REG - FireAngel SafetyTech - Half-year Report
25 September 2018
FireAngel Safety Technology Group plc
("FireAngel", the "Company" or the "Group")
Interim results for the six months ended 30 June 2018
FireAngel (AIM: FA.), one of Europe's leading developers and suppliers of home safety and connected home products, announces its unaudited interim results for the six months ended 30 June 2018.
Financial highlights
· Group revenue of £17.7m (H1 2017: £26.0m)
· Adjusted operating loss* of £1.8m (H1 2017: operating profit* of £1.5m)
· Gross margin** decreased by 6.5% to 25.2% (H1 2017: 31.7%**)
· Basic loss per share of 3.2p (H1 2017: EPS of 2.8p per share)
· Cash of £3.4m and no debt (30 June 2017: cash of £10.0m and no debt)
· The warranty provision at 30 June 2018 was £1.5m (30 June 2017: £3.9m; 31 December 2017 £2.2m)
· Inventory reduced to £11.0m (30 June 2017: £13.2m)
· £1.4m investment in new product development (H1 2017: £1.4m)
*2018 adjusted operating profit is stated before share-based payments charge of £0.1m (H1 2017: £0.2m)
** Pre-BRK distribution fee
Operational highlights
· On track against the Company's strategic plan - to be an independent technology-led business with connected propositions that complement and drive core product sales that underpin long term revenues
· The new FireAngel ranges, manufactured through our two new manufacturing partners, have been well received by both existing and new customers
· Full scale production at Flex is expected in Q4 2018, driving greater cost effectiveness in 2019 and beyond
Post-period end highlights
· Strong pipeline of opportunities in core product sales alongside the Company's proprietary connected solutions, FireAngel Connect
· Continued traction with leading retailers in the UK and overseas for expanded range of FireAngel home safety products
· Signed strategically significant partner agreement with Mears, supplying the Company's integrated connected home management system to Mears' clients, and becoming Mears' preferred fire safety product provider
· Appointed as exclusive supplier of smoke and heat alarms to St Leger Homes, housing services provider to over 22,000 properties in partnership with Doncaster Council
Graham Whitworth, Executive Chairman of FireAngel Safety Technology Group plc, commented:
"We started our transformation to an independent, technology-led business two and a half years ago and, through the talents and determination of the team, I am delighted with the progress made as we continue on track to deliver our strategic milestones.
"Our team continues to work with our manufacturing partner to optimise production volumes at the Flex facility in Poland and we firmly believe the improved economies of scale, shorter time to market combined with operational and supply chain efficiencies will further grow the Group's presence in core markets, alongside expanding into new ones.
"The Board believes that the Group's ongoing expansion as a leading provider of integrated safety solutions will continue to support medium to long term growth.
"Whilst innovations such as FireAngel Predict™ and FireAngel Connect will undoubtedly provide upside in the future, and will complement and drive incremental core product sales, the Company remains keenly focused on its core product range and markets which underpin our near term revenues."
For further information, please contact:
FireAngel Safety Technology Group plc
02477 717 700
Graham Whitworth, Executive Chairman
Neil Smith, Group Chief Executive
Vigo Communications
020 7390 0238
Jeremy Garcia / Fiona Henson/ Charlie Neish
Stockdale Securities
0207 601 6100
Tom Griffiths
Notes to Editors
FireAngel's mission is to protect, save and improve our customers' lives by making innovative, leading edge technology simple and accessible. FireAngel is one of the market leaders in the European home safety products market operating through both retail and trade channels.
FireAngel's principal products are smoke alarms, heat, CO alarms and accessories. The Company has an extensive portfolio of patented intellectual property in Europe, the US and other selected territories. Products are sold under FireAngel's leading brands of FireAngel, FireAngel Pro, AngelEye and FireAngel Connect.
For further product information, please visit: www.fireangeltech.com
OPERATIONAL review
Introduction
The first six months of 2018 have been both challenging and hugely constructive for the business as we seek to build a long-term platform for future growth.
We firmly believe that becoming an independent business, focused on the Company's core FireAngel brand, will enable us to extend product functionality to offer integrated safety solutions and will best position FireAngel for future growth.
We have had a dedicated team working with our manufacturing partner in Poland to resolve certain short term transitional supply chain issues and are pleased to report good progress in line with our expected forecasted demand.
The full and final settlement agreement with BRK (the "Settlement Agreement"), the terms of which were announced on 10 May 2018, followed receipt of notice by the Company to terminate the Distribution Agreement ("DA") and Manufacturing Agreement ("MA") in March 2017, dealt with all outstanding matters and enabled both parties to move forward.
Financial review
In the first half, the Company generated revenues of £17.7m (H1 2017: £26.0m) and an adjusted operating loss* of £1.8m (H1 2017: adjusted operating profit of £1.5m). The reduction in revenues in H1 2018 was in line with management expectations driven predominantly by lower sales of smoke alarms in German Trade and an anticipated slowdown in UK sales as customers managed discontinued inventory and the transition to the new FireAngel products. Gross margin** of 25.2% (H1 2017: 31.7%) was lower than our medium term goal of closer to 40% due to the mark down on BRK/First Alert products at the end of Q1 2018, adverse sales mix, the weakness of GBP Sterling against the US Dollar compared to the $1.40 FX rate which was included in the Company's budget and a charge of £0.6m to increase the FireAngel battery warranty provision in line with the original estimate and rework costs.
Sales of CO alarms in the first half in the UK and Europe increased by 49% compared with the corresponding period last year, with sales in both the UK and Germany having grown by more than 200 per cent. This strong performance is testament to both the investment made and our particular focus on the carbon monoxide market.
The Group's inventory position had reduced to approximately £11.0m at 30 June 2018 (30 June 2017: £13.2m) with a continued focus to reduce this further by the end of this financial year.
At 30 June 2018, the Company had £3.4m of cash and no debt (30 June 2018: £10.0m cash and no debt). The Company has in place a three year revolving credit facility with HSBC Bank plc of £7.0m to fund working capital if required. On 29 March 2018, the Company drew down £3.0 million on this facility, to increase its available short term cash resources. This was repaid in full to HSBC as it was not required during the 30 day draw down period. There were no further drawings on this facility within the reporting period. Subsequently, on 20 August 2018 there was a draw down of £750k.
For the reasons set out in its announcement on 6 August 2018, the Company expects to deliver a potential loss of up to £0.5m for the year ending 31 December 2018.
In view of the ongoing transition of the business, the Company will not be paying an interim dividend. The Board will keep the dividend policy under review with a desire to recommence dividend payments when it considers that it is prudent to do so.
Strategic Priorities
As part of its strategy, the Company commenced two new manufacturing agreements in April 2018, which over time will improve FireAngel's operational performance, through improved quality, economies of scale and supply chain efficiencies.
These new agreements enable the Company to focus on delivering the following key strategic priorities:
· To build on the Company's existing market presence - growing and extending its own branded FireAngel standalone and connected products;
· To increase sales of FireAngel's products and services through new channels, markets and complementary partnerships;
· To utilise the Company's core technology to exert greater end-to-end autonomy over the product offering, underpinned by strong IP protection and in-house product development capabilities;
· To leverage the Group's new manufacturing footprint and expertise, extracting further supply chain capabilities and cost efficiencies going forward; and
· To capitalise on the growth potential of the Company's 'Connected Homes' proposition.
The Company has implemented additional internal processes and procedures, in particular within its supply chain and product planning teams, to create a solid foundation for the business and for future success. Earlier this month, FireAngel received approval to the ISO9001:2015 Quality Management Systems Requirements. Approval against the more results based and risk analysis focused requirements, compared to the previous ISO9001:2008, is testament to the diligent and determined approach taken by the Company to ensure robust quality processes and procedures.
Products and brands
At its Annual General Meeting in June 2018, the Company changed its name to FireAngel Safety Technology Group plc, reflecting the renewed focus on its core brand and the further development of its innovative home safety technology, including its connected home offering.
Recent new product initiatives include:
· New FireAngel product ranges launched to replace the BRK and First Alert products;
· The launch of FireAngel PredictTM, a patented innovation that utilises cloud-based technology and the Company's unique algorithm to identify properties at a heightened risk of a fire event and thereby facilitating early pre-emptive intervention;
· A touch screen smart panel and home automation hub that enables continuous monitoring of devices within the property - ideal for housing associations and landlords; and
· Auto boiler shut off, a connected solution linking FireAngel carbon monoxide alarms and domestic boilers.
Following the name change, the Company will consolidate its brands to leverage the FireAngel name, thereby significantly reducing the level of stock which the business needs to carry. The FireAngel brand is widely recognised and resonates well with customers, and the new FireAngel products will become the central focus of the Company's sales and marketing efforts.
Core product range
The Group's core product range continues to focus on smoke, heat and carbon monoxide alarms for the retail and trade markets. The retail offering, sold as FireAngel, is stocked by leading retailers across the Company's core markets and is dominated by the battery powered smoke, heat, carbon monoxide and gas alarms for residential properties. The Group's FireAngel Pro product line is focused on the UK Trade market, with mostly mains powered smoke and heat alarms being sold to housing maintenance and management businesses, utility companies and wholesalers.
Carbon monoxide range
The Company continues to be at the forefront of raising awareness of the dangers of carbon monoxide poisoning through effective marketing campaigns across its markets. The low household penetration combined with increased awareness of the dangers and risks of CO poisoning have, as set out above, resulted in a 49% increase in sales in H1 2018.
FireAngel PredictTM patented technology
In the first half of the year, we announced the launch of FireAngel Predict™, a technology that has been developed in-house that uses cloud-based technology and the Company's unique predictive algorithm to monitor data in real time over the internet. Constant monitoring of the activity of alarms enables the algorithm to identify and alert the relevant authorities to alarms that are triggered frequently. Properties that have a high number of "false" alarms have an increased risk of fire and identification of these properties allows for appropriate action to be taken before a potential incident occurs. This technology is protected by a granted US patent and a pending patent in Europe and other key territories.
FireAngel Connect / FireAngel Smart Panel
Last month, the Company announced the launch of its broader connected home product range, FireAngel Connect. The Company's connected home products use FireAngel's Wi-Safe 2 wireless interlink technology to connect to a cloud-based system which is then used for remote monitoring and instant notifications. Additionally, the products can integrate with leading smart home hubs and other devices utilising Z-wave1 and ZigBee2 communication technology.
The Company has also developed the FireAngel smart panel, which has been designed specifically to address the demands of housing associations and private landlords, seeking to streamline interaction with tenants, enable remote monitoring and optimise maintenance management processes.
The development of these new products and, in particular, our panel technology expands the potential market for our products, drives incremental product sales and for those requiring a more integrated solution with remote monitoring capabilities. The panel technology application programme interface ("API") can be adapted on a customer-by-customer basis to be personalised for tenants and as the system is integrated with the customers' technology. This bespoke specification drives higher margins alongside the requirement for multiple battery or hard-wired devices in the home.
Partner Agreement with Mears
On 12 September 2018, the Company announced an exclusive partner agreement with Mears Limited ("Mears"), a subsidiary of Mears plc, the provider of support services to the housing and care sectors in the UK, which is responsible for the maintenance, repair and upgrade of over 700,000 properties across the UK.
Under the terms of the agreement, the Company will supply Mears with an integrated connected home management system (the "System"). The System uses FireAngel's Wi-Safe 2 wireless interlink technology to connect the Company's smoke, heat and carbon monoxide alarms to a cloud-based system, for remote monitoring by, and instant notifications delivered to, Mears. The System includes a touch screen smart panel, and a home automation hub (which will be sold to Mears' clients) that enables continuous monitoring by Mears of the Company's alarms located within Mears' clients' properties, ensuring timely updates and notifications. In addition, FireAngel will become the preferred safety product provider for Mears, fitting FireAngel smoke, heat and carbon monoxide alarms across its UK property portfolio.
____________
1 Z-Wave is a wireless communications protocol used primarily for home automation
2 https://www.zigbee.org/
Business units
UK Retail
In UK Retail, sales were flat in the first half of the year largely attributable to customers transitioning to the new FireAngel product range.
The Company has seen good support within UK Retail for the new ranges of FireAngel products across both its traditional customers and through digital channels. The Group has also signed a number of notable store and digital channel extensions, including with Tesco, Wickes and Robert Dyas.
UK Trade
We continue to make good progress in winning new customers and market share within UK Trade which we estimate is valued at approximately £100m per annum.
Sales in H1 2018 were impacted by the short term transition from BRK products to FireAngel products which is now complete.
The Group has invested in refocusing and rebuilding its UK Trade team alongside a targeted new product development programme. We are pleased to report that the team is gaining traction in winning new business as evidenced by the recent announcements of contracts with Mears and St Leger Homes.
Alarms fitted via the UK Trade channel are predominantly mains powered solutions with multiple devices being required in each property, thereby significantly increasing the value of each sale. We are seeing increased interest in our products, particularly our connected solutions, which have been designed to meet heightened duty of care concerns within social housing.
The Board considers that the signing of the recent partnership agreement with Mears demonstrates the value of the Group's technology. FireAngel's new and unique connected technology solutions offer housing associations, landlords and their tenants the highest level of protection and maintenance.
The Company recently announced the signing of a new contract with St Leger Homes which works with Doncaster Council to provide housing services in the social and private sectors across 22,000 properties. The contract will be delivered on a rolling basis, with the installation of new alarms as part of the natural replacement cycle.
New fire and carbon monoxide safety legislation in Scotland
Following a recent consultation, new legislation is anticipated to be introduced later this year in Scotland, requiring all homes to be fitted with interlinked smoke alarms in living rooms, hallways and landings, heat alarms in kitchens, and a carbon monoxide alarm in any room where there is a fossil fuel burning appliance, such as a gas boiler or a wood burning stove.
The Company is working with current and new customers in transitioning its product ranges across to the higher value interlinked smoke alarms, and extended range listings of heat and carbon monoxide alarms to complement their existing smoke alarm offer.
Europe
The H1 sales decline was predominantly due to lower sales through German Trade due to overstocking at the Company's distributor. The Panasonic battery powered "P Line" range launched in H2 2016 is central to the Company's strategy in building advocacy around the FireAngel brand alongside the new connected solutions. We are looking forward to the launch in H1 2019 of our new smoke alarm specifically engineered for the German Trade market.
As set out above, in the first half, sales of carbon monoxide alarms in Germany were up over 200 per cent. compared to the corresponding period last year through a combination of effective marketing, which mirrors our success in the UK through Project Shout, and our strong carbon monoxide product proposition.
Sales in the first half continued to build significantly through the German Retail channel under the Siemens and AngelEye brands through leading DIY retailers, Bauhaus and OBI, with carbon monoxide products delivering a high proportion of overall sales.
Sales into the Nordics doubled in H1 2018 compared to the corresponding period last year with sales into Southern Europe up by 40 per cent., with encouraging growth in France of 230 per cent., albeit off a low base following the legislative "spike" of 2015.
Board changes
In March 2018, the Company announced the resignation of John Gahan, the Group Finance Director, with immediate effect. On 1 June 2018, the Company announced the appointment of Mike Stilwell as Group Finance Director. Mike is currently Finance Director of Synectics plc and will join FireAngel on 3 December 2018 at the conclusion of his notice period.
In addition, on 1 June 2018, the Company announced that Graham Whitworth, Executive Chairman, had indicated his intention to step down from his role as Executive Chairman once a non-executive Chairman has been appointed. As a result, the Board created a Nominations Committee, comprising the Company's non-executive Directors, to commence the search for, and appointment of, a new non-executive Chairman. Following the appointment of the new Chairman, the intention is that Graham Whitworth will remain on the Board and, over time, become a non-executive Director. The Company has initiated this search and will make a further announcement in due course.
Outlook
While the business has faced a challenging first half, the Board has remained focused on executing the transformative changes around production, processes, technology and people that underpin the Group's medium and longer term growth plans. As a result, the Board firmly believes that the business is now in a much stronger position.
The recent contracts secured by the UK Trade team with Mears and St Leger Homes demonstrate the size and potential of this market. The connected homes proposition is an area where the Company is, in our view, uniquely positioned to capitalise not just in the UK, but also within other existing and potential new markets in which we are actively building a strong sales pipeline.
The Board remains focused on positioning FireAngel as the leading provider of home safety technology and solutions and is confident in the medium to long term prospects for the business. We look forward to updating shareholders on the progress being made.
Graham Whitworth
Executive Chairman
24 September 2018
Neil Smith
Group Chief Executive
FINANCIAL REPORT
Summary
Revenue in H1 2018 declined to £17.7m (H1 2017: £26.0m) principally due to a reduction in sales into the German Trade sector due to overstocking at our distributor.
Whilst there was some benefit year-on-year in FX on both purchases and sales, gross margin before the BRK distribution fee declined by 6.5% to 25.2% (H1 2017: 31.7%) due to an adverse change in sales mix with significantly lower sales into German Trade, the sale of BRK products at reduced selling prices to exit stock, a charge of £0.6m to increase the FireAngel battery warranty provision in line with the original estimate and rework costs.
The additional warranty charge of £0.6m relates to the battery impedance issue identified in April 2016. The total cost of the battery impedance issue is still expected to be in line with the original expected value of £6.2m.
In H1 2018, the Group booked a net £0.4m gain from the mark to market of forward contracts within gross profit (H1 2017: £0.3m loss).
Excluding share-based payments charge, fixed costs were in line with those in the corresponding period in the prior year at £5.4m (H1 2017: £5.4m). With the lower sales in the first half, the Group continues to exert tight control over fixed costs.
Given the reduction in sales in the period, the Group reported an adjusted operating loss* of £1.8m (H1 2017: adjusted operating profit* of £1.5m).
Basic EPS was a loss per share of 3.2 pence (H1 2017: EPS of 2.8 pence).
Investment in new product development in the period remained constant at £1.4m (H1 2017: £1.4m).
Revenue by business unit
The table below summarises the revenue for each business unit and Pace Sensors:
H1 2018
H1 2017
Revenue
Revenue
Change
Revenue
£m
£m
£m
Business Units:
EMEA
4.5
11.8
(7.3)
UK Retail
3.8
3.7
0.1
UK Trade
5.3
5.7
(0.4)
UK Fire & Rescue Services
2.4
2.4
-
UK Utilities
0.9
0.9
-
Pace Sensors
0.8
1.5
(0.7)
Total revenue
17.7
26.0
(8.3)
EMEA sales decline in H1 2018 was predominantly due to lower sales into German Trade.
Destocking in the supply chain, together with a move to sell more Nano sensors from the Gen 1 sensor contributed to a reduction in the value of sales at Pace Sensors to £0.8m (H1 2017: £1.5m).
As set out in the Company's report and accounts for the year ended 31 December 2017, from 1 January 2018, certain customers previously reported within the Retail Business Unit, such as Screwfix and Toolstation are now reported through the Trade Business Unit. The H1 2017 sales comparatives have been adjusted accordingly.
Balance sheet
Intangible assets - capitalised product development costs
The net book value of capitalised product development costs as at 30 June 2018 was £14.9m (30 June 2017: £11.0m). An analysis of the intangibles by major category together with detailed commentary thereon is set out in note 6 below.
Specific people and non-people costs which meet the relevant criteria are capitalised and amortised against future profits from the sale of products which incorporate the intangible assets. Product development costs are typically amortised under the units of production method and are regularly reviewed for any signs of impairment.
As part of the impairment review, the net book value of each intangible asset is compared with the expected gross profit from the sales over the next 24 months of products which incorporate that technology. This allows an assessment of the carrying value of each intangible asset relative to the expected gross profit each asset is forecast to generate. Except for the connected home intangible asset (where sales are still low but are expected to increase over time as acceptance of the technology increases), gross profit generated from the expected sale of relevant products over the next two years is typically greater than the carrying value of the intangible asset.
In essence, a key judgement relates to the Board's ongoing assumption that the total £4.5m carrying value for connected homes technology as at 30 June 2018 is not impaired in value. Whilst connected home product sales are still in their infancy and are expected to increase significantly over time, the Group will need to generate a significant amount of incremental profit from this technology within the next few years to justify the current carrying value of the asset on the balance sheet. The Board expects sales of connected home products will increase as acceptance and use of the technology becomes more widespread as evidenced by the recent signing of the partnership agreement with Mears.
Deferred tax
Deferred tax assets as at 30 June 2018 of £0.5m reflect temporary differences on the charge for share based payments which amounted to £0.1m and £0.4m tax losses, (30 June 2017: £0.9m in total analysed as to £0.3m for share based payments and £0.6m for tax losses). The Group utilised the tax losses in the second half of 2017 and, therefore, £0.6m of the deferred tax asset as at 30 June 2017 was realised.
Deferred tax liabilities as at 30 June 2018 of £2.1m (30 June 2017: £1.7m) relate primarily to product development costs where the Company has claimed accelerated R&D tax credits. The Group's tax treatment of intangibles is mirrored in its tax computations submitted to HMRC.
Stock
Stock reduced to £11.0m as at 30 June 2018 (30 June 2017: £13.2m) mainly due to the £3.4m stock write down booked in H2 2017 as part of the exceptional £3.8m charge and the purchase of approximately £1.0m of 2017 manufactured stock by BRK as part of the Settlement Agreement.
As at 30 June 2018, the gross book value of BRK stock held by the Company amounted to £0.3m (30 June 2017: £4.8m).
Warranty provisions
Total warranty provisions as at 30 June 2018 amounted to £1.5m (30 June 2017: £3.9m; 31 December 2017: £2.2m) of which £0.9m is included within current liabilities to cover warranty costs expected to be incurred over the next twelve months. Following investigation of German returns from June to September 2018, an increase of £0.6m has been charged to the income statement in these results. The Board believes that this will provide sufficient headroom going forward to deal with future returns. The majority of warranty costs incurred by the Group relate to the battery impedance issue identified in April 2016.
Cash flow
Net cash flow from operations was positive at £2.6m (H1 2017: negative £2.3m) principally due to cash inflow from year end debtor collections. This was offset by the ongoing cash cost of servicing free of charge replacement product and capital expenditure. Reductions in stock were broadly offset by lower trade creditors as the Group sought to reduce stock.
During the period, the Group purchased tooling and capital equipment at Flex for £0.4m (H1 2017: £nil), together with the final £0.3m payment in cash to Intamac for software modules and a further £0.8m for Flex pre-production setup costs.
In total, H1 2018 net cash increased by £0.1m (H1 2017: decline of £4.1m). Net cash at 30 June 2018 amounted to £3.4m (30 June 2017: £10.0m) and no debt (30 June 2017: £nil).
Dividend
The Board has not proposed payment of an interim dividend for 2018 (H1 2017: 2.5p per share). The Board confirms that the Company will seek to introduce a dividend as soon as it is prudent to do so.
Signed on behalf of the Board on 24 September 2018
Neil Smith
Group Chief Executive
Graham Whitworth
Executive Chairman
CONDENSED STATEMENT OF CONSOLIDATED INCOME
PERIOD ENDED 30 JUNE 2018
Notes
(Unaudited)
Period ended
30 June 2018
(Unaudited)
Period ended
30 June 2017
(Audited)
Year ended
31 December 2017
£000
£000
£000
Revenue
3
17,689
26,026
54,277
Cost of sales excluding BRK distribution fee
(13,228)
(17,768)
(36,309)
BRK distribution fee
(944)
(1,415)
(2,915)
Exceptional charge for BRK settlement agreement
15
-
-
(3,777)
Total cost of sales
(14,172)
(19,183)
(43,001)
Gross profit
3,517
6,843
11,276
Distribution costs
(535)
(469)
(1,007)
Administrative expenses excluding share-based payments charge
(4,831)
(4,916)
(9,390)
Share-based payments charge
(107)
(179)
(358)
Total administrative expenses
(4,938)
(5,095)
(9,748)
Total fixed costs
(5,473)
(5,564)
(10,755)
(Loss) / profit from operations pre-share- based payments charge
% of sales
(1,849)
(10.5%)
1,458
5.6%
4,656
8.6%
(Loss) / profit from operations
(1,956)
1,279
521
Finance (expense) / income
-
18
24
(Loss) / profit before tax
(1,956)
1,297
545
Income tax credit/ (charge)
4
465
(26)
(57)
(Loss)/ profit attributable to equity owners of the parent
(1,491)
1,271
488
Earnings per share (pence)
5
From continuing operations:
Basic
(3.2)
2.8
1.1
Diluted
(3.2)
2.8
1.1
Continuing operations
None of the Group's activities are treated as acquired or discontinued during the above periods.
CONDENSED STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
FOR THE PERIOD ENDED 30 JUNE 2018
(Unaudited) Period ended 30 June 2018
(Unaudited) Period ended
30 June 2017
(Audited)
Year ended
31 December 2017
£000
£000
£000
(Loss) / profit for the period
(1,491)
1,271
488
Items that may be reclassified subsequently to profit and loss:
Net exchange loss on translation of foreign operations (net of tax)
(55)
(80)
(85)
Other comprehensive loss for the period
(55)
(80)
(85)
Total comprehensive (loss) / income for the period
(1,546)
1,191
403
CONDENSED STATEMENT OF consolidated FINANCIAL POSITION
NOTES
(Unaudited)
30 June 2018
(Audited) 31 December 2017
£000
£000
£000
Non-current assets
Goodwill
169
169
169
Purchased software costs
2,919
110
2,575
Other intangible assets
6
12,089
11,000
10,474
Plant and equipment
2,337
914
2,077
Deferred tax assets
512
855
273
18,026
13,048
15,568
Current assets
Inventories
8
10,968
13,167
11,201
Trade and other receivables
9
9,871
14,365
17,366
Current tax assets
804
527
625
Derivative financial assets
17
300
-
-
Cash and cash equivalents
3,418
10,044
3,273
25,361
38,103
32,465
Total assets
43,387
51,151
48,033
Current liabilities
Trade and other payables
10
(14,125)
(13,705)
(16,472)
Proposed dividends
-
(1,376)
-
Current tax liabilities
(10)
-
(15)
Warranty provisions
11
(914)
(2,400)
(1,507)
Derivative financial liabilities
17
(229)
(388)
(364)
(15,278)
(17,869)
(18,358)
Net current assets
10,083
20,234
14,107
Non-current liabilities
Warranty provisions
11
(600)
(1,455)
(687)
Deferred tax liabilities
(2,104)
(1,705)
(1,974)
Total non-current liabilities
(2,704)
(3,160)
(2,661)
Total liabilities
(17,982)
(21,029)
(21,019)
Net assets
25,405
30,122
27,014
Equity
Share capital
12
918
917
918
Share premium
12,729
12,713
12,729
Foreign exchange reserve
124
184
179
Retained earnings
11,634
16,308
13,188
Total equity attributable to the owners of the parent
25,405
30,122
27,014
CONDENSED STATEMENT OF consolidated CHANGES IN EQUITY
FOR THE PERIOD ENDED 30 JUNE 2018
Share
capital
Share premium
Foreign exchange reserve
Retained earnings
Total
£000
£000
£000
£000
£000
Balance at 1 January 2017
917
12,713
264
16,090
29,984
Profit for the six months
-
-
-
1,271
1,271
Foreign exchange gains and (losses) from overseas subsidiaries
-
-
(80)
-
(80)
Total comprehensive income for the six months
-
-
(80)
1,271
1,191
Transactions with owners in their capacity as owners:-
Dividends
-
-
-
(1,376)
(1,376)
Total transactions with owners in their capacity as owners
-
-
-
(1,376)
(1,376)
Share-based payment charge
-
-
-
179
179
Deferred tax charge on share-based payment
-
-
-
144
144
Balance at 30 June 2017
917
12,713
184
16,308
30,122
Balance at 1 January 2018
918
12,729
179
13,188
27,014
Loss for the six months
-
-
-
(1,491)
(1,491)
Foreign exchange (losses) from overseas subsidiaries
-
-
(55)
-
(55)
Total comprehensive income for the six months
-
-
(55)
(1,491)
(1,546)
Share-based payment charge
-
-
-
107
107
Deferred tax on share-based payment charge
-
-
-
(170)
(170)
Balance at 30 June 2018
918
12,729
124
11,634
25,405
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
FOR THE PERIOD ENDED 30 JUNE 2018
(Unaudited)
Period ended
30 June 2018
(Unaudited)
Period ended
30 June 2017
(Audited)
Year ended31 December 2017
£000
£000
£000
(Loss) / profit before tax
(1,956)
1,297
545
Finance income
-
(18)
(24)
Operating (loss) / profit for the period
(1,956)
1,279
521
Adjustments for:
Depreciation of property, plant and equipment
121
145
271
Amortisation of intangible assets
242
299
465
(Increase)/ reduction in fair value of derivatives
(437)
302
277
Share-based payments charge
107
179
358
Operating cash (outflow) / inflow before movements in working capital
(1,923)
2,204
1,892
Movement in inventories
232
146
2,116
Movement in receivables
7,315
(915)
(4,188)
Movement in warranty provision
(679)
(738)
(2,405)
Movement in payables
(2,347)
(3,037)
(236)
Cash generated/ (expensed) by operations
2,598
(2,340)
(2,821)
Income taxes (paid) / received
-
(152)
376
Net cash inflow/ (outflow) from operating activities
2,598
(2,492)
(2,445)
Investing activities
Purchase of intangible assets
(2,200)
(887)
(2,670)
Purchase of software costs
-
(602)
(925)
Purchase of property, plant and equipment
(382)
(143)
(1,432)
Interest received
-
18
24
Net cash used on investing activities
(2,582)
(1,614)
(5,003)
Financing activities
Bank loan drawdown
3,000
-
-
Bank loan repayment
(3,000)
-
-
Proceeds from issue of shares
-
-
17
Dividends paid
-
-
(3,670)
Net cash used on financing activities
-
-
(3,653)
Net increase/ (decrease) in cash and cash equivalents
16
(4,106)
(11,101)
Cash and cash equivalents at beginning of period
3,273
14,333
14,333
Non-cash movements
129
(183)
41
Cash and cash equivalents at end of the period
3,418
10,044
3,273
Notes to the financial information
1. General information
This condensed consolidated interim financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2017 were approved by the Board of Directors and have been delivered to the Registrar of Companies. The audit report on those accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.
This condensed consolidated interim financial information has been reviewed, not audited.
2. Accounting policies
Basis of preparation
The annual financial statements of FireAngel Safety Technology Group plc are prepared in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee (IFRS IC) interpretations as adopted by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS. The condensed consolidated set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union.
The accounting policies adopted in the preparation of the condensed consolidated interim financial information are mostly consistent with those followed in the preparation of the Group's financial statements for the year ended 31 December 2017 except for the adoption of IFRS 15 and IFRS 9 which are detailed below.
Critical accounting estimates and areas of judgement
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates and assumptions will, by definition, seldom equal the related actual results. The estimates and assumptions at the end of the accounting period that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Warranty provisioning of FireAngel products
In April 2016, the Company identified an issue in certain batteries supplied by a third party supplier that may cause a premature low battery warning chirp in certain of its smoke alarm models sold in the UK and in Continental Europe. The Board is keen to stress that this is not a safety critical issue.
As a result of the battery issue, to support the Company's customer service obligations, the Board increased the Group's total warranty provisions as at 31 December 2015 to £6.8m and has continued to provide free of charge replacement products to compensate customers who experience issues with the Group's products. The Group's total FireAngel warranty provision as at 30 June 2018 reduced to £1.3m and is expected to continue to unwind as the Group provides free of charge product replacements for customers who experience warranty issues with the Group's products.
In H1 2018 the Company experienced an increase in German returns offset by lower UK returns. The overall expected terminal rate of return % for each year of production was estimated by FireAngel's Technical team and this remains within the Board's original expectations.
To prevent the issue happening again, the Company's supplier has introduced additional screening processes on the production line prior to the battery being fitted into finished smoke alarms.
The determination of the amount of the provision required, which reflects the Board's best estimate of resolving these issues, requires the exercise of judgement. It is necessary, therefore, to form a view on matters such as the returns profile over time, the final return rate, whether the return rate of each year of production will be similar, whether the return rates from different sales channels will vary and the average cost of redress. Consequently, the continued appropriateness of the underlying assumptions will be reviewed on an ongoing basis against actual experience and other relevant evidence, and adjustment made to the provision over time as required.
Impairment of non-financial assets
At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets (including goodwill) 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 other 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. 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.
During 2018 to date, the Group did not record any material impairment charges upon review of its tangible and intangible assets. Whilst the Company is forecasting a loss for the full year, its medium term forecast shows it returning to profit and the Directors note that the current market capitalisation of the Company is well above net asset value indicating that there is no overall impairment of the Group's assets.
The Board notes that the Company has significant intangible assets on the statement of financial position as at 30 June 2018 of £15.0m which included a net book value £2.7m of connected home intangibles not being amortised and a net book value of £1.8m of connected home intangible assets which are being amortised. The Board expects that in future, the majority of its products sold will in some way be connected to the internet (through Wi-Safe 2, Z wave or Zigbee etc) and given that the Group already has a connected home solutions product offering which is working, the Board believes that the carrying value of connected homes solutions intangibles is not impaired. This assumption will be reviewed over time. Should sales of connected home products not start to increase in the short to medium term, the Board would need to reassess the carrying value of the connected homes intangible assets as it may indicate that the carrying value of the intangible assets has impaired.
With effect from 1 January 2017, the Group adopted the "units of production" method for amortising product development costs and moved away from straight line amortisation. The change in policy is intended to ensure that the amortisation charge of product development costs more closely correlates to the gross profit generated on the sale of products which incorporate the Group's technology. Essentially, the units of production methodology more closely matches the consumption of the economic benefit of the Group's technology.
Inventory provision
The Group reviews each stock SKU on a line by line basis taking into account sales and gross margins achieved on every SKU over the past 24 months and the expected sales of each SKU over the next 12 months (and beyond) and the likely gross margin thereon.
Discontinued SKUs are fully provided for (at 100% of the cost) where the potential recovery of the book value is not likely to be achieved in full. In addition, where stock is identified as being potentially slow moving, a 10% provision is typically booked against the cost of the stock. The Group's stock provisioning policy reviews unit sales and margins on each line of stock and considers what sales are likely to be achieved in the future, and at what margin, before determining if a stock provision is required.
Historically, on eventual sale of slow moving SKUs, the Group has not experienced any major issues where the net realisable value of stock ultimately transpires to be less than the book value of the stock (plus associated rework costs). Moreover, where stock has been identified as slow moving (for example the Group's own French stock), 10 year products are typically reworked into 7 year or 5 year product packaging and sold as such still at a positive net margin. Even after rework costs, the net realisable value of slow moving SKUs typically exceeds the product costs plus rework costs added together. The Group is fortunate that products are certified to common European standards (and certain country standards) and many products are saleable in markets other than the original market destination.
The inventory provision as at 30 June 2018 was £3.4m (30 June 2017: £0.3m; 31 December 2017: £3.7m) and effectively included a 100% provision to write down the value of BRK stock as at 30 April 2018 retained by the Group to £nil as the Group no longer sells BRK products. The Group has started to dispose of the BRK inventory and is expected to complete this over the next 6 months.
Revenue Recognition - warranty obligations
The Group has adopted IFRS 15 in these financial statements. IFRS 15 provides guidance on the treatment of warranties provided on the sale of goods. The Group sells products with warranties ranging from one year to 10 years.
The longer-term warranties are usually applicable to products with either long term sealed batteries or sealed CO sensors that degrade over time. The performance of either the battery or the sensor for the warranted period of time is integral to the overall performance of the product and is a key feature of the product at the point of sale.
The Directors have carefully considered the guidance within IFRS 15 as to whether these warranties are assurance type or service type. Assurance warranties solely warrant that the product will function as sold, whilst service warranties provide a higher level or assurance. Assurance warranties are not separate performance obligations, whilst service warranties are considered separate performance obligations and revenue attributes to the service element should be spread over the service period.
In light of the IFRS 15 guidance, and on the basis that the majority of warranties provided by the Group solely warrant that the product will operate as sold, the Directors have concluded that these warranties are assurance type warranties and do not represent a separate performance obligation.
Going concern
In determining whether the Group and Parent Company's financial statements can be prepared on a going concern basis, the Directors considered the Group's business activities, together with the factors likely to affect its future development, performance and position. The review also included the financial position of the Group, its cash flows, and borrowing facilities. The key factors considered by the Directors were:
Ø the financial consequences of the Settlement Agreement, including the £3.8m cash cost in 2018;
Ø the latest expected trading performance for 2018 and beyond;
Ø the availability of currently committed banking facilities and actual and projected compliance with material terms attaching to those facilities;
Ø the degree of headroom offered by current cash reserves and available banking facilities;
Ø the implications of the current economic environment and future uncertainties around the Group's revenues and profits;
Ø the consequence of reasonably foreseeable downside sensitivities including lower than expected trading performance and adverse movements in working capital; and
Ø the potential actions that could be taken in the event that revenues or gross profits are worse than expected, to ensure that operating profit and cash flows are protected.
The Group's review of forecasts and projections, taking account of the £3.8m cash cost of the Settlement Agreement which will be borne in 2018 and reasonably predictable changes in trading performance (even after applying downside sensitivities), support the conclusion that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, a period of not less than twelve months from the date of this report. Even after applying downside sensitivities, the Group is forecast to remain within HSBC Bank plc's revolving credit facility banking covenants.
Consequently, at the date of this report, the Directors have a reasonable expectation that the Group has adequate resources to continue in business for the foreseeable future. Accordingly, the financial statements have been prepared on the going concern basis.
New standards, amendments and interpretations
The following new standards and amended standards, none of which have had a material impact on these financial statements, are mandatory and relevant to the Group for the first time for the financial period commencing 1 January 2018:
· IFRS 15: Revenue from contracts with customers
· IFRS 9: Financial Instruments
· Amendments to IFRS 2: Classification and measurement of share-based payment transactions
· IFRIC 22: Foreign currency transactions and advance consideration
With regards IFRS 15, this brings into play significantly different principles for determining how revenue should be recognised and how it is measured in comparison with IAS 18. The Group has completed a review of its principal customer contracts and concluded that the recognition of revenue is not affected by the adoption of IFRS 15 for the vast majority of sales.
However, it is noted that under IFRS 15, the sales and profit on "bill and hold sales" is only to be recognised if the bill and hold conditions have been met, which includes a condition that the products under the bonded sale are not capable of sale to another customer. Consequently, the Directors have amended the Group's revenue recognition policies such that sales are no longer recognised on a bill and hold basis.
Finally, the Company has carefully investigated the treatment of warranties provided to consumers. Further commentary is provided within areas of judgement above.
IFRS 9 introduces an expected credit loss model on impairment that replaces the incurred loss impairment model used in IAS 39. The expected credit loss model is forward-looking and eliminates the need for a trigger event to have occurred before credit losses are recognised.
The Company has considered a range of information, including historic trade receivable losses and current market conditions and has determined that it is not materially affected by its adoption. The Company regularly reviews the credit limits it offers existing customers and conducts further credit checks where it deems appropriate.
Accounting standards in issue but not yet effective:
At the date of authorisation of these financial statements, the following standards and interpretations, which have not been applied in these financial statements and which are considered potentially relevant, were in issue, but not yet effective (and in some cases had not yet been adopted by the EU):
· IFRS 16: Leases (effective 1 January 2019)
· IFRS 3: Annual improvements 2015-2017 (effective 1 January 2019)
· IFRIC 23: Uncertainty over income tax treatments (effective 1 January 219)
IFRS 16 'Leases' will impact the financial statements and the relevant disclosures as the Group has operating leases that are to be disclosed and identified separately on the face of the Consolidated Financial Position. The Group is still in the process of quantifying the impact and deciding on which transitional exemptions it will take. Given the relatively low level of operating lease commitments of the Group, the adoption of IFRS 16 in 2019 is expected to slightly increase the Group's reported operating profit (compared to current reporting requirements) whilst the implicit interest cost of the leases will go "below the line" as part of "interest". The Directors will provide further guidance on the adoption of this standard in due course.
The Directors anticipate that the adoption of the remaining standards and interpretations in future periods will have no material impact on the recognition and measurement of assets, liabilities and their associated performance of the Group or the Company when the relevant standards and interpretations come into effect.
3. Operating segments
FireAngel sells and distributes home safety products and accessories in the UK, Continental Europe and certain other countries and undertakes manufacturing activities in Canada. Its major customers are based throughout the UK, Continental Europe and in a number of other countries outside Continental Europe. Financial information is reported to the Board on a consolidated basis with revenue and operating profit stated for the Group.
The Board considers that there are no identifiable business segments that are engaged in providing individual products or services or a group of related products and services that are subject to risks and returns that are different to the core business of the home safety products market in Europe.
Revenue and gross profit for each of the Group's business units are reviewed by the Board and rolled up into consolidated financial information with non-business unit costs included to arrive at the results that investors see. Business unit reporting to the Board generally excludes information on overheads by business and other income statement information, which is all reported on a consolidated basis. Assets and liabilities are also generally reported to the Board on a consolidated basis.
Business units earn revenue from the sale of smoke and carbon monoxide detectors and accessories to end customers. Pace Sensors Limited earns revenue from the manufacture and sale of carbon monoxide sensors to a third party carbon monoxide detector assembler based in China.
For H1 2018, revenues of approximately £1.7m (H1 2017: £7.4m) were derived from one external customer (H1 2017: one external customer), which individually contributed over 10% of the revenue of the Group. This revenue is attributable to the Trade business unit (H1 2017: revenue attributable to the European business unit).
A geographical analysis of the Group's revenue is as follows:
(Unaudited)
Period ended30 June
2018
(Unaudited
Period ended
30 June
2017
(Audited)
Year ended
31 December
2017
£000
£000
£000
Continuing operations:
United Kingdom
12,414
12,685
29,362
Continental Europe
4,341
11,487
20,474
Rest of World
934
1,854
4,441
17,689
26,026
54,277
Non-current assets, excluding deferred tax assets, for UK and overseas territories are shown as follows:
(Unaudited)
30 June 2018
(Unaudited)
30 June 2017
(Audited)
31 December 2017
£000
£000
£000
Continuing operations:
UK
17,379
11,963
15,108
Canada
134
230
187
Non-current assets
17,513
12,193
15,295
4. Income tax
The major components of income tax charge / (credit) in the Income Statement are as follows:
(Unaudited)
Period ended
30 June 2018
(Unaudited)
Period ended
30 June 2017
(Audited)
Year ended
31 December 2017
£000
£000
£000
Current tax
UK corporation tax (credit) / charge
(183)
(154)
(624)
UK - Adjustments in respect of prior periods (credit)
-
-
(332)
Foreign tax (credit)/ charge
(3)
130
190
(186)
(24)
(766)
Deferred tax
Origination and reversal of temporary differences
(279)
50
823
Income tax (credit)/ expense
(465)
26
57
Domestic income tax is calculated at 19% (H1 2017: 19.5%) of the estimated assessable profit for the period.
The tax credit for H1 2018 is primarily attributed to claiming small company's enhanced R&D tax relief at the elevated 230% rate (H1 2017: 230%).
Legislation to reduce the main rate of corporation tax from 19% to 17% from 1 April 2020 has been enacted. The deferred tax balances have therefore been calculated at 17%.
5. Earnings per share
Further details on the earnings per share per the Consolidated Statement of Income are set out in the note below:
(Unaudited) Period Ended 30 June
2018
(Unaudited) Period Ended 30 June
2017
(Audited)
Year Ended 31 December 2017Earnings from continuing operations
£'000
£'000
£'000
Earnings for the purposes of basic earnings per share (profit for the year attributable to owners of the parent)
(1,491)
1,271
488
Number of shares
'000
'000
'000
Weighted average number of ordinary shares for the purposes of basic earnings per share
45,905
45,855
45,905
Effect of dilutive potential ordinary shares:
-
-
-
Deemed issue of potentially dilutive shares
-
71
30
Weighted average number of ordinary shares for the purposes of diluted earnings per share
45,905
45,926
45,935
2018
2017
2017
pence
pence
pence
Basic earnings per share
(3.2)
2.8
1.1
Diluted earnings per share
(3.2)
2.8
1.1
Basic EPS is calculated by dividing the earnings attributable to ordinary owners of the parent by the weighted average number of shares outstanding during the period.
Diluted EPS is calculated on the same basis as Basic EPS but with a further adjustment to the number of weighted average shares in issue to reflect the effect of all potentially dilutive share options. The number of potentially dilutive share options is derived from the number of share options and awards granted to employees and directors where the exercise price is less than the average market price of the Company's ordinary shares during the period.
6. Product development costs
A summary of intangible costs as at 30 June 2018 is shown overleaf.
Impairment review
In H1 2018, the Group did not record any material impairment charges upon review of its product development cost intangible assets.
As part of the Group's impairment review, the Group prepares a schedule that compares the net book value of each intangible asset with the gross profit which is expected to be derived from the sale of products in the next 12 months that use the relevant intangible asset. The purpose of this review is to ensure that the value of the intangible asset is likely to be "recovered" within the foreseeable future. In many cases, the expected gross profit within the next 12 months from the sale of products that use the intangible asset is significantly greater than the net book value of the individual intangible asset on the balance sheet. This provides significant comfort that the carrying value of the intangible is reasonable and, therefore, is not impaired.
Given the gradual take up of Connected Homes Solutions technology which is expected to increase over time, the Group introduced "units of production" amortisation in 2017.
Projects being amortised
Projects not currently being amortised
Connected Homes
£000
Wi-safe 2
£000
Nano
£000
Mains Powered
£000
Smoke Sensing products
£000
CO Sensing Products
£000
Other
£000
Total
£000
Other Projects
£000
Connected Homes
£000
Total
£000
Grand Total
£000
Cost
At 1 January 2018
1,852
1,803
1,487
1,280
1,464
280
1,729
9,895
3,304
2,249
5,553
15,448
Technical Costs Capitalised
-
-
34
-
-
-
1
35
795
371
1,166
1,201
Employment Costs Capitalised
-
-
41
-
-
-
5
46
827
103
929
974
Total Additions
-
-
75
-
-
-
6
81
1,627
468
2,095
2,175
At 30 June
1,852
1,803
1,562
1,280
1,464
280
1,735
9,976
4,931
2,717
7,648
17,623
Amortisation
At 1 January
32
450
59
124
478
97
1,252
2,492
-
-
-
2,492
Charge
2
49
29
23
75
21
21
220
-
-
-
220
At 30 June
34
499
88
147
553
118
1,273
2,712
-
-
-
2,712
Carrying amount
At 1 January
1,820
1,353
1,428
1,156
986
183
477
7,403
3,304
2,249
5,553
12,956
At 30 June
1,818
1,304
1,474
1,133
911
162
462
7,265
4,931
2,717
7,648
14,911
% of total
12%
9%
10%
8%
6%
1%
3%
49%
33%
18%
51%
100%
*Analysed on the following pages
Projects being amortised
The following is a high level summary of the projects being amortised which are set out in the table above:
Connected Home Solutions ("CHS")
CHS products connect a range of FireAngel's own products through its interface gateway technology to the internet. FireAngel has an app for users which works on any Android or iOS device which enables the products to be monitored in real time.
FireAngel has expanded the skills and capabilities of its Technical team to accelerate CHS product development. The total net book value of projects being amortised with CHS technology as at 30 June 2018 amounted to approximately £1.8m (H1 2017: £1.8m).
Wi-safe 2
Wi-safe 2 (including products using Wi-safe 2 capabilities) are an enhancement and development on the Group's Wi-safe 1 technology with a combined net book value of approximately £1.3m as at 30 June 2018 (H1 2017: £0.8m). Wi-safe 2 is a core piece of technology which is expected to underpin a number of key products and accessories going forwards, including the Group's product offering in the Connected Homes arena.
NANO
NANO is the miniaturised CO sensor developed by the Group's wholly owned subsidiary in Canada, Pace Sensors. The NANO sensor went into production into finished CO detectors in Q4 2016. The net book value of NANO technology was approximately £1.5m as at 30 June 2018 (H1 2017: £1.3m) and represents the costs incurred in the development of the CO sensor and the final development of finished CO products that incorporate the sensor.
Mains powered products
Mains powered products include the SONA range of mains powered products which as at 30 June 2018 had net book value of approximately £1.1m (H1 2017: £ 1.0m).
Smoke sensing products
The net book value of non-mains powered smoke sensing products (heat, ionisation optical products) had net book value as at 30 June 2018 of approximately £0.9m (H1 2017: £0.8m). This category includes all of the Group's own branded FireAngel developed products.
CO sensing products
The net book value of CO sensing products as at 30 June 2018 was approximately £0.2m (H1 2017: £0.2m), which includes FireAngel's 10 year life CO alarm, the British Gas developed CO alarm and CO sensing products currently under development.
Other projects
The net book value of other projects amounted to approximately £0.5m as at 30 June 2018 (H1 2017: £0.4m).
Projects not currently being amortised
Product development costs and other intangible assets not yet available for use are tested for impairment annually, and are assessed whether there is any indication that the asset may be impaired. This assessment includes consideration of the likely cost of completing the project, the time to market and an assessment of the potential sales and gross profit opportunity using the relevant technology.
Assessing the potential sales of products like FireAngel's CHS technology is inherently more difficult than products where the "run rate" of sales is already well known and the pattern of sales is established. The Board expects that the take up of CHS products will increase over time as the technology gradually becomes "mainstream".
Other projects
Other projects with cost and net book value of approximately £4.9m as at 30 June 2018 (H1 2017: £2.7m) includes the major project development activities of the Group, including "Gen 5" costs of £1.3m (the next generation major product platform), Flex pre-production costs of £1.5m and other product development which makes up the balance of £2.1m (split between circa 15 different projects).
To date the Group has incurred approximately £1.5m of costs by its Technical and Project Management teams in readying Flex to produce FireAngel products and in readying the Far East based supplier to produce replacements to the BRK range of products. Such costs have been included within intangible assets and are to be amortised over 4 years from when the Company starts selling such products in 2018.
Many of the products to be produced by Flex include the products that were being made in China but which reflect changes in components, or suppliers, or change in design to improve the design for manufacture. The transition of manufacturing to Flex has been a considerable undertaking which has involved a substantial proportion of the Group's Technical team working in close collaboration with Flex.
The Board expects consistent high quality of FireAngel's own products made at Flex and that, over time, the Group will see reductions in product costs as further improvements from enhanced design for manufacture, waste reduction, consolidation of component buying power come to bear. In addition, manufacturing in Europe, closer to our core customers and our team of 30 engineers in Coventry, will help keep the Company closer to the manufacturing of its products.
Connected Homes
Connected Homes technology which is not currently in use includes approximately £2.7m as at 30 June 2018 (H1 2017: £1.8m) in total of specific product development cost and Intamac software costs which are still under development.
7. Tooling, plant and equipment
Tooling
Office equipment
Motor vehicles
Fixtures & fittings
Total
£000
£000
£000
£000
£000
Cost
At 1 January 2018
1,382
1,400
12
432
3,226
Additions
352
32
-
-
384
Disposals
-
-
-
-
-
At 30 June 2018
1,734
1,432
12
432
3,610
Accumulated Depreciation
At 1 January 2018
-
950
7
192
1,149
Depreciation charge for the period
-
95
1
23
119
Disposals
-
-
-
-
-
Effect of exchange rates
-
4
-
1
5
At 30 June 2018
-
1,049
8
216
1,273
Net book value
At 1 January 2018
1,382
450
5
240
2,077
At 30 June 2018
1,734
383
4
216
2,337
8. Inventories
A summary of inventory is set out below:
(Unaudited)
As at 30 June2018
(Unaudited)
As at 30 June2017
(Audited)
As at 31 December
2017
£000
£000
£000
Raw materials
168
247
229
Work-in-progress
687
715
494
Finished goods
13,519
12,606
14,130
Total gross inventories
14,375
13,568
14,853
Inventory provisions
(3,407)
(401)
(3,652)
Total net inventories
10,968
13,167
11,201
Provision % of total gross inventory
23.7%
3.0%
24.6%
CO sensors made by Pace Sensors, the Group's wholly owned subsidiary in Canada, are shipped to Pace Technology, an independent third party supplier based in China for assembly into finished CO detectors which are purchased by FireAngel. As Pace Technology is an independent third party business to the Group, the Board considers that it is not appropriate to maintain a provision for unrealised profit in CO detectors purchased from Pace Technology and held at the balance sheet date.
9. Trade and other receivables
A summary of trade and other debtors is set out below:
(Unaudited)
As at 30 June
2018
£000
(Unaudited)
As at 30 June2017
£000(Audited)
As at 31
December
2017
£000
Trade receivables
9,135
13,135
16,634
Other debtors
126
289
293
Prepayments
610
941
439
Trade and other receivables
9,871
14,365
17,366
10. Trade and other payables
(Unaudited)
As at 30 June2018
£000
(Unaudited)
As at 30 June2017
£000
(Audited)
As at 31 December2017
£000Trade payables
11,471
8,936
10,583
Accruals and deferred income
1,892
3,996
4,968
Other tax and social security
762
773
921
14,125
13,705
16,472
At 30 June 2018, £8.5m (30 June 2017: £7.8m) of Trade payables were denominated in Sterling, £0.1m of payables were denominated in Euros (30 June 2017: £0.1m) and £2.9m in US Dollars (30 June 2017: £1.0m).
11. Provisions
A summary of the warranty provision analysed between FireAngel and BRK products is as follows:
FireAngel product warranty
£000BRK Brands product warranty
£000Warranty
Total
£000
At 1 January 2017
4,333
260
4,593
Increase in provision
-
314
314
Utilisation
(943)
(109)
(1,052)
At 30 June 2017
3,390
465
3,855
At 1 January 2018
1,917
277
2,194
Increase in provision
581
30
611
Utilisation
(1,202)
(89)
(1,291)
At 30 June 2018
1,296
218
1,514
The total product warranty provision is classified between less than one year and greater than 1 year as follows:
(Unaudited)
As at 30 June
2018
£000
(Unaudited)
As at 30 June
2017
£000
(Audited)
As at 31 December 2017£000
Current provision
914
2,400
1,507
Non-current provision
600
1,455
687
Total warranty provision
1,514
3,855
2,194
In its report and accounts for the year ended 31 December 2015, the Company increased the FireAngel product warranty provision by £5.5m as an issue had been identified in certain batteries supplied by a third party that may cause a premature low battery warning chirp in certain smoke alarm models sold in the UK and in Continental Europe.
In determining this provision, it is necessary to form a view on matters which are inherently uncertain, such as the returns profile over time, the final return rate, whether the product return rates of each year of production will be similar, whether the return rates from different sales channels will vary and the average cost of redress.
The continued appropriateness of the underlying assumptions is reviewed on an ongoing basis against actual experience and other relevant evidence and adjustment made to the provision over time as required.
The Board notes that, in total, the expected terminal rate of product returns is still broadly in line with its expectations, although returns in Germany are higher, and returns in the UK are lower than originally expected.
12. Share capital
Details of the Company's authorised and issued fully paid share capital are as follows:
(Unaudited) Company
As at 30 June 2018
Number
'000
(Unaudited) Company
As at 30 June 2017
Number
'000
(Audited) Company
As at 31 Dec 2017
Number
'000
Authorised:
100,000,000 Ordinary shares of 2p each
Ordinary shares in issue:
As at 1 January
45,905
45,855
45,855
Issue of shares in respect of share options exercised
-
-
50
As at 30 June
45,905
45,855
45,905
Issued and fully paid ordinary shares of 2p each:
£000
£000
£000
As at 1 January
918
917
917
Issue of share capital in respect of share options exercised
-
-
1
As at 30 June
918
917
918
The Company has one class of ordinary shares which carry no right to fixed income.
13. Options
A summary of the change in share options is set out below:
H1 2018
H1 2017
Options
'000
Weighted average exercise price
Options
'000
Weighted average exercise price
Outstanding at 1 January
1,902
99p
1,952
97p
Exercised during the period
-
-
-
-
Granted during the period
-
-
-
-
Expired during the period
(945)
2p
(3)
200p
Outstanding and exercisable 30 June
957
194p
1,949
96p
Further details of share options outstanding at 30 June 2018 are as follows:
Grant date
Outstanding at start of period
Exercised during the period
Granted during the period
Expired during the period
Reclassified during the period
Outstanding at end of period
Expiry date
Exercise price
Directors' share options
25/04/2014
319,445
-
-
-
(69,445)
250,000
28/04/2021
200p
03/06/2015
900,000
-
-
(900,000)
-
-
03/06/2025
2p
Employee share options
25/04/2014
607,614
-
-
-
69,445
677,059
28/04/2021
200p
03/06/2015
45,000
-
-
(45,000)
-
-
03/06/2025
2p
03/06/2015
30,000
-
-
-
-
30,000
03/06/2020
2p
1,902,059
-
-
(945,000)
-
957,059
The 2015 LTIP did not satisfy the target within the agreed time and has therefore not met the criteria needed to exercise the shares.
14. HSBC £7m revolving credit facility
In late January 2018, the Group entered into a committed 3 year revolving credit facility with HSBC Bank plc for £7.0m ("RCF") to fund its working capital. On 29 March 2018, the Company drew down £3.0 million under the facility to increase its available short term cash resources which was subsequently repaid in full at the end of the 30 day draw down period. The costs of arranging the facility amounting in total to approximately £0.1m are being amortised over the life of the RCF.
15. Settlement Agreement
As announced on 10 May 2018, the Group entered into the Settlement Agreement. In summary, and in consideration for a full and final settlement of all matters between the parties, it has been agreed that:
· BRK will purchase from FireAngel all BRK inventory manufactured from 1 January 2017 for £1.02 million to be paid by way of deduction from payments due by FireAngel to BRK under the terms of the DA, save for 3,097 units required by FireAngel for its ongoing warranty purposes;
· FireAngel will provide warranty support to its customers on all BRK products manufactured before 1 April 2018 and provide transitional support to ensure an orderly handover as part of the Settlement Agreement;
· FireAngel will dispose of all BRK inventory manufactured before 1 January 2017 at its own cost, save for 4,857 units required by FireAngel for its ongoing warranty purposes;
· BRK approves the sale by FireAngel of excess stock of FireAngel's CO products using BRK's brands valued at approximately £300,000 for a period of 6 months;
· FireAngel grants BRK a 12 month non-exclusive licence for its relevant intellectual property, including registered patents and design registration; and
· FireAngel will pay the outstanding balance of payments, amounting to a total of £10,972,484.88 and $71,071, owed to BRK under the terms of the DA and the MA in monthly instalments by 24 December 2018.
As a result of the Settlement Agreement, the Company recorded a £3.8m exceptional charge as part of cost of sales in its audited financial results for the year ended 31 December 2017 (2016: £nil) which includes £3.4m to write down the book value of remaining BRK inventory as at 30 April 2018 to £nil (as the Company will no longer sell BRK inventory), provisions of £0.2m to cover disposal (scrappage) costs of the BRK inventory and £0.2m to cover the Group's legal and professional fees since 22 March 2018 in respect of the dispute with BRK.
There is no income statement impact for the above in 2018, as this was borne in 2017.
16. Dividends
In light of the £3.8m cash cost this year of the Settlement Agreement, the Group's reduced expectations for 2018, the long term higher capital costs the Group faces using a third party contract manufacturer and the Board's commitment for significant investment in new products and technology, the Board did not recommend payment of a final dividend in respect of 2017. The Board has not proposed payment of an interim dividend for 2018 (H1 2017: 2.5p per share).
The Group's dividend policy will remain under constant review with the Board's desire to recommence dividend payments when it is prudent to do so.
17. Financial risk management and financial instruments
Introduction
The Group's activities expose it to a variety of financial risks that include currency risk, interest rate risk, credit risk and liquidity risk. These financial statements do not include all financial risk management information and disclosures required in the annual financial statements which should therefore be read in conjunction with the Group's financial statements as at 31 December 2017. There have been no changes to the risk management policies since the year ended 31 December 2017.
The Group's bankers perform the valuations of financial derivatives for financial reporting purposes.
The total net gain on forward contracts recognised in the operating result for the period ended 30 June 2018 was £0.4m (2017 H1: £0.3m loss) and is included within "Cost of sales". The decrease or increase in the valuation of forward contacts in the period is presented in the cash flow statement.
Foreign exchange rate risk
Over the next 12 months, a significant proportion of total sales are likely to be generated in Continental Europe in Euros. To mitigate the exchange rate risk, the Group regularly places forward contracts up to 12 months out selling Euros buying either US Dollars or buying Sterling. In addition, a significant proportion of the Group's product costs are in US Dollars. Again, to mitigate the exchange rate risk on product purchases, the Group covers part of the forward US requirements by placing forward contracts up to 12 months out from the reporting date.
Typically, there are a number of forward contracts maturing in any one month which blends the impact of changes in the relevant currency exchange rate against Sterling over time. At 30 June 2018, the Group had forward contracts in place to sell Euros which amounted to €13.7m (as at 30 June 2017: €15.5m) and forward contracts to buy US Dollars of US $32.3m (as at 30 June 2017: US $12.9m).
The Group's results are inevitably affected by the translational impact of changes in relevant exchange rates. Accordingly, if Sterling weakens against the Euro by 1 cent, measured over a whole year, the Group's Euro sales and Euro gross profit in Sterling would each increase - all other things being equal - by approximately £0.1m. If Sterling strengthens against the Euro by 1 cent, again measured over a whole year all other things being equal, the Group's Euro sales and gross profit in Sterling would decline by approximately £0.1m.
If Sterling strengthens against the US Dollar by 1 cent, measured over 12 months, current product costs would reduce by approximately £0.2m and if Sterling weakens against the US Dollar, over 12 months, the Group would see an increase in costs of approximately £0.2m. The value of opening and closing stock has a significant impact on the net impact of foreign exchange rates on the balance sheet.
Financial Instruments and the non-adoption of hedge accounting
All forward contracts are "marked to market" at the reporting date with the net gain or loss arising taken to cost of sales in the month. The movement in the value of forward contracts (which is a non-cash unrealised profit or loss) is disclosed in the cash flow statement as an adjustment to operating profit. Losses on forward contracts are added back to operating profit, and gains on forward contracts are deducted from operating profit to arrive at net cash flow from operations.
The Board believes that by using forward contracts and by valuing those contracts at the reporting date and reflecting the entire net gain or entire net loss in the income statement to date, the presentation of the financial performance of the Group is transparent and easy to understand. However, in adopting this accounting treatment and by not hedge accounting, the Board accepts that the financial performance of the Group in times of volatile exchange rates may fluctuate significantly.
18. Related party: Newell Brands Inc. ("Newell")
Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
Newell is a party to the Settlement Agreement.
During the period, certain Group companies entered into the following transactions with Newell which is not a member of the Group:
Newell
(Unaudited)
Period ended
30 June 2018
(Unaudited)
Period ended
30 June
2017
(Audited)
Year ended
31December 2017
£000
£000
£000
Sales of goods in period
-
-
-
Net Purchases of goods in period including engineering fees
4,378
9,975
9,628
9,975
23,521
Distribution agreement fee
944
1,415
2,915
Dividends payable
-
-
859
Amounts owed to related parties at period end
7,184
6,506
6,839
Newell, through its subsidiary BRK Brands Europe Limited, holds a significant proportion of the Company's ordinary shares (23.4% as at 30 June 2018).
Given its significant shareholding and the significant purchases by the Company from Newell, the Directors consider that Newell is a related party to the Company. Purchases between related parties are made under contractual arrangements negotiated on an arm's length basis.
Up to 31 March 2018, Newell represented the single largest supplier to the Group supplying all of the Group's smoke alarms, heat alarms and accessories from DTL which in turn sources products from CICAM. Since 31 March 2018, products which were being acquired from DTL are now sourced directly from Flex in Poland and a Far East Asia based supplier.
19. Post balance sheet events
There were no material post balance sheet events between 30 June 2018 and the date of approval of these unaudited interim results by the Board on 24 September 2018.
20. Availability
The interim financial information covers the period 1 January 2018 to 30 June 2018 and these statements were approved by the Board on 24 September 2018. Further copies of this interim announcement can be accessed on the FireAngel Safety Technology Group plc investor relations website, www.fireangeltech.com.
Responsibility Statement
We confirm to the best of our knowledge:
Ø the consolidated interim financial information has been prepared in accordance with IAS 34 Interim Financial Reporting;
Ø the Interim management report includes a fair review of the information, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and
Ø the Interim management report includes a fair review of the information, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during the period and also any changes in the related party transactions described in the last Annual Report that could do so.
At the date of this statement, the Directors are those listed in the Group's 2017 Annual Report.
Approved by the Board and signed on its behalf.
Neil Smith Graham Whitworth
Group Chief Executive Executive Chairman
INDEPENDENT REVIEW REPORT TO FIREANGEL SAFETY TECHNOLOGY GROUP PLC
Introduction
We have been engaged by the Company to review the condensed set of financial statements in the interim financial report for the six month period ended 30 June 2018 which comprises the Condensed Statement of Consolidated Income, Condensed Statement of Consolidated Comprehensive Income, the Condensed Statement of Consolidated Financial Position, the Condensed Statement of Consolidated Changes in Equity, the Condensed Statement of Consolidated Cash Flows and related explanatory notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
Directors' Responsibilities
The interim financial report, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing and presenting the interim financial report in accordance with the AIM Rules of the London Stock Exchange.
As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards and International Financial Reporting Interpretations Committee pronouncements as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting" as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of the interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the six month period ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union, and the AIM Rules of the London Stock Exchange.
Use of our report
This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our review work has been undertaken so that we might state to the Company those matters we are required to state to them in an independent review 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, for our review work, for this report, or for the conclusions we have formed.
RSM UK Audit LLP
Chartered Accountants
St Philips Point
Temple Row
Birmingham
B2 5AF
24 September 2018
Board of Directors
Executive
G Whitworth Executive Chairman
N Smith Group Chief Executive
N Rutter Chief Product Officer
Non-executive
W Payne
A Silverton
J Shepherd
Corporate Directory
REGISTERED NUMBER
3991353
SECRETARY
W Payne
REGISTERED OFFICE
Bridge House
4 Borough High Street
London
SE1 9QR
AUDITOR
RSM UK Audit LLP
Chartered Accountants
St Philips Point
Temple Row
Birmingham B2 5AF
REGISTRAR
Neville Registrars Limited
Neville House
18 Laurel Lane
Halesowen
B63 3DA
SOLICITORS
Pinsent Masons
30 Crown Place
London
EC2A 4ES
BANKER
HSBC plc
3 Rivergate
Temple Quay
Bristol
BS1 6ER
NOMINATED ADVISOR AND BROKER
Stockdale Securities Limited
100 Wood Street
London
EC2V 7AN
Shareholder information
SHAREHOLDER ENQUIRIES
Any shareholder with enquiries should, in the first instance, contact our registrar, Neville Registrars, using the address provided in the Corporate Directory.
SHARE PRICE INFORMATION
London Stock Exchange Alternative Investment Market (AIM) symbol: FA
Information on the Company's share price is available on the FireAngel investor relations website at www.fireangeltech.com
INVESTOR RELATIONS
Vanguard Centre
Sir William Lyons Road
Coventry
CV4 7EZ
England
Telephone: 024 7771 7700
Email: info@fireangeltech.com
Website: www.fireangeltech.com
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDIR DXGDCCSDBGIS
Recent news on Fireangel Safety Technology
See all newsREG - Takeover Panel - Disclosure Table
AnnouncementREG - Takeover Panel - Disclosure Table
AnnouncementREG - Takeover Panel - Disclosure Table
AnnouncementREG - Takeover Panel - Disclosure Table
AnnouncementREG - Takeover Panel - Disclosure Table
Announcement