Croma Security Solutions Group PLC : - Preliminary Results

Croma Security Solutions Group plc

(LON: CSSG)

PRELIMINARY RESULTS

FOR THE YEAR TO 30THJUNE 2012

Croma Security Solutions Group plc ("CSSG" or the "Group"), the AIM listed total security services provider, announces its unaudited preliminary results for the year to 30 June 2012.  The results reflect a full year's contribution from the historical Croma business ("Croma"), together with three months' contribution from the CSS Companies (being CSS Total Security Limited, CSS Locksmiths Limited and Alarm Bell Company Limited, together "CSS") which were acquired on 27 March 2012 transforming the Group into a fully integrated security services specialist.

FINANCIAL HIGHLIGHTS

·     Revenue growth to £9.90 million, an increase of 17.0%

·     Growth in gross profit to £1.76 million, an increase of 8.9%

·     Adjusted EBITDA of £0.09 million

·     Balance sheet strengthened with net assets of £8.4 million

·     Net asset value per share of 57.9 pence

·     Successful placing of new ordinary shares raising £5 million less costs

OPERATIONAL HIGHLIGHTS

·     Transformational acquisition creates a fully integrated security services specialist operating across four key divisions

·     The Group enjoyed a fourth year of sales growth

·     Contracts secured with Odeon, Colas, the NHS and London 2012 Olympics

·     Board strengthened through key appointments

Commenting on today's news, Sebastian Morley, Chairman of CSSG, said: 

"The financial year to 30 June 2012 was transformational for the Group as it grew by acquisition from a manned guarding business into a fully integrated security services specialist.  The process of of acquiring the CSS Companies took almost a year and entailed the complexity of a re-admission process and equity fundraising.  Whilst the Croma and CSS businesses both performed creditably through this period of change and management distraction, I am confident that we will see the full benefit of the combination of these businesses in the current financial year and beyond.

The Board continues to view future prospects with confidence.  Moving into the second half of 2012 and beyond, our main focus is on the continued integration of the Group in support of further organic growth across the Group.  Going forward we will look to develop further new business from high-end corporates that are seeking a one-stop-shop of security services under one single roof, ensuring both cost and time efficiencies.

The Group has a number of key opportunities in its new business pipeline, both with current and new prospects, in the UK and overseas, and the Board looks forward to updating on these developments in due course."

Croma Security Solutions Group plc

Sebastian Morley, Chairman                                                                                Tel: +44 (0)7768 006 909

WH Ireland Limited

Adrian Hadden / Nick Field                                                                                  Tel: +44 (0)207 220 1666

Yellow Jersey PR Limited

Dominic Barretto                                                                                                      Tel: +44 (0)7768 537 739

CHAIRMAN'S STATEMENT

In my first Chairman's Statement since my appointment, I have pleasure in reporting to shareholders the Group's Final Results for the year to 30 June 2012, a transformational period in CSSG's history .

The focus of the business remains that of maintaining growth and unlocking shareholder value by accessing significant opportunities that exist within the markets in which we operate.   Roberto Fiorentino, who has taken up the role of CEO, and I believe the newly incorporated CSSG business presents a compelling offer in today's fragmented market place, where customers are increasingly seeking out vertically integrated providers of well-managed and cost-effective services.

The period under review is skewed in terms of financials, as it includes the acquisition of the CSS Companies.  The acquisition of CSS is transformational for the Group, completing the stated ambition of the Board to re-focus CSSG into a total security services provider. The acquisition brings security personnel, CCTV, intruder, fire and access control systems into an enlarged group targeting the high-end security market. The acquisition was funded by a successful placing of new ordinary shares raising £5 million in March 2012.

2012 has been a key year in the restructuring and development of the Group and the Board believes that the synergies and cross-selling opportunities created by the acquisition will drive growth and increase shareholder value.

Operational Overview

With the acquisition of the CSS Companies the Group now comprises four key operating divisions: Croma Vigilant (guarding and asset protection); Croma Locksmiths (locks, safes and keys); Croma Security Systems (security and fire); and Croma Biometrics (identity management and access control), and these are discussed individually below.

Croma Vigilant

Croma Vigilant continues to be the largest sales revenue contributor to the Group.  It comprises manned guarding, key holding and commissionaire services.

Turnover grew 10.9% to £8.60m (2011: £7.75m).  This growth resulted mainly from client wins including the previously announced guarding contract with a major international utilities business (Balfour Beatty Utilities), guarding and key-holding with highly prestigious residential communities in Central London and Surrey (Earls Terrace and St George's Hill Residents Association), and the five year contract worth £1.15m per annum (£0.3m to 30 June 2012) to secure the premises of a major listed London property group (Great Portland Estates).  Turnover also benefited from a full year's turnover from significant contracts with GVA and with Grainger plc.

On the back of higher turnover, gross profit grew 8.9% to £1.17m (2011: £1.07m) reflecting a gross margin of 13.6%, which declined slightly from 13.8% (2011) due to changes in the mix of contracts. 

Vigilant operates in the upper echelon of the manned guarding market.  This market demands the highest grade of security officer and management. Vigilant's ex-military offering is an attractive USP to these clients.

Vigilant has experienced a lack of willingness to deploy a luxury head count of security officers that was seen before the true bite of recession but essential and core contract security spend has been maintained.  Insurance demands keep the market and client spend steady, in addition, the business has seen a demise in total facilities management and a return to specialised managed soft services.

Vigilant has a contract retention rate that is maintained through very close client liaison and this has proved enduring.  2012-13 will be a year of consolidating the fast growth of previous years, maintaining contracts and controlled growth with an emphasis on improved gross margin.  Vigilant management will encourage clients to spend smarter, utilising systems to decrease head count but to increase the CSSG offering.

Croma Security Systems & Croma Locksmiths

Despite the generally strong market for the Vigilant manned guarding business, the same cannot be said of the the traditional areas of Locksmithing and Security Systems which in the past few months have seen a general decline not only in new business but in maintenance spending, as customers have allowed contracts to lapse.  We have seen local authorities and other government sectors not only cutting spending but terminating contracts due to pressure on budgets.   The domestic sector is also spending less and in many cases avoiding essential works.

This fall in activity levels is compounded by an increasing proportion of existing clients seeking discounts or changes in payment terms to continue maintenance contracts.  Regrettably this is a sign of the times where every household and purchasing officer in the land is being pushed to drive down costs, particularly capital expenditure.

Against this generally challenging background, CSS has begun to feel the benefits of the merger with the existing business of Croma.  We are now engaging with large national clients for whom our integrated technical capabilities can deliver significant value.  Our relationships with clients such as GVA are starting now to deliver systems based revenue, and so despite difficult economic conditions over the coming year we expect to see a steady rise in maintenance spending, remedial works, and further capital expenditure for systems.

The value of our integrated proposition is further reinforced by our contract wins with Odeon Cinemas where our client indicated that they required a single security services provider with advanced capabilities in all areas.  The first contracts in Dorchester and Llanelli will contribute nearly £100k of sales initially and on-going maintenance arrangements thereafter.  As the preferred supplier of security to Odeon Cinema's, CSSG can expect to see future orders not only for on-going maintenance but for remedial works, refits and all new builds.

In May, CSS won a contract with the UK's leading traffic management company, Colas, to provide incident reporting, CCTV and early warning for impact protection vehicles.  This £70k initial order may increase significantly over the next two years, and represents the first fruit of our work to capture market share in the traffic management arena.

The system is designed to alert drivers using advanced video analytics to give early warning of an impending collision. It is likely that all traffic management companies will follow the lead set by Colas as will the Highways Agency and therefore the CSSG Vehicle Impact Protection System presents a very unique opportunity for the Group to grow and develop.

Despite these positive developments, it is clear that many clients are holding back on capital expenditure.  We see it as essential that we are there supporting them with repairs and on-going maintenance ready for times when spending returns to more normal levels.

Croma Biometrics

Fastvein®, the key development project of Croma Biometrics has historically been managed by the CSS team under a licencing arrangement from Croma. This was the relationship that lead ultimately to the acquisition of CSS by Croma.

Following two years of development effort, in April 2011 the FastVein® system was launched commercially. This is a complete biometric identification system which can be integrated with existing security systems or deployed as a stand-alone solution. FastVein® is quick and easy to access and eliminates the need for security cards, fobs or tokens. The system uses a sub-dermal scanning technology to perform ultra-rapid identity matching, with an ISO verified certainty of 1,000,000:1, and is recognised as a leading biometric identification system in the security sector market.

The system has been adopted by 18 HM Prisons and Immigration Removal Centres, and its potential was demonstrated recently during the London 2012 Olympics and Paralympics

Turnover for the year was £0.15m (2011: £0.17m) and although proven with a small number of customers, in order to exploit fully the potential of Fastvein®, further product development will be required over the coming year, with the aim of both reducing the average unit cost significantly, and widening the scope of potential applications for the system.

Financials

The Group's financial performance reflects the costs incurred and management time diverted to ensure the successful reverse acquisition and integration of the CSS Group.  Included in these results are a full year's trading from the existing businesses together with three months' results from the CSS Companies, and significant non-recurring items arising from the reverse acquisition.

Turnover rose to £9.89m (2011: £8.46m), growth of 16.9% or £1.43m. Organic growth delivered sales growth of £0.62m, whilst the CSS Companies contributed £0.81m for the last quarter.  Gross profit grew £0.14m to £1.76m (2011: £1.62m), reflecting growth across the main operating divisions, tempered by continued pressure on margins particularly in guarding & commissionaire services.

With the inclusion of the CSS Companies and other cost increases as a result of the higher turnover base in Vigilant, administrative expenses increased £0.56m to £1.69m (2011: £1.13m).  Whilst the Board is conscious of the importance of cost management, at this stage of the Group's development, the enlargement of the business and the investment necessary to support growth over the coming years have inevitably enlarged our cost base.  The Group generated £0.09 million at the EBITDA level, after adjustment for non-recurring items related to the reverse acquisition.

The operating profit for the year after the inclusion of £0.37m of non-recurring acquisition costs, depreciation and amortisation is an operating loss of £0.41m (2011: Profit £0.32m).  This performance reflects both the inevitable costs of a significant corporate transaction, and a challenging year for margins.

With benefit of both lower average borrowings and a lower average cost of debt, finance costs decreased £0.10m to £0.08m (2011: £0.18m).  Additionally there was a non-recurring gain of £0.12m, being the agreed and final tranche of the earn-out proceeds of the sale of RDDS Avionics Limited in the prior year. These factors resulted in a net loss for the year of £0.30m (2011: Loss £0.63m).

New cash arising from the placing of shares in March 2012 allowed the Group both to purchase the CSS Companies, repay a significant proportion of the borrowings extant at 30 June 2011 and fund the working capital required to support revenue growth.  Overall borrowings therefore decreased £1.51m to £0.77m, and cash increased £0.09m to £0.69m.  With significant cash on hand and the invoice discounting facility of £2m in place, the Group therefore closed the year in a financially sound position, with significant resources available to support future growth.

Goodwill of £4.47m and intangible assets of £1.67m were recognised following the acquisition of the CSS Companies, and the total balance of goodwill and intangible assets at the year-end is therefore £7.5m.  The intangible assets represent primarily the customer relationships acquired with CSS and give rise to an amortisation charge of £0.05m, which is included in administrative expenses.  Part of the consideration of the CSS Companies was a share for share exchange which has resulted in the creation of a merger reserve of £2.3m.

Team strengthened

During the period, a number of strategic management changes were made.In March 2012 following the acquisition of the CSS Companies, I was appointed Executive Chairman and Roberto Fiorentino, one of the UK's prominent security specialists, was appointed CEO. Mr. Fiorentino has been involved in the security industry for 30 years and has been responsible for a number of ground breaking technological advances within the electronic security sector, including the installation of High Security Master Key Locking systems, Vehicle Alarm Systems, Access Control, CCTV with transmission systems, CCTV over IP and, most recently, Video Analytics.

The amalgamation of Croma and CSS in March 2012 also prompted the appointment of two new non-executive directors, Charles McMicking and Lord James Percy, who together with the outgoing Non-executive Chairman Nick Hewson, will provide three independent voices on the Board to carry out the various services required for proper governance of a Group of the size and ambition of CSSG. Their biographies and those of all the Board are set out within the Report and Accounts.

In June 2012, Richard Juett was appointed Finance Director.  Mr Juett, who is a Chartered Accountant and a member of the Chartered Institute of Taxation, has served in a number of senior finance and tax roles with Ernst & Young, BDO Stoy Hayward, B&Q plc and Kia Motors (UK) Limited.  His experience of working both in the accountancy profession and with larger businesses will bring to the Board the strong reporting and financial controls which will be needed to manage the finances of the enlarged and growing business going forward.  The Board thanks Jay Dunion for his sterling efforts as Finance Director over the preceding year and over the period of the re-admission process.

WH Ireland Limited was also appointed as the Group's new nominated adviser and broker in June.The Group now stands ready to continue to target a much larger portion of the security services sector as the engine for its future growth, and as a fully integrated services provider.

Outlook and Priorities

The security sector is seeing a downturn, and as with many other business sectors we will see more business failures going forward.  To place ourselves to benefit from this industry consolidation, it is essential that we continue to invest our time and resources in the development of our systems business in order that we can grow to become a national organisation with in-house capabilities to support our growing list of clients and to continue targeting clients that have a need for our expertise with, of course, the funds to pay for it.

We have seen high margin orders and maintenance slow down significantly but our new clients are generally filling the holes left by the losses. We expect to see turnover continue to grow although pressure on margin is unlikely to abate as we continue to develop and grow the business. Many clients are now choosing to build long term relationships with us as a security supplier of choice, but at the same time they are scrutinising our margins and ever seeking better value for money.

The Board continues, however, to view the prospects for the Group for the current financial year with confidence. The original philosophy and reasons for the integration of CSS into Croma remain on target; they were to create a complete security services Group which we now have.Moving into 2013 and beyond, our main focus will be on the continued integration of the Group in support of further organic growth.  Going forward we will seek to further develop new business from high-end corporates that are seeking a one-stop-shop of security services under one single roof and team, ensuring both cost and time efficiencies.

The Group has a number of key opportunities in its new business pipeline, both with current clients and new prospects, in the UK and overseas, and looks forward to updating on these developments in due course.

As Chairman, and on behalf of the Board and shareholders, I would like to formally thank our staff. Each year we set ourselves challenging targets across the Group, and each year our staff react positively and enthusiastically to the challenges set. This year in particular, given the reverse acquisition, we are especially proud of their efforts.

Sebastian Morley

Chairman

5 November 2012

Consolidated Statement of Comprehensive Income

for the year ended 30 June 2012 (unaudited)

Consolidated Statement of Financial Position

as at 30 June 2012 (unaudited)

Consolidated Statement of Changes in Equity

for the year ended 30 June 2012 (unaudited)

Consolidated Statement of Cashflows

for the year ended 30 June 2012 (unaudited)

Key Notes to the Accounts

Note 1 - Basis of preparation

While the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards ("IFRSs"), this announcement does not itself contain sufficient information to comply with IFRSs.  The company expects to publish its full financial statements in November 2012.

The financial information set out in this announcement is unaudited and does not constitute the company's statutory financial statements for the year ended 30 June 2012 for the purposes of section 435 of the Companies Act 2006.  The financial information for the year ended 30 June 2011 is derived from the statutory financial statements for that year which has been delivered to the Registrar of Companies.   The statutory financial statements for the year ended 30 June 2012 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the company's Annual General Meeting.

Note 2 - Going concern

The Group's activities are funded by a combination of long term equity capital, and short term invoice discounting and bank overdraft facilities.  The day to day operations are funded by cash generated from trading and primarily invoice discounting facilities.

In considering the ability of the Group to meet its obligations as they fall due, the directors have considered the expected trading and cash requirements of the group and the potential cash outflows associated with the remaining convertible loan notes which are repayable between December 2012 and February 2013 and the contingent consideration.

The Board remains positive about the retention and outlook of its main trading operations.  The Board's profit and cash flow projections suggest that the Group will meet its obligations as they fall due with the use of existing uncommitted invoice discounting facilities, including repaying the convertible loan notes of £245k and any contingent consideration which falls due.  The invoice discounting and overdraft facilities fall due for review on 30 September 2013.  The Board believes these will be renewed, and also in mitigation, they believe that they could defer payment of £200K of the convertible loan notes, if this was so required.

The financial statements do not reflect the adjustments that would be necessary were the trading performance of the Group to deteriorate and in the unlikely event that the funding available from invoice discounting and the overdraft was not available.  The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.