 1,224 1,276 316 680 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 15. Non-current liabilities: Borrowings 2016 2015 2016 2015 £’000 £’000 £’000 £’000 Group Company Borrowings (note 17) 2,301 2,242 2,225 2,225 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 16. Trade and other payables Group Company 2016 2015 2016 2015 £’000 £’000 £’000 £’000 Current Trade payables 1,112 404 393 56 Other taxation and social security 393 336 4 - Payments received on account 432 536 - - Accruals 1,958 293 1,671 75 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 3,895 1,569 2,068 131 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Group Company 2016 2015 2016 2015 £’000 £’000 £’000 £’000 Non-current Trade payables - 299 - 299 Amounts owed to group undertakings - - 1,261 1,294 Accruals - 1,549 - 1,549 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– - 1,848 1,261 3,142 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Included in trade payables is an amount owed to G G Watt of £274,000 (2015: £299,000). 34 PipeHawk plc Annual Report and Accounts 2016 Notes to the Financial Statements For the year ended 30 June 2016 16. Trade and other payables (continued) Included within accruals above are the following amounts owing to directors relating to unpaid fees and accrued interest; 2016 2015 G G Watt £1,544,754 £1,439,709 R G Tallentire £49,148 £83,034 R R MacDonnell £2,000 £2,000 17. Borrowing Analysis Group Company 2016 2015 2016 2015 £’000 £’000 £’000 £’000 Due within one year Bank and other loans 404 173 - - Obligations under finance lease agreements 30 45 - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 434 218 - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Due after more than one year Obligations under finance lease agreements 76 17 - - Directors’ loans 2,225 2,225 2,225 2,225 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 2,301 2,242 2,225 2,225 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Repayable Due within 1 year 434 218 - - Over 1 year but less than 2 years 1,244 1,238 1,225 1,225 Over 2 years but less than 5 years 1,057 1,004 1,000 1,000 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 2,735 2,460 2,225 2,225 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Finance lease agreements with Close Motor Finance are at a rate of 4.5% over base rate. The future minimum lease payments under finance lease agreements at the year end date was £106,596 (2015: £61,863). A working capital loan of £220,000 was given by Mirrasand Partnership from a trust settled by Mr G Watt. The loan attracts interest at 10% per annum. £70,000 was repaid on 31 August 2016. The remainder is repayable in January 2017. The loan was guaranteed personally by Mr G Watt. The director’s loan due in more than one year is a loan of £1,225,000 from G G Watt. Directors’ loans attract interest at 2.15% over Bank of England base rate. During the year to 30 June 2016 £nil (2015: £160,000 was repaid). Included in bank and other loans is an invoice discounting facility of £160,000 (2015 £75,000). On 13th August 2010 the Company issued £1 million of Convertible Unsecured Loan Stock 2014 (“CULS”) to G G Watt, the Chairman of the Company. The CULS have been issued to replace loans made by G G Watt to the Company amounting to £1 million and has been recognised in non-current liabilities of £2,225,000. The CULS were renewed on 13th November 2014. PipeHawk plc Annual Report and Accounts 2016 35 Notes to the Financial Statements For the year ended 30 June 2016 17. Borrowing Analysis (continued) The principal terms of the CULS are as follows: - - The CULS may be converted at the option of Gordon Watt at a price of 5p per share at any time prior to 13th November 2018; Interest is payable at a rate of 10 per cent per annum on the principal amount outstanding until converted, prepaid or repaid, calculated and compounded on each anniversary of the issue of the CULS. On conversion of any CULS, any unpaid interest shall be paid within 20 days of such conversion; - The CULS are repayable, together with accrued interest on 13th November 2018 (“the Repayment Date”). On the basis of materiality no equity element of the convertible loan stock has been recognised in these financial statements. 18. Financial Instruments and derivatives The Group uses financial instruments, which comprise cash and various items, such as trade receivables and trade payables that arise from its operations. The main purpose of these financial instruments is to finance the Group’s operations. The main risks arising from the Group’s financial instruments are credit risk, liquidity risk and interest rate risk. Several high level procedures are already in place to enable these risks to be controlled. These include profit forecasts by business segment, quarterly management accounts and comparison against forecast. The board reviews and agrees policies for managing this risk on a regular basis. Credit risk The credit risk exposure is the carrying amount of the financial assets as shown in note 14. Of the amounts owed to the Group at 30 June 2016, the top 3 customers comprised 30.7% (2015: 37%) of total trade receivables. The Group has adopted a policy of only dealing with creditworthy counterparties and the Group uses its own trading records to rate its major customers. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. The directors believe that the Group does not have any significant credit risk exposure to any single counterparty. At year end, the Group did not have any customer with a concentration of credit in excess of 6% of gross assets. An analysis of trade and other receivables: Neither Past due but not impaired Carrying impaired nor More than 2016 amount past due 61-90 days 91-120 days 121 days Trade and other receivables 1,224 854 199 92 78 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Neither Past due but not impaired Carrying impaired nor More than 2015 amount past due 61-90 days 91-120 days 121 days Trade and other receivables 1,276 988 - 51 257 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 36 PipeHawk plc Annual Report and Accounts 2016 Notes to the Financial Statements For the year ended 30 June 2016 18. Financial Instruments and derivatives (continued) The group allows an average receivables payment period of 60 days after invoice date. It is the group’s policy to assess receivables for recoverability on an individual basis and to make provision where it is considered necessary. No debtors’ balances have been renegotiated during the year or in the prior year. As at 30 June 2016, trade receivables of £nil (2015: £nil) were impaired and provided for. Liquidity risk As stated in note 1 the Executive Chairman, G G Watt, has pledged to provide ongoing financial support for a period of at least twelve months from the approval date of the group statement of financial position. It is on this basis that the directors consider that neither the Group nor the company is exposed to a significant liquidity risk. Notes 17 and 18 disclose the maturity of financial liabilities. Contractual maturity analysis for financial liabilities, (see note 18 for maturity analysis of borrowings): Due or due in less than Due between Due between Due between 2016 1 month 1-3 months 3 months-1 year 1-5 years Total Trade and other payables 3,895 - - - 3,895 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Due or due in less than Due between Due between Due between 2015 1 month 1-3 months 3 months-1 year 1-5 years Total Trade and other payables 1,529 - - 1,848 3,377 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Interest rate risk The Group finances its operations through a mixture of shareholders’ funds and borrowings. The group borrows exclusively in Sterling and principally at floating rates of interest and are disclosed at note 17. Fair value of financial instruments The fair value of loans and receivables is measured at amortised cost using the effective interest method after consideration to impairment losses. Financial liabilities are measured at amortised cost using the effective interest method. The directors consider that the fair value of financial instruments are not materially different to their carrying values. Capital risk management The group’s objectives when managing capital are to safeguard the group’s ability to continue as a going concern in order to be able to move to a position of providing returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The entity manages trade debtors, trade creditors and borrowings and cash as capital. The entity is meeting its objective for managing capital through continued support from GG Watt as described per Note 1. PipeHawk plc Annual Report and Accounts 2016 37 Notes to the Financial Statements For the year ended 30 June 2016 19. Share Capital 2016 2016 2015 2015 No £’000 No £’000 Authorised Ordinary shares of 1p each 40,000,000 400 40,000,000 400 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Allotted and fully paid Brought forward 33,020,525 330 33,020,525 330 Issued during the year - - - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Carried forward 33,020,525 330 33,020,525 330 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Fully paid ordinary shares carry one vote per share and carry a right to dividends. In addition to the 13,323,703 share options and warrants held by directors, options over ordinary shares have been granted under the Company’s share option scheme for staff, such that at 30 June 2016 the following options to subscribe for ordinary shares of 1p each were outstanding. 450,000 options lapsed during the period, No options or warrants were exercised Share based payments have been included in the financial statements where they are material. No share based payment expense has been recognised. No deferred tax asset has been recognised in relation to share options due to the uncertainty of future available profits. Date Options Exercisable Number of Shares Exercise Price Between December 2008 and December 2016 117,500 13.5p Between March 2015 and March 2022 200,000 3p The weighted average contractual life of options and warrants outstanding at the year-end is 1.82 years (2015: 2.82 years). No options were exercised during the period. 20. Financial Commitments Group 2016 2015 £’000 £’000 Capital commitments Capital expenditure commitments contracted for, but not provided in the financial statements were as follows: - - ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– Operating lease commitments The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Motor vehicles 25 37 Land and buildings - within one year 42 65 - one to five years 77 119 ––––––––––––– ––––––––––––– 144 221 ––––––––––––– ––––––––––––– ––––––––––––– ––––––––––––– 38 PipeHawk plc Annual Report and Accounts 2016 Notes to the Financial Statements For the year ended 30 June 2016 21. Related Party Transactions Directors’ loan disclosures are given in notes 17 and 18. The interest payable to directors in respect of their loans during the year was: G G Watt R G Tallentire £134,045 (2015: £135,602) £1,614 (2015: £2,759) The directors are considered the key management personnel of the company. Remuneration to directors is disclosed in note 6. During the year ended 30 June 2016, there were the following transactions with SUMO Limited and SUMO Services Limited, a subsidiary of the joint venture company SUMO Limited. £ Sales Nil As at 30 June 2016, there was an amount of £nil (2015: £986) due from SUMO Limited. As at 30 June 2016, there was an amount of £5,082 (2015: £5,083) due from Wessex Precision Instruments, a company that G G Watt is also a Director. As at 30 June 2016, there was an amount of £39,539 (2015: £50,487) due from Online Engineering Limited, a company that G G Watt is also a Director. Included within the amounts due from and to group undertakings were the following balances: 2016 2015 £ £ Balance due from: Adien Limited 139,808 546,845 QM Systems Limited 123,375 123,375 Balance due to: Adien Limited 626,314 340,218 QM Systems Limited 634,620 954,793 There is no ultimate controlling party of PipeHawk plc. PipeHawk plc Annual Report and Accounts 2016 39 Notice of Annual General Meeting NOTICE IS HEREBY GIVEN that the annual general meeting (the AGM) will be held at the offices of Allenby Capital Limited, 3 St Helen’s Place, London, EC3A 6AB at 2.30 on Thursday 15 December 2016 for the purpose of considering and, if thought fit, passing the following resolutions: Ordinary business The following resolutions will be proposed as ordinary resolutions: 1. To receive the accounts for the year ended 30 June 2016 together with the reports of the directors and auditor thereon (Resolution 1) 2. To appoint Soumitra Padmanathan who, having been appointed since the last AGM, retires but being eligible offers herself for re-election (Resolution 2) 3. To re-appoint Randal MacDonnell as Director, who retires but, being eligible, offers himself for re-election. (Resolution 3) 4. To re-appoint Crowe Clark Whitehill LLP as auditor of the Company and to authorise the Directors to set their remuneration. (Resolution 4) To transact any other ordinary business Serious loss of capital To consider whether any, and if so what, steps should be taken to address the serious loss of capital within the Company, pursuant to section 656 (1) of the Companies Act 2006. Registered Office Manor Park Industrial Estate Wyndham Street Aldershot Hampshire GU12 4NZ Dated: 14 November 2016 Notes: By order of the Board S P Padmanathan Secretary 1. A member of the Company entitled to attend and vote at the AGM may appoint one or more proxies to attend and, on a poll, vote on his/her behalf. A form of proxy for the use of members who are unable to attend the AGM in person is enclosed. A proxy need not be a member of the Company. This instrument appointing a proxy and the power of attorney (if any) under which it is signed, or a notarially certified copy of that power, must be deposited with the Company’s Registrars, SLC Registrars, Thames House, Portsmouth Road, Esher, Surrey, KT10 9AD not less than 48 hours before the time of the General Meeting. 2. The completion of a proxy does not preclude a member from attending the AGM and voting in person. 3. As permitted by Regulation 41 of the Uncertified Securities Regulations 2001, only those shareholders who are registered on the Company’s Register of Members at 18.00 on 13th December 2016 shall be entitled to attend the Annual General Meeting and to vote in respect of the number of ordinary shares in their names at that time. Changes to entries on the register of members after 18.30 on 13th December 2016 shall be disregarded in determining the rights of any person to attend/or vote at the AGM. 4. Copies of all the Directors’ service contracts are available for inspection at the Company’s registered office during normal business hours on business days from the date of this notice until the close of the AGM and will be available for inspection at the place of the AGM for 15 minutes before the AGM and during the AGM. 40 PipeHawk plc Annual Report and Accounts 2016 Perivan Financial Print 243082 

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