29/11/2022 - Pipehawk plc: Final Results for the Year ended 30 June 2022

This announcement contains inside information as stipulated under the Market Abuse Regulations (EU) no. 596/2014 (which forms part of domestic UK law pursuant to the European Union (Withdrawal) Act 2018) ("MAR"). With the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

29 November 2022

PipeHawk plc

("PipeHawk", "Company" or the "Group")

Final Results for the year ended 30 June 2022

Highlights

• Turnover of £6.2 million, a decrease of 7.5% (2021: £6.7 million)
• Loss before taxation for the financial year of £1,576,000 (2021: profit £79,000)
• QM Systems completed a move into a modern and far larger facility on the Hartlebury Trading Estate, providing approx. 200% more office space and 600% more manufacturing capacity
• TED has moved into a significantly larger premises and since the financial year end has signed a global distribution memorandum of understanding with Unipart Rail Limited

The Group reported an operating loss in the year ended 30 June 2022 (the "financial year" and the "2021/22 FY") of £1,312,000 (2021: £257,000), a loss before taxation for the financial year of £1,576,000 (2021: profit £79,000) and a loss after taxation of £868,000 (2021: profit £522,000). Turnover for the financial year reduced to £6.2million (2021: £6.7 million). The loss per share for the financial year was 2.42p (2021: profit 1.50p).

In line with the outlook expressed in my Chairman's Statement last year, like others in the industry, we have been faced with difficult market conditions this financial year. As outlined on 24 March 2022 in the Group's unaudited results for the six months ended 31 December 2021 this has been an extremely challenging year. Just when we thought we were getting over the vicissitudes of the Coronavirus ("COVID-19") pandemic with its consequent delays caused by material shortages, extended lead times and increased costs, all suffered without the furlough buffer - then Russia invades the Ukraine, fuel costs soar and suddenly the world realises that energy is the key to our standard of living and economic livelihood at all levels.

As a consequence, the Group continued to see decisions across all levels of the chain be deferred and/or delayed throughout the financial year. The impact of the delay in receiving contract decisions continued to impact the Group right up to late September 2022. However, following September 2022, the Group has seen a number of larger orders that have previously been in abeyance for several months placed. In addition, the Group notes a shift in market sentiment, namely, that there appears to be a general willingness to actively re-engage and commit to forward-looking business decisions (as opposed to remaining in tick-over mode).

Despite the disappointing results for the financial year, the directors believe, for the reasons outlined above, that this merely represents a temporary blip in our growth trajectory. Notwithstanding this result, this financial year has been critical for the Group as seen by our underlying positive direction of travel. In addition, we have invested significantly to be able to take advantage of the opportunities evident from our groundwork. Not only have we expanded Thomson Engineering Design's ("TED") footprint fourfold (we have decided to retain, and rebuild its original premises whilst retaining its new premises, as we foresee the need for further growth), QM Systems Limited ("QM") footprint has increased fivefold, and a new line to QM business, contract manufacturing, has been established. Lastly, Adien is now fully engaged in 5G work and the integration of Utsi and PipeHawk's technology bodes well for the future.

I am confident therefore that the future looks very promising.

QM Systems

QM Systems has completed a challenging financial year where for a large part of that time the orderbook has been significantly below management expectation. This trend continued longer than expected into the 2021/22 FY resulting in the inability of QM Systems to pull through the expected level of revenue and profit. It does seem as though the effect of the pandemic eventually rippled through QM Systems later than initially anticipated. In addition, following Russia's invasion of the Ukraine, decision makers decided to defer making capital commitments, which manifested into expected orders being delayed by several months.

During the second half of the financial year, QM Systems completed a move into a modern and far larger facility on the Hartlebury Trading Estate. The move expands the available facilities from approximately 8,000 sq ft to approximately 45,000 sq ft; providing approx. 200% more office space and 600% more manufacturing capacity. The move was required to facilitate not only the anticipated growth in the company's project business but also the housing of the newly established contract manufacturing business unit. In addition, QM Systems has secured two manufacturing contracts with both expected to begin operation with manufactured product towards the end of the current 2022/23 FY. Both contract manufacturing projects bring the capacity for rapid growth in a new and exciting direction for QM Systems. Inevitably a move to a new facility of this size and scale brings commercial challenges and has required significant investment. In this regard, QM have invested over £750k in securing and fitting out the new facility to a very high standard.

Looking ahead, I am pleased to report that as we approached the end of the previous 2021/22 FY and entered the current FY order enquiries have increased dramatically. A number of projects that have been slow to gestate have now arrived resulting in an order intake for the first four months of the current FY alone at QM Systems being in excess of £3 million. Historically, this is an unprecedented order intake in such a short period of time and should enable QM Systems to rapidly recover the ground lost during the 2021/22 FY. In addition to orders received the order pipeline has again returned to a very healthy level with further significant order intake expected through the second quarter of the current FY and anticipated for the following quarter. It is also important to recognise that the projects won are sizeable projects that are expected to run across several months. This brings a further level of stability to QM Systems project business. To support the significant growth in the QM Systems projects business a number of new roles have been advertised for and subsequently filled across the engineering, projects and sales departments during the first third of the current FY. In addition to recruitment to support the project business the start and growth of the contract manufacturing business will see approximately 30 new employees join the QM Systems team over the next few months to support the production and administration activities required across the three contract manufacturing projects.

As a result of the above I fully expect to see QM Systems recover to a position of significant growth in both sales and profit during this current FY whilst securing a stable platform from which healthy growth can continue for the foreseeable future.

Thomson Engineering Design ("TED")

Revenue at Thomson Engineering Design ("TED") continued to grow into this financial year, with the best quarter on record achieved during the final quarter of the financial year. Revenue for FY2021/22 compared with the previous financial increased from approx. £1.2 million to £1.4 million (representing a circa16% increase). This did not however translate through into profit with a loss before taxation of £57k.

There are three key drivers within the year resulting in the reduction in profit versus expectation. The first is the significant upwards inflationary pressure regarding raw material cost which skewed the material content to be considerably higher than previous years. The second key factor was rising facility costs and investment into the new premises required during the 2021/22 FY. The third factor is that whilst we received a rent-free period in order to settle into and upgrade the new premises there is an accounting standard which requires us to amortise that rent free period over the life of the lease. The first two issues have been addressed through re-balancing margin on material and labour to accommodate higher material content and to provide for increased overhead recovery. The third is a non-cash cost in the short term.

Order intake at TED during the current 2022/23 FY continues to be strong, predominantly focused on the UK market with some export. Post the financial year, on 20 September 2022, TED entered into a

memorandum of understanding with Unipart Rail Limited ("Unipart Rail"), a global retailer of Rail equipment for Unipart Rail to be the exclusive partner for sales and distribution of TED rail equipment into territories in Europe, Asia, New Zealand, Australia and the Americas. This enables TED to facilitate its strategy for global growth by utilising an established and well-respected distribution partner. Unipart and TED jointly attended the InnoTrans Expo in Berlin to launch the new partnership, where a number of key TED products have been on display to premium rail clients. Since the year end, TED has also entered into a partnership with a key client to provide rail conversions for Kawasaki Utility vehicles. This innovative approach allows capital outlay and emissions to be significantly reduced and eliminates the need to use high-cost excavators when carrying smaller loads and tools. We expect this partnership to add substantial additional revenue potential to TED's current portfolio over the next few years.

Overall, having taken measures to address profitability the future for TED both in the UK and the wider global market appears significantly positive.

Adien

After a very promising start last year's results ended with a disappointing loss of £15k due to work volumes dropping in the last few months of the year. This was, mainly due to continually delayed starts from the 5G telecom sector. The order lethargy continued into July and August this year, but has picked up dramatically since the start of September.

Adien now supplies the majority of the key contractors to the telecom providers.

Adien's Ministry of Defence projects are also starting to come on stream after a slow start following the renewal of the framework contracts in April this year. Similarly, Scottish & Southern Electricity Networks has recently put significant funding in place which will allow us to progress with their larger sites.

Positively, clients in the construction and infrastructure sectors are showing increased activity both in volume of the orders placed and enquiries for new projects.

Hybrid working for staff in the Doncaster office and the rationalisation of the Scottish operation has resulted in efficiencies, cost reductions and reduced travel times as well as a reduction in the carbon footprint of the business.

Recent investment in new vehicles that are more efficient, cost effective, greener and continued investment in new hardware and software for the computer-aided design as well as field teams ensure Adien is able to survey and process data effectively to all our clients' various requirements.

The outlook for the current year remains positive.

UTSI

As enquiry levels have steadily risen through the 2022 calendar year, so too have material costs, component shortages and delivery timescales with the resulting lengthening transition times between enquiry, order and payment making the business of doing business, severely challenging. Sales of our flagship products; those manufactured and ordered in the largest quantities, have been most disrupted by the continuing supply delays, whereas those for more specialist, made to order products and those requiring bespoke alteration, have been less affected. Moving from just in time supply to just in case, namely, the increased stockholding of major "at risk" and "long lead time" components will reduce exposure to the worst supply chain excesses over the medium term. However, this change in approach has had a notable immediate effect on UTSI's cashflow and profits in the short term. While external R&D opportunities remain in recovery, bringing forward internal R&D timescales has offered a way towards achieving near term cost savings as tighter integration of existing PipeHawk & UTSI's product lines, becomes possible, whilst also offering the promise of attractive hybrid hardware/software solutions on the near horizon. While UTSI continues to seek out new opportunities, new partners and new markets, the restrictions imposed by global supply chain issues are expected to remain a significant limiting factor into the second half of 2022 and beyond.

Financial position

The Group continues to be in a net liability position and is still reliant on my continuing financial support.

My letter of support dated 6 September 2021 was renewed on 11 October 2022 to provide the group with financial support until 31 December 2024. Loans due to me, 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%.

The CULS agreement for £1 million, provided by myself, was renewed on 30 June 2022 and extended on identical terms, such that the CULS are now repayable on 13 August 2026.

In addition to the loans I have provided to the Company in previous years, I have deferred a certain proportion of fees and the interest due until the Company is in a suitably strong position to make the full payments.

Historically, my fees and interest payable have been deferred. During the year under review, the deferred element amounted to £160,000. At 30 June 2022, these deferred fees and interest amounted to approximately £1.8 million in total, all of which have been recognised as a liability in the Company's accounts.

Strategy & Outlook

The 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. In light of market conditions, all divisions of the Group are currently performing well and I remain optimistic in my outlook for the Group.

Gordon Watt

Chairman

Date: 28 November 2022

Consolidated Statement of Comprehensive Income

For the year ended 30 June 2022

		30 June 2022		30 June 2021
	Note	£'000		£'000
Revenue	2	6,191	6,665
Staff costs	5	(3,861)	(3,478)
Operating costs		(3,642)		(2,930)
Operating (loss) / profit	4	(1,312)	257
Profit / (loss) before interest and taxation		(1,312)		257
Finance costs	3	(264)		(178)
(Loss) / profit before taxation		(1,576)	79
Taxation	7	708	443
(Loss) / profit for the year attributable to equity holders of
the parent		(868)	522
Other comprehensive income		-	-
Total comprehensive (Loss) / profit for the year attributable to
equity holder of the parent		(868)		522
(Loss) / profit per share (pence) - basic	8	(2.42)	1.50
(Loss) / profit per share (pence) - diluted	8	(2.42)	0.80

The notes form an integral part of these financial statements.