Preliminary Unaudited Results

VPhase plc

("VPhase" or the "Group")

Preliminary Unaudited Results

For the year ended 31 December 2012

VPhase plc, (AIM:VPHA), a leading developer of energy saving products for residential and commercial properties announces its preliminary results for the twelve months ended 31 December 2012.

Highlights of the year

For further information:

Media enquiries

Update on current trading

Despite excellent growth in 2012, sales were slower than expected in the first two months of 2013. The funding regime in the social housing sector was limited up to the end of March 2013, restricting some of our targeted projects, although the directors believe that funding is being made available as we approach the beginning of the new budget year.

The directors believe that the largest single obstacle to the widespread adoption of voltage optimisation is Government policy. This is affecting product take-up both in the UK and in Australia. The Department of Energy & Climate Change ("DECC") has not yet approved the award of a Standard Assessment Procedure ("SAP") Point to the UK voltage optimisation industry despite the proven and well documented savings available for domestic and commercial installations alike. In Australia, our distributor has not yet been awarded regulatory approval for state and federally based renewable energy certificates, which has impacted sales. They have informed us that it will affect their ability to meet the contractual volumes. In both territories, we are engaged with Government officials and in time believe we will gain approval.

In spite of this issue, in the last three years, we have sold over 15,000 VPhase units, saving households some 6.75 million kWh of electrical consumption per annum, with associated savings of approximately £1 million per annum.

We continue to work with other partner organisations in the UK and other export markets. We have had some success working with Solar PV providers, whereas progress with the utility sector remains slow.

In export markets, we continue to extend our footprint and can today announce that we have signed new distribution agreements in Italy and Slovenia as well as a non-exclusive arrangement with a distributor in Singapore and Malaysia.

Our current Q2 order book is improving steadily and we have a substantial and growing pipeline of VPhase specifications with Registered Social Landlords ("RSLs")as well as new overseas distributors signing up. Our new French distributor has just placed their first order for 1,100 units for call off during Q2.

However, given the slower than anticipated start to 2013, our full year sales target is likely to be affected, the full extent of which, including the impact on cash, will not be clear until our half-year.

We continue to manage the business tightly, focussing on the conversion of our substantial pipeline of specifications in the UK Social Housing sector and our work with other partners in the UK and export markets.

Together, these actions should enable us to deliver growth this year, and we look forward to reporting on our progress at the half-year.

Chairman's Statement

I can report a year of sustained progress across all areas of our business. This is demonstrated by a four-fold growth in sales volumes, new contract wins in the UK and overseas and a number of important product range extensions.

Strategic focus

In the UK, VPhase's strategy is to gain specifications in the social housing sector with RSLs, who in turn put the installation work out to tender, with the successful contractor buying from us directly or through our UK network of distributors. Driving growth in our penetration of this sector is of key importance to us going forward and whilst we have more than doubled the number of RSLs working with us this year, there remains great potential for further growth.

Partners

We continue to work with partner organisations in the UK and are having success with solar PV providers whereas progress with the utility sector remains slow.

In international markets, VPhase continues to develop relationships with partners in selected territories and we are currently working with distributors in Australia, Cyprus, France, Belgium and Luxembourg. Additionally the Group has received expressions of interest from a number of its other territories and will continue to work to progress these opportunities and drive sales.

Product range

The Group has extended its range of voltage optimisation products with the introduction of our new VX2 (2kw rated) and VX5 (5kw rated) units, giving us a larger potential market through greater flexibility and ease in installation. Both products can also accept their own modular 6 way and 16 way distribution board, further enhancing the product offering and facilitating installation.

Focus on Energy Efficiency

The Government focus on energy efficiency is creating the right environment for VPhase's product range and it highlights the need to address energy consumption. We continue to lobby strongly for voltage optimisation to be included in the Green Deal and recent indications from DECC are that it will be included from 2014. In addition, we continue to seek a SAP Point and reduced VAT to 5%, the latter providing equality of treatment with other energy efficiency products.

Board

During the year, Nick Moss, Non-Executive Director, stepped down after five years on the Board.

Nick made an important contribution to the business, especially in its early years, for which we thank him. We were pleased to welcome Colin Black to the Board as a Non-Executive Director. Colin is a Chartered Accountant and chairs the Audit Committee.

Outlook

The Board continues to oversee the execution of the Group's strategy: to focus on Social Housing in the UK, opportunities to work with other UK partner organisations, and providing support for our overseas partners.

Together, these actions are creating a firm platform for future growth and although sales were slower than expected in the first two months of 2013 we look forward to reporting continued progress during the course of the current year.

Vanda Murray OBE

Chairman

25 March 2013

Chief Executive's Report

Review of 2012

2012 can best be described as a firm building block on the road to establishing a commercial company. The Group's sales' traction has begun to demonstrate a volume demand for our product with units sold rising 274% and revenue increasing from £440,000 to £1,378,000. This has been achieved against the backdrop of a challenging economic environment, increasing competition and a lack of decisive Government action to support the voltage optimisation sector. The Group's biggest area of sales growth has been in Social Housing where we have increased the number of RSLs that we are working with from 27 in 2011 to 85 in 2012, although this still only represents 7% of the 1,200 RSLs that VPhase can target. Less than 0.2% of the addressable housing stock now has a VPhase unit installed, which represents a great opportunity for future growth.

Overseas interest has continued to develop and we are adhering to our reactive approach, only signing up those distributors who demonstrate genuine interest and commitment. To date we have signed 3 overseas agreements in Australia, Cyprus and the third covering France, Belgium and Luxembourg. These agreements are currently in their early stages and we continue to negotiate agreements in other territories whilst investigating further opportunities as they arise.

Despite the fact that our distributor is not currently meeting their contractual volumes we believe the Australian market still presents an opportunity for VPhase where the electrical consumption is much higher than the UK at around 15,000 kwh per annum (three times that of the UK) despite the population at 23 million and 8.7 million homes being only a third of that of the UK. The Australian market has seen electricity prices increase by 30% over the last two years. In addition to the rapid increase in domestic electricity prices, Australian utilities are looking to address specific issues on their networks including:

·; Over and under voltage

·; Islanded sites

·; Reduction in Government subsidy

·; Customer retention

During 2012, gross margins remained under pressure at 26% (2011 34%) generating a contribution from sales of £363,000. However, product margins improved to 26% (2011: 24%) as we move our manufacturing to lower cost providers. We continue to source lower cost manufacturing and as the units produced begin to comprise a higher proportion of the Group's sales, this should improve margins further. In addition our development team continues to work on identifying lower cost components and improved configurations for assembly.

We continue to control our overheads tightly whilst investing in new product development and the development of the business. Our move to new premises at Venture Point during the year will further help us control costs as well as provide a better working environment for our employees and provide improved team dynamics.

The net impact of these factors is a reduction in the reported loss before tax to £1,658,000 (2011: £1,966,000), an improvement of £308,000.

Cash utilised by operating activities in 2012 was £1,414,000, compared to £1,969,000 in 2011, reflecting the improved contribution from sales and the tight overhead control offset in part by the need to invest in working capital as the business grows.

Competitor activity increased in 2012 with new players entering the market and conducting a much more aggressive strategy than in previous years.

During the year we developed two new optimisers, the VX2 and VX5 in response to feedback and experience with the VX1 and to address the emerging competitive threat. These new products offer many additional features for end users and installers and are accordingly premium priced.

Financial Review

Set out below is an extract of the Group Financial Statements for the year ended 31 December 2012 together with an analysis of the Group's Key Performance Indicators.

Revenues

Revenue growth of 213% was achieved in the year, with sales rising to £1,378,000 (2011: £440,000) of which product sales accounted for all the growth, up 260% to £1,378,000 (2011: £383,000). This is driven by our focus on social housing, growing awareness of the benefits of voltage optimisation in this sector and increased overseas sales.

Overseas sales accounted for £234,000 (2011: £16,000) some 17% of total revenue (2011: 3.6%). The vast majority of this growth was driven by our Australian distributor.

Gross Margins

Overall gross margins were reduced to 26.3% (2011: 34.0%) due to the reduction in non-product sales to £nil (2011: £57,000). Product margins improved to 26.3% (2011: 24.2%) as we move our manufacturing to lower cost providers.

Warranty Claims

Warranty claims remain low at less than 2% in the year and in line with previous years.

Research and Development Expenditure

Research and development expenditure increased during the year to £255,000 (2011: £168,000) as we concentrated on completing the new range of products; VX2 and the higher powered VX5. Both were completed at the end of the year and first sales delivered in January 2013. Their associated distribution boards will be available for sale from Q1 2013. Of this expenditure £250,000 (2011: £110,000) has been capitalised under IAS38 'Intangible Assets'.

Administration Expenditure

Administration expenditure of £2,020,000 (2011: £2,118,000) was incurred during the year, the reduction largely as a result of the capitalisation of research and development costs. Underlying expenditure, including research and development costs capitalised, remains unchanged at around £2,100,000 per annum.

Income tax

During the year the Group submitted research and development tax credit claims for 2011 but has not included any expected receipts in the accounts until recovery is confirmed (2011: £103,000).

Loss for the year and loss per ordinary share

The net loss for the year was £1,658,000 (2011: £1,863,000) which equates to a loss per ordinary share of 0.13 pence (2011: 0.24 pence).

Capital expenditure

Intangible assets

The Group invests in research and development which, when it meets the criteria established in IAS38 'Intangible Assets', is capitalised and then amortised over its useful economic life from the point the asset comes into use. The research and development assets form part of the Group's intangible assets. During 2012 the Group completed the development of its new VX2 and higher powered VX5 as well as progressing the associated distribution boards. This resulted in the capitalisation of £250,000 (2011: £110,000). These assets will be amortised over 60 months from the commencement of mainstream sales of the underlying products.

Tangible assets

The Group invested £181,000 (2011: £76,000) in tangible fixed assets during the year. Of this £151,000 was related to tooling or equipment associated with the VX2 and VX5 products and the balance general business equipment.

Cash Management

Cash utilised by operating activities reduced to £1,414,000 (2011: £1,969,000) largely through improved contribution from higher sales and transfer of development cost to capital. Working capital was largely neutral in 2012 but the investment in tangible and intangible fixed assets was higher at £431,000 (£186,000) as the costs for completing VX2 and VX5 were capitalised.

Cash utilisation

Cash is fundamental to the Group's assessment of its position as a going concern.

Having made due enquiries the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements. Further details of the factors taken into consideration are given in note 1 to this statement.

Rick Smith

Chief Executive Officer

25 March 2013

GROUP INCOME STATEMENT

for the year ended 31 December 2012

All revenue and costs originate from continuing activities.

The loss for each year is also the total comprehensive loss for the year and consequently no separate statement of comprehensive loss is presented.

GROUP STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

for the year ended 31 December 2012

GROUP STATEMENT OF FINANCIAL POSITION

as at 31 December 2012

GROUP STATEMENT OF CASH FLOWS

for the year ended 31 December 2012

NOTES

1. Basis of preparation

The Group's Financial Statements consolidate the Financial Statements of VPhase plc and its subsidiaries. The Group's Financial Statements have been prepared by the Directors in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The Group Financial Statements have been prepared under the historical cost convention.

Whilst the financial information included in this preliminary announcement has been computed in accordance with IFRS as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full financial statements within the next month. 

Going concern

During the year ended 31 December 2012 the Group incurred a loss before tax of £1.7m. The Group's directors have prepared projected cash flow information for the period ending 31 December 2015.

During the year, the Group has continued to grow the business and in the latter half of the year secured a number of new agreements with customers and distributors. However, given that the majority of these agreements do not guarantee minimum sales volumes and there is no history of trading on which to base forecasts, there remains considerable difficulty in accurately forecasting the timing and quantum of cash receipts from the sale of units under these agreements and this indicates the existence of a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern and therefore it may be unable to realise its assets and discharge its liabilities in the normal course of business. The directors have reviewed the current sales orders and opportunities and expenditure forecasts, together with other means of managing the cash outflows including identifying possible cost savings to enable the Group to operate within its available resources. The directors have also given consideration to the likelihood of securing any additional financing that may be required to support the business in the event that the phasing of, or acceleration of, sales is not as anticipated and the impact cannot be managed through cost mitigation. It is on the basis of these considerations that the directors consider it appropriate to prepare the Group's accounts on the going concern basis.

The accounts do not include any adjustments which may be necessary if the group was unable to continue to operate.

2. Taxation

There was no prior year adjustment in 2012 as claims submitted are only included once payment is certain. A claim has been submitted for the year ended 2011. In 2011 the prior year adjustment originates from a tax credit received in cash which related to research and development activities during the financial years ended 31 December 2008 and 2009.

Unrelieved losses relating to the current trade of £ 6,690,000 (2011: £4,864,000) remain available to offset against future taxable trading profits. No deferred tax asset has been recognised in respect of the losses, as recoverability is uncertain.

3. Loss per ordinary share

The loss per ordinary share is based on the loss of £1,658,000 (2011: loss £1,966,000) and 1,277,154,545 (2011: 835,689,813) ordinary shares of 0.25 pence each, being the weighted average number of shares in issue during the year. All shares have been included in the computation based on the weighted average number of days since issuance.

The share options in issue are anti-dilutive in respect of the diluted loss per share calculation and have therefore not been included.

4. Cash consumed by operations

5. Financial information

The financial information set out above does not constitute the Company's consolidated statutory accounts for the years ended 31 December 2012 or 31 December 2011. Statutory accounts for the year 31 December 2011 have been delivered to the Registrar of Companies, and those for the year ended 31 December 2012 will be delivered following the Company's Annual General Meeting. The previous auditor, Grant Thornton LLP, reported on the accounts for the year ended 31 December 2011; their report was unqualified and did not contain statements under section 498(2) or(3) of the Companies Act 2006 or equivalent preceding legislation. The statutory accounts for 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 in due course. In light of the disclosures provided in note 1 in relation to the directors' going concern assessment, it is anticipated that the audit opinion on the 2012 statutory accounts will contain an emphasis of matter in relation to going concern.

6 Annual General Meeting

The Annual General Meeting will be held at 10.00am on 24 May 2013 at the Company's registered office, Castlefield House, Liverpool Road, Castlefield, Manchester M3 4SB. 

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