www.FiltaPlc.com Registered in England. Company Number 10095071 Registered Office: The Locks Hilmorton Rugby Warwickshire CV21 4PP Tel: +44 1788 550100 Email: Enquiries@FiltaPlc.com Annual Report & Accounts 2017 F l i l t a G r o u p H o d n g s p c A n n u a i l l R e p o r t a n d A c c o u n t s 2 0 1 7 About Filta Filta Group Holdings plc is a multi-service B2B provider to commercial kitchens, primarily operating in the UK, North America and now Mainland Europe. The Company has over 180 Franchise Owners, and teams of corporate vans, providing services to over 6,000 commercial kitchens and restaurants every week. Filta has an impressive blue chip customer base that underlies a recurring revenue, cash generative business model that supports a strong dividend commitment. Index Overview 1 2 Highlights Chairman’s Statement Major Markets Services The Franchise Model Business Model Strategy and Operations 6 8 9 10 11 Our Market 12 14 Chief Executive’s Operating Review 18 Chief Financial Officer’s Review Principal Risks and Uncertainties 21 Strategy Governance 24 26 27 30 Directors’ Remuneration Report 33 Directors’ Report Corporate Social Responsibility Report Board of Directors Corporate Governance Statement Financial Statements 39 Independent Auditor’s Report to the Members of Filta Group Holdings PLC Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Parent Company Statement of Financial Position Parent Company Statement of Changes in Equity Parent Company Statement of Cash Flows Notes to the Financial Statements 42 43 44 45 46 47 48 49 71 Corporate Information Further information and investor updates can be found on our website at www.FiltaPlc.com Nominated Advisor and Broker: Cenkos Securities plc 6.7.8. Tokenhouse Yard London, EC2R 7AS Auditors: Crowe Clark Whitehill LLP St Bride’s House 10 Salisbury Square London EC4Y 8EH Corporate Information Directors: Timothy (Tim) John Worlledge Non-Executive Chairman Jason Charles Sayers Chief Executive Officer Brian Joseph Hogan Finance Director Victor Clewes Executive Director Jlubomir (Roscoe) Urosevic Executive Director Roy Charles Sayers Non-Executive Director Graham Jeffrey Woolfman Non-Executive Director Secretary: Brian Hogan Registered Office: The Locks Hillmorton, Rugby Warwickshire CV21 4PP Company Number: Registered in England with Company Number 10095071 Bankers: HSBC Bank PLC 6th Floor, 165 Fleet Street London, EC4A 2DY Solicitors: Howard Kennedy LLP No. 1 London Bridge London, SE1 9BG Registrar: Computershare Investor Services plc The Pavilions Bridgwater Road Bristol BS13 8AE Designed and produced by london@blackandcallow.com www.blackandcallow.com 020 3794 1720 71 Highlights Financial Highlights - continuing operations Revenue £11.5m +36% Gross Profit £5.7m +41% Adjusted EBITDA* £2.1m +77% Deferred Income Balance £2.9m +8% Revenue £m 11.5 8.5 6.7 Gross profit £m 5.7 4.0 3.4 Adjusted EBITA* £m 2.1 1.2 1.0 2016 £8.5m 2016 £4.0m 2016 £1.2m Deferred Income Balance £m 2.9 2.7 1.7 2016 £2.7m 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 *Adjusted EBITDA is a non-statutory measure that represents earnings before interest, taxation, depreciation and amortization adjusted for non-recurring items and share based payments. Operational Highlights • Net increase in Franchise Owner base to 184. • • • • o Number of MFUs (mobile filtration units) increased from 341 to 394. Fryer Management revenue, primary recurring in nature, grew 36% to £8.4m. Robust revenue growth in our Company Owned Operations FiltaSeal and FiltaGMG. Management continued to execute on its strategy of focusing on high margin, recurring service offerings which, in turn, resulted in the following key events: o Aug 2017 First franchise in Canada; o o o Aug 2017 Acquisition of Grease Management Limited; Jan 2018 Exit from Refrigeration; and Jan 2018 Buy-in of German master franchise. 1 Financial StatementsGovernance OverviewStrategy and Operations Chairman’s Statement £11.5m Group Revenue +36% 2016: £8.5m £2.1m Adjusted EBITDA +77% 2016: £1.2m 2.90p Basic Earnings Per Share 2016: (1.89)p 2.87p Diluted Earnings Per Share 2016: (1.89)p Full Year 2017 Operating Revenue 15% 12% £11.5m 73% ■ Franchise Development ■ Fryer Management ■ Company Owned 2 ■ FiltaDrain ■ Filter Refrigeration ■ Filta-Seal 11 7 31 2016 2015 2014 Introduction I am pleased to report that 2017, our first full year as an AIM-listed company, was another year of growth for all of our core businesses and one in which we won some important new clients in both our main territories, launched operations in Canada and made a small but commercially significant acquisition in the UK. On 4 January 2018, we completed the sale of Filta Refrigeration, a business which we regarded as peripheral to our mainstream activities, as we focus our strategic development on businesses with high margins and low working capital requirements. We have also, since the year end, bought in the FiltaFry master franchise in Germany and will use its existing franchise base to commence the roll out of our North American model into mainland Europe. These financial results contain financial information on both the Continuing Operations of the Company and, separately, the Discontinued Operations of the Company being Filta Refrigeration. Results Total profit before tax of the Group for the year ended 31 December 2017 was £1.7m (2016: loss of £0.2m) on revenue up by 34% at £13.5m (2016: £10.1m), whilst the adjusted EBITDA was £2.2m (2016: £1.3m), an increase of 67% over 2016. The Continuing Operations recorded a profit before tax for the year of £1.6m (2016: loss of £0.3m) on revenue up by 36% at £11.5m (2016: £8.5m), whilst the adjusted EBITDA was £2.1m (2016: £1.2m), an increase of 77% over 2016. The Discontinued Operations contributed a net trading profit of £0.03m (2016: £0.1m) on revenue of £1.9m (2016: £1.6m). In addition to increasing adjusted EBITDA, the Group increased Deferred Revenue by a further £0.2m to £2.9m, despite a £0.3m negative impact from a weakened dollar. During the second half of the year the Group incurred £0.1m of legal and other costs related primarily to the acquisition of Grease Management Limited (now ‘FiltaGMG’) and accounted for a £0.1m charge in relation to options issued under the Company’s Share Scheme, resulting in a full year profit from operations of £1.7m (2016: loss of £0.2m). A one-off tax charge of £0.3m was taken at year end, to revalue our deferred tax position, due to the recent reduction in the US corporation tax rate. This gave rise to an inflated tax charge, leading to an attributable profit for the year of £0.8m (2016 – loss of £0.3m). There is no cash impact from the deferred tax charge and we will see it being reflected in reduced actual tax charges and payments beginning in 2018. Performance of Continuing Businesses The £0.9m increase in adjusted EBITDA resulted from strong performances in all areas of our business and was achieved on the basis of higher turnover and improved gross profit margins. We have seen a net increase in our Franchise Owner base to 184, the number of allocated territories increased by 49 to 347, and a 16% increase in the number of MFUs (mobile filtration units) from 341 to 394, further strengthening our platform for growth in future years and reflecting the level of organic growth we are experiencing. Revenues and profits from Fryer Management Services increased by 36% and 33% respectively and, during the year, we commenced operations in Canada, where our first franchisee began trading in August and now has four MFU’s in operation. The Company-owned activities have also had a good year. FiltaSeal, has enjoyed revenue growth of some 31% and, with the increased efficiency that flows from better utilisation, improved profit margins. Similarly, FiltaDrain, renamed FiltaGMG following the acquisition of Grease Management Limited, has seen its customer base expand and contributed £0.4m in the first four months of our ownership at higher than anticipated profit margins. Strategic Developments We took a small but important step into the increasingly in-demand drain- maintenance and grease management space with the acquisition, in August, of Grease Management Limited. FiltaGMG augments our existing drain services and enables us to offer a broader range of drain maintenance options to customers. Since the year-end, as referred to above we have completed the sale of our refrigeration and air-conditioning business, which contributed lower margins than our other activities and was not a business in which we saw opportunities for growth at the same rate as are available elsewhere. We have also taken a significant step towards building our franchise business in mainland Europe by buying in the master franchise for Germany in January 2018. FiltaFry GmbH will be developed along the same lines as our North American business with the aim being to establish a strong foothold in Germany before extending into neighbouring European countries. The franchising of FiltaFry services will continue to be the cornerstone of our business wherever we operate but we believe that there are a number of related or ancillary services which, depending on the territories concerned may be more suitable to run as directly owned businesses. We therefore envisage pursuing an Infill strategy to acquire and develop 3 Financial StatementsGovernance OverviewStrategy and Operations Management, staff and Franchise Owners The Board much appreciates the considerable efforts of our management and staff. I welcome to the Group those who have joined us during the year and I thank all our employees for their continuing hard work and commitment to the Group. I also take this opportunity to recognise our Franchise Owners, whose own performance and client commitment is critical to our success and reputation. Tim Worlledge Chairman 16 April 2018 Chairman’s Statement additional service offerings, which, typically, will require only modest capital investment, will be complementary to our existing activities and will contribute to earnings as well as improving return on capital. Dividends We have a stated policy to distribute one third of annual earnings by way of dividends to shareholders in respect of each year. However, the Board considers that the one-off, non-cash, deferred tax charge has caused a significant distortion to the profits generated during the year and believes that it is appropriate to maintain the dividend at the same level as that paid in respect of the first half of the year. The Board is therefore proposing a final dividend of 0.65 pence per share, which together with the second interim dividend of 0.65 pence paid on 29 September 2017 makes a total dividend of 1.30 pence per share in respect of the year and represents 45% of the reported earnings. The proposed final dividend, if approved by shareholders, will be paid on 7 June 2018 to shareholders on the register at the close of business on 25 May 2018. Current trading and outlook We saw growth in all our core businesses in 2017 and this has continued into 2018. We have secured 4 new franchisees, allocated 6 further territories and added 10 MFU’s in the year to date, all of which will contribute to additional revenues from Fryer Management Services through the year. Our FiltaSeal activity in the first quarter was 8% up on the same period last year and the newly formed FiltaGMG is continuing to gain new clients, thus increasing the repeat revenue base. With the additional business that we expect to derive from our new European operations and the encouraging progress in Canada, your Board is therefore confident of achieving further growth through the remainder of the year. 4 Strategy and Operations Company & Major Markets Services & Franchise Model Business Model 6 8 10 11 Our Market 12 14 Chief Executive’s Operating Review 18 Chief Financial Officer’s Review Principal Risks and Uncertainties 21 Strategy 5 5 Financial StatementsGovernanceStrategy and Operations Overview Strategy and Operations Major Markets Filta operates principally in North America, the UK, and now Germany, providing a range of commercial kitchen related services through franchise networks and Company-owned operations. Filta Group Holdings Plc N. America UK Mainland Europe North America Number of vans 351 Franchise Operated 6 Business growth drivers: • New Franchise Sales (new territories) • Existing Franchise Owners growing and adding MFUs • National Accounts • New services and products offered through Franchise Network Corporate HQ in Orlando, Florida, USA • Principally a franchise network business Franchisees mostly multi-unit operators Exclusive rights to defined area • All services provided through Filta Franchise Network Fryer management is principal service Ancillary services include FiltaBio waste oil collection, FiltaGold new oil supply, FiltaCool moisture absorbing panels for coolers and FiltaDrain kitchen drain solution • Revenues generated mainly from franchise sales, franchise services, oil resales UK Business growth drivers: • Expansion of existing Company-owned services • Development of additional related services • Increased focus on national accounts Corporate HQ in Rugby, England • Franchise network business and company-owned operations • Franchise network business: Franchisees mostly single unit operators Services are solely fryer management • Company-owned Operations: FiltaSeal, replacement of refrigeration seals FiltaGMG, kitchen drain solution • Revenues derived principally from FiltaFry, FiltaSeal and FiltaGMG. Number of vans 43 Franchise Operated 15 Company Owned Mainland Europe (Germany) Business growth drivers: • New Franchise Sales (new territories) • Existing Franchise Owners growing and adding MFUs • National Accounts • New services and products offered through Franchise Network • Plan to adapt US model in Germany before expanding into surrounding countries. Corporate HQ in Debbeshoek, The Netherlands • Principally a franchise network business Franchisees both single and multi-unit operators Exclusive rights to defined area • All services provided through Filta Franchise Network Fryer management is principal service Ancillary services include FiltaBio waste oil collection, FiltaGold new oil supply Revenues generated mainly from franchise sales, franchise services, oil resales 7 Number of vans 7 Franchise Operated Following acquisition of FiltaFry Deutschland GmbH in Jan 2018 Financial StatementsGovernanceStrategy and Operations Overview Strategy and Operations Services One customer – multi-services Fryer Management - The FiltaFry Service FiltaFry, our unique Fryer Management service, is the cornerstone of the Group’s activities and service offering in North America, the UK and Germany. It provides an effective, hygienic and economic service for commercial kitchens, cleaning fryers, reducing cooking oil costs and disposing of waste cooking oil. • FiltaFry provides a total fryer management service, including the on-site micro-filtration, removal and replacement of cooking oil. • 6,000+ restaurant and food service customers receive FiltaFry services on a weekly basis. • Fryer Management also includes supplemental services provided by our Franchise Owners to customers such as FiltaCool and FiltaDrain. • Franchisees operate a total of 394 MFUs of which 349 are in the USA, 2 in Canada and 43 in the UK. FiltaSeal FiltaSeal service is sold in the UK and is a patented system for replacing damaged or perished refrigerator and freezer door seals on-site in a cost and time effective manner. Specifically, the system allows engineers, using patented on-board equipment and materials, to replace a seal in one visit, producing cost and time savings for its clients, who would otherwise experience ordering and fitting delays following an initial engineer’s visit. The benefit of this service, apart from avoiding the disruption that multiple engineer visits cause, is the energy cost saving and avoidance of longer-running food hygiene risks. FiltaGMG FiltaGMG is a UK-wide provider of drain- related services including live bacteria drain dosing and the installation and servicing of Grease Recovery Units. Over 75% of FiltaGMG’s revenue is recurring in nature, with work typically being carried out quarterly under scheduled maintenance programmes. Fryer Management Single visit Seal Replacement FiltaFry FiltaSeal FiltaGMG Enzyme FOG Management 8 The Franchise Model Our Fryer Management service is provided through a network of Franchise Owners, who operate under 10-year franchise licences in North America and under 5-year franchise licences in the UK and Germany. Filta, as the Franchisor, owns the intellectual property (“IP”) comprised in the equipment and systems and, through its Franchise Model, allows its Franchise Owners to make use of that IP and of the FiltaFry name in providing the Fryer Management Service to its customers. There are two key components to the creation of a successful franchise: • The quality of the franchisee and • The provision by the franchisor of constant advice and support to the franchisee as he first establishes and then develops the business Filta takes a great deal of time in selecting its franchisees, who undergo an extensive interviewing and assessment process before being awarded a franchise. Care is taken to establish that the applicant has the necessary funds, drive and enthusiasm to run and build the business. Typically, in North America, Franchisees are likely to develop into multi-van operations, while, in the UK, they more often remain as single unit operators. Germany is being developed as a multi-unit operator model. As the Franchisees grow their businesses, both by increasing their customer base and by adding extra units, they receive extensive support from Filta. Filta believes that this high level of support is critical to the success of its Franchise Owners. Filta considers that its role is to bring down barriers, identify opportunities, pass on experience and, above all, help to set up all the normal business practices and systems that are needed in young businesses. Franchise Selection Finance Programs Business Planning IT Development Technician Recruitment Support Franchise Owners Training Launch & Support Key Account Acquisition & Maintenance Dedicated Inside Sales Support 9 Financial StatementsGovernanceStrategy and Operations Overview Strategy and Operations Business Model There are three key components of revenue generation in the Group and each of these is important, not just to revenues, but in providing the platform for growth in the future. 1 – Franchise Development 2 – Fryer Management Services • New Franchise Owners and territories • Territory Fee and Opening Package Fee paid by franchisee • 10 Year Franchise Agreements (5yr UK and Germany) with annual royalties • Key objective is continuing improvement of our Franchise Owner quality to provide a platform for growth as they add units, take on new territories and enhance our brand and reputation • All services are provided by or through Franchise Owners • Franchisees pay a fixed royalty per MFU • All products are provided by Filta, generating additional margin • Franchise Owners’ customer growth drives additional Filta revenues at little or no resource cost to Filta, providing increasing revenue visibility (2017 – repeat revenues at 92%) • Key objective is growth of franchisees’ revenue, driving predictable Group revenues at increasing marginal profit 3 – Company Owned Operations (UK Only) • FiltaSeal provides an essential service to customers with a high level of visibility • FiltaGMG provides a service under contract to commercial kitchens, often already FiltaSeal customers • Key objective is to build repeat revenues, from high revenue-visibility maintenance contract customers Repeat Revenues Underpinned by Growing Royalty Income A significant proportion (82%) of the Group’s revenue is of a recurring nature and derives from the existing customer base, which requires continuing and reliable services. These revenues include royalties and other income from Fryer Management, revenue from FiltaSeal and from non-installation services by FiltaGMG, which have the common feature of being regular periodic services. This provides strong cash flow and, with the growing amount of deferred revenue, good visibility into future years. Blue Chip Client Base The Group has a broad client base in North America, the UK and Germany with clients ranging from small single outlet enterprises to many blue-chip clients with multi outlets and national coverage including major supermarket groups, national pub chains and restaurant chains. The high quality and breadth of the client base helps to mitigate the risks of exposure to any single business or organisation. 10 Our Market Target Markets Filta’s products and services are suitable for catering establishments throughout North America, the UK and mainland Europe. We have identified a number of commercial business sectors and public organisations which we believe to represent our principal target markets: Sector No. of Establishments Fryers Seals & Drains Restaurants North America 630,000 UK 72,000 Germany 165,000 Supermarkets 37,000 8,000 25,000 Universities & Colleges 2,000 106 100 Sports Stadiums 1,000 50 100 Hospitals Casinos 5,600 500 1,900 50 Contract Caterers 50,000 13,000 Core to Filta’s business in both the US and UK. Multi-unit organisations and therefore potentially attractive customers Most have fryers, all have many seals and refrigeration units. Mostly accessed through Contract Caterers. Only stadiums with over 5,000 capacity. Filta services over 300 US stadiums. Mostly accessed through Contract Caterers. Casinos can have many restaurants and most provide fried food. Whether outside contract or provision of on-site staff, provide valuable access to many sectors. Some Some Most All Some All Some All All All All All All All FiltaGMG Operating in the UK only, FiltaGMG is also a long-term generator of repeat revenues from all of the market segments listed above. It is estimated that Filta currently has under 1% of the UK market. FiltaSeal FiltaSeal has the same core customer base as Filta’s Fryer Management business, being commercial kitchen operators. The key target customers for FiltaSeal, are many of those to which the Group already provides services. Management estimates that this customer list alone has over 400,000 seals that require regular replacement. Based on the Company’s current service rate, FiltaSeal is achieving only 5% customer penetration of its list and around 1% of the UK market. Fryer Management The target market for Fryer Management is any commercial kitchen with two or more deep fryers. There are around 258,000 eating out venues in the UK alone (source: Horizon FS Ltd), of which Management estimates that a total of 80,000 sites would benefit from the FiltaFry service. The North American market is over 10x the size of the UK, reflecting both population (roughly 5x the size of the UK) and higher consumption of fried food. US restaurant sales alone are estimated at $799B for 2017, having grown in each of the last 8 years. Data from the USDA (United States Department of Agriculture) shows food consumption out of home within the US - the two largest segments of which are Full Service and Fast Food restaurants - is near equal to US food consumption in home. Management estimates that over 800,000 target foodservice businesses in North America would benefit from the FiltaFry service. Filta’s current Fryer Management Services client base represents market penetration of under 2% in North America and 2% in the UK. 11 Financial StatementsGovernanceStrategy and Operations Overview Strategy and Operations Strategy Our objective is to deliver sustainable, predictable and profitable growth founded upon the following strategic operational pillars: 1. Recruit the best Franchise Owners possible 2. Drive and support the growth of the Franchise Owners 3. Grow key and national accounts 4. Increase our range of products and services 5. Attract and develop the best people 6. Increase the use of technology to improve our offering 12 Franchised Company Operated North America Europe UK UK Expand through Franchise Sales & Additional MFUs Prove Model in Germany then expand into adjacent countries Expand through Franchise Sales & Additional MFUs Organic Growth Organic Growth & Acquisitions Growth Opportunities North America The Fryer Management Services segment is the cornerstone of our business and we continue to seek to grow this area both by securing new franchisees and by increasing the numbers of customers serviced by our franchisees through higher penetration of the NCA (National and Centralised Accounts) market. This in turn drives royalty and other repeat revenue growth. In addition, we are increasing the range of services that our franchisees offer customers, including FiltaDrain, a weekly-applied drain cleansing service. UK We continue to support our Fryer Management franchisees and to grow the Company Owned Operations, FiltaSeal and FiltaGMG, through gaining key accounts. Germany With the recent expansion into Germany, the plan is to spend 2018 perfecting the same model that we have developed in North America. Growth in Germany will come from both the sale of new franchises and by helping our acquired franchisees to expand. New Markets Once we have proven the model in Germany, the plan is to expand further within mainland Europe in the coming years using the resource base in Filta’s offices in the Netherlands. 13 Financial StatementsGovernanceStrategy and Operations Overview Chief Executive’s Operating Review Introduction I am very pleased to report that the Group’s continuing businesses delivered strong results with an operating profit of £1.7m, adjusted EBITDA of £2.1m, an increase of 77% over the previous year, and profit before tax of £1.6m. Equally important, we have increased our deferred revenue balance and, therefore, go into 2018 with higher revenue visibility than at the start of 2017. Fryer Management Services, our principal activity, exhibited a 36% increase in revenue, driven by both organic growth and new franchise development which, in turn, enlarges the platform for increasing Fryer Management Services revenue in the future. We also experienced robust revenue growth in our Company Owned Operations due to strong performances from, particularly, FiltaSeal, whose revenues were up 31%, and FiltaGMG since the acquisition of Grease Management Limited. In addition to continuing the growth of our existing franchise and Company- owned businesses, the Group’s strategy is to expand our Fryer Management activities into new geographies, to seek complementary activities to add to our portfolio of services and to continually strive for improved margins and return on our capital. The pursuit of this strategy led to several key events during the year: • In August we launched FiltaFry in Canada with our first Franchise Owner, in Woodstock Ontario, already operating four (two at 31 December 2017) MFUs and strong interest from potential franchisees to start up elsewhere. • In August we acquired Grease Management Limited, a drain management business with an established client base and, historically, regular income. This expands Filta’s UK Company-owned services to include higher margin drain management activities which can be offered in addition to those already being provided. • On 4 January 2018, the Group completed the sale of Filta Refrigeration Limited, its refrigeration and air-conditioning installation and maintenance business. Whilst a profitable business, Filta Refrigeration did not fit the Group’s business ideal of being a fast-turnaround, high margin service offering • Post year-end, Filta bought-in FiltaFry GmbH, its master licence in Germany and it is intended that this business, which is already established with 6 franchisees and 7 MFU’s, will provide the platform for expansion in Europe using Filta’s North America franchise model. Franchise Development During the year we accounted for a total of 51 new franchise and territory sales. These contributed £1.3m of Franchise Development revenue in the year whilst we added £0.2m to the Deferred Revenue balance to be carried forward to future accounting periods. Our strategy is to recruit quality Franchise Owners, who have the ambition and business ability to expand their franchises, thereby enlarging the platform for Filta’s own Fryer Management repeat revenues to increase year after year. With Filta now operating in many key markets in the US, we have increasingly used business brokers, who are particularly useful in targeting markets in which we need additional coverage. Sales through brokers accounted for 43% of Filta’s new franchise sales. With this increasing coverage in the US, we will see a reduction in the number of available territories for sale which will result in a decrease of new franchise sales in the US over the coming years. However, it is anticipated that our expansion into Canada, where we expect to have 12-15 multi-unit Franchise Owners in the next few years, and Europe will ensure that the franchise base continues to grow. As our franchise base grows, we are experiencing an increased demand and opportunity for franchise resales with 10 Filta Franchise Owners selling their businesses during 2017, from which we generated fees of £0.1m. We expect resale transactions to grow in value and number in the coming years, which will not only generate increasing fees but will also provide opportunities to strengthen the franchise network. Fryer Management Services Fryer Management Services contributed £8.4m of revenues in the year (2016: £6.2m). Our Franchise Network is both the showpiece and the cornerstone of our business – our franchisees connect us to our markets and our performance reflects their performances. We are committed to providing the franchisees with the necessary support to give them the best chance of success. One of our strategic objectives is to encourage multi-unit franchisees, which helps to allay financial risk and to provide Owners with higher investment returns. In 2017, our highest grossing Franchise Owner achieved over $2m (£1.5m) in revenue and six (2016: four) Franchise Owners recorded over $1m (£0.8m) of revenue. Network revenue, defined as the total revenue of our U.S. based franchisees for all services provided to customers, represents the best indicator of the Filta brands growing strength in the market. Our U.S. franchise network generated $36m (£28m) of revenues in 2017 (2016: $29m/£21m). In supporting our Franchise Owners, we endeavour to lower as many barriers as possible for them with programs such as: • Inside Sales – our Inside Sales Team, which is our “growth engine”, has daily contact with franchise owners and helps them win new customers and upsell new products to existing customers. The team excelled again in 2017. • Tech recruitment – with 394 trucks on the road at year end and growing quickly, hiring and keeping good technicians is the lifeblood of our franchisees’ businesses. To help them in managing this resource, Filta expanded the service to assist in the recruitment and retention of technicians. • National Accounts – we continue to grow our national account customer base with new contracts being signed and greater penetration being driven within existing contracts. • Waste oil – 6K – as the volumes of waste cooking oil collected by our network continues to grow, we have put in place 14 and implementing new operational systems. The integration was relatively straightforward, and the results have fully justified our enthusiasm for expansion into this market. It is our aim to grow this activity through organic growth and further in-fill acquisitions. Germany Post year-end we announced that we had bought in FiltaFry GmbH, our master licence holder for FiltaFry in Germany owned by Jos van Aalst, which had six franchisees with seven MFU’s operating at that date. Traditionally, Filta has engaged directly with licence holders in the UK and North America but sold master licences for other countries in the world. Although this brought in up-front licence fees and allowed us to achieve a broader reach without imposing undue strain on the management resources, it limited the long- term earnings potential for the Group and relied upon the skills of the master-licensee to develop the markets outside the UK and North America. Jos van Aalst has held the master-licence for Germany since late 2014 and we have been impressed with the speed with which he has developed the business in Germany. Aware that he had also had past successes in building other brands across Europe, we developed, with him, a plan to expand our FiltaFry business across key markets in Europe using the successful Filta franchise model employed in the US. In order to do this and to give the venture a starting platform, we decided to buy in the German business from Mr van Aalst and to appoint him as our managing director of European operations. With Jos van Aalst in place as Managing Director of Filta’s European business, the plan is to spend 2018 putting the building blocks in place for the franchise support model in Germany before replicating the US model by expanding the business into adjacent countries with multi-unit franchise owners in the years to come. This will be a long-term project with at least the first 12 months to be focussed on developing the German business and refining the model as needs be for the wider European market. This should be making a positive contribution for the current financial year. International In 2017, we sold the FiltaFry master-license for Eire, which adds to our successful FiltaFry partners in Benelux and South Africa, both of whom are expanding. Although we plan to expand across much of mainland Europe with the US franchise model, we still plan to award Master Licenses in countries where we feel it would be best to have a local Master Franchise Owner develop the market. Filta Refrigeration On 4 January 2018, we completed the sale of Filta Refrigeration and exited the refrigeration business to enable us to concentrate resources on our higher margin businesses FiltaFry, FiltaSeal and FiltaGMG. a program of upgrading the facilities of franchise owners to allow them to increase their storage capacities to 6,000 gallons (22 metric tonnes) of waste oil at one time. This improves the economics for Filta by reducing the collection costs as well as the revenue potential because we are able to sell larger loads at better prices. In the last 12 months, we have upgraded a further 21 facilities in the US to this 6k capacity, giving a total of 51 such facilities. Company Owned Operations (UK) FiltaSeal Revenue from FiltaSeal was £1.3m (2016: £1.0m), reflecting the fact that the number of seals fitted grew by 35%, achieved without the need for additional vans. The increased efficiency of our vans has resulted in a positive contribution to gross margin and, although we are now approaching optimal utilisation, we expect to see this trend continue into 2018. FiltaGMG Revenues from FiltaGMG in the four months since the acquisition of Grease Management Limited were £0.4m. In 2016 we recognised that there was a developing demand, driven by both legislation and commercial efficiency benefits, for the provision of preventative drain maintenance to commercial kitchens. We therefore started supplying and servicing auto- dosing drip systems to keep drains clear for commercial kitchens and it quickly became clear that there was a far greater opportunity if we could broaden our services to include the maintenance of grease recovery units. This is a highly fragmented, but growing, market and so in August 2017 we acquired Grease Management Limited, a company with a strong reputation and a well-established client base in this area of activity. Moreover, it was located just 30 minutes from our offices in Rugby and has been well known to us for many years. With a solid customer base and experienced team, Grease Management Limited was integrated into our existing FiltaDrain business to create FiltaGMG, sharing the existing call-centre resources 15 Financial StatementsGovernanceStrategy and Operations Overview Chief Executive’s Operating Review People Good people are key to any business and we continue to build a great team at Filta, many of whom have worked for the Group for well over 10 years. They have been a key component to our success in that period both through their hard work and dedication to the brand and by the strong relationships they’ve developed with customers and franchise owners alike. In the US, the management team is very stable with Tom Dunn, Chief Operating Officer, continuing to run the day to day business, enabling us to continue executing on our plans. In the UK, we significantly strengthened the management team; Alan Richards was hired as Accounts Manager in August, Alastair Anderson joined as Head of Sales in November, Debbie Sarson-Lowe was promoted from Operations Director to Managing Director in January 2018 with Roscoe Urosevic moving into a Corporate Development role. He will focus on identifying suitable acquisition targets and will assist with the management of our expansion into Europe. This experienced team can drive the UK business forward. With the expansion into Europe, we gained Jos van Aalst whose experience was key in our decision to replicate our US model there. We have also recently added Frank Hartong, an ex-Compass executive, to run the sales department in Germany as we endeavour to develop business for our Franchise Owners. One of the aims of taking Filta public was the ability to offer all employees share options in the business (SAR’s in the US), helping align all goals and giving everybody the opportunity to share in the long-term success of the business. I am pleased to say that we put such a scheme in place and issued options to all staff in May 2017. Systems We are continually improving our systems, with the most notable development in 2017 being the implementation of NetSuite to handle the accounting and reporting for the Group. NetSuite provides real-time financial information to our businesses around the world with its multi-company, multi-book, multi-currency functionality, while also allowing our operational systems to integrate directly, thereby streamlining efficiencies and ensuring accuracy. Market Conditions Despite the economic and political uncertainties that persisted in both the US and the UK through much of 2017, we experienced a steady level of enquiries from potential franchise owners, with many superior quality candidates coming forward. We see no reason for this to change, particularly in view of the strong U.S. economy. Moreover, the Canadian operation is up and running and we are already seeing a strong level of interest, which will help to maintain our progress on the North American continent as the number of available U.S. territories diminishes. With this and the commencement of the German operation we are excited by the prospect of further progress in the year ahead. The market for each of Filta’s services in the UK and US, remained steady throughout the year and we believe that with the ever- increasing health, safety and food hygiene requirements, the demand for our services is likely to remain constant. Current Trading & Outlook In 2017 we continued to build our franchise base and took several strategic steps, including the entry into Canada and the acquisition of Grease Management Limited. This has been followed, more recently, by the purchase of FiltaFry GmbH, all of which laid the ground for further growth and improved margins in the years ahead. Early 2018 has seen the benefit of these actions with further growth in Fryer Management revenues, the recurring revenue engine, while FiltaSeal volumes have experienced a good start to the year. We continue to integrate FiltaGMG and we anticipate an acceleration in revenue and profitability as it builds its client base through the year. Franchise Development remains important to the growth of Fryer Management revenues. We have continued to add new franchises, territories and MFU’s to our franchise platform through the first quarter 16 and are encouraged by the strength of the new business pipeline. Finally, we are already seeing an improvement in our gross margins because of the strategic moves outlined above and we expect this trend to continue through the year. Jason Sayers, CEO, commented: “In 2017 we continued to build our franchise base and took several strategic steps, including the entry into Canada and the acquisition of Grease Management Limited. This has been followed, more recently, by the purchase of FiltaFry Deutschland GmbH, all of which laid the ground for further growth and improved margins in the years ahead. Early 2018 has seen the benefit of these actions with further growth in Fryer Management revenues, the recurring revenue engine, while FiltaSeal volumes have experienced a good start to the year. We continue to integrate FiltaGMG and we anticipate an acceleration in revenue and profitability as it builds its client base through the year. Franchise Development remains important to the growth of Fryer Management revenues. We have continued to add new franchises, territories and MFU’s to our franchise platform through the first quarter and are encouraged by the strength of the new business pipeline. Finally, we are already seeing a modest improvement in our gross margins as a result of the strategic moves outlined above and we expect this trend to continue through the year.” Jason Sayers Chief Executive Officer 16 April 2018 Operational Performance & KPIs The key performance indicators for our Fryer Management Services are:- 1 – Franchise Development Franchise Sales North America UK • The number of new franchisees and territories that we are able to add each year • The number of operating MFU’s in the Group 15 25 19 25 5 4 9 and for our Company-owned services: 2 – Fryer Management • The number of seals that we fit each year MFU’s at the year end • The number of GMG service jobs each North America UK year Our performance against each of these indicators is summarized in the charts: 20 Franchise Sales 394 MFUs at y/e 29,000 Seals Replaced 2017 2016 2015 2017 2016 2015 351 300 250 43 41 39 3 – Company Owned Operations Seals Replaced 28,906 21,345 19,089 FiltaGMG Jobs Performed 1,067 1,240,279 1,026,360 2017 2016 2015 2017 2015 2014 We will seek modest growth in the numbers of franchisees, ensuring that we preserve the quality of our network, and augment this with the sale of additional territories to existing franchisees Each additional MFU has a direct impact on revenues as it increases the earning capacity of franchisees. New MFU’s are commissioned both when a new franchisee is recruited and to enable the expansion of existing franchises. The number of seal repairs should increase as we secure additional customers as, typically, the number of times that a refrigerator seal requires replacement is fairly constant from year to year. FiltaGMG jobs represent the number of individual jobs performed at sites for the FiltaGMG services. Typically a site is serviced every quarter. 17 Financial StatementsGovernanceStrategy and Operations Overview Chief Financial Officer’s Review Summary • Group revenue, from continuing operations, increased 36% to £11.5m (2016: £8.5m) • Fryer Management revenue, primarily recurring in nature, grew 36% to £8.4m (2016: £6.2m) • Profit before tax was £1.6m (2016: loss of £0.3m) • Adjusted EBITDA, from continuing operations, was up 77% to £2.1m (2016: £1.2m) • Deferred income balance grew by £0.2m (£0.5m in constant currency) to £2.9m • Basic earnings per share from continuing operations was 2.90p (2016: loss per share 1.89p) Revenue Group revenue from continuing operations grew 36% to £11.5m (2016: £8.5m). Revenue, from our continuing operations, in North America was £8.3m, 72% of Group revenue (2016: £5.9m, 70%) while the U.K. delivered £3.2m of revenue, 28% (2016: £2.6m, 30%). The 36% increase in revenue was a result of robust growth across each of our core service offerings of Franchise Development, Fryer Management, FiltaSeal and the newly-formed FiltaGMG, following the acquisition of Grease Management Limited in August. Fryer Management Services continues to be the key driver of the business contributing £8.4m of revenue (2016: £6.2m) on higher royalty, national account and waste oil revenues while FiltaSeal experienced a 31% increase in revenue growing to more than £1.3m (2016: £1.0m). We are encouraged by the opportunity that FiltaGMG provides - it has a well-established client base and delivered £0.4m of revenue in the 4 months following its acquisition in late August 2017. The Franchise Development activities also finished the year solidly, up 9%, while maintaining a strong pipeline entering the new year. Adjusted EBITDA Adjusted EBITDA increased 77% to £2.1m (2016: £1.2m) at a significantly higher adjusted EBITDA margin of 18.3% (2016: 14.1%), reflecting utilisation efficiencies brought about by delivering a 36% increase in revenue on an adjusted overhead base that was constant as a percent of sales and supported by our strategy to focus on the provision of higher margin service offerings, including the Grease Management Limited acquisition. Gross profit margins were up to 49.2% (2016: 47.5%). Adjusted EBITDA reconciliation Adjusted EBITDA has been arrived at as follows: Profit/(loss) before tax Acquisition, legal and IPO related costs Share-based payments Depreciation and amortisation Finance costs Adjusted EBITDA 2017 £ 2016 £ 1,607,727 120,280 87,082 209,912 90,952 2,115,953 (328,991) 1,260,539 - 182,032 79,738 1,193,318 Alternative Performance Measures In addition to performance measures (IFRS) directly observable in the financial statements, additional performance measures (Adjusted EBITDA, Network Revenue and EBITDA to Cash Conversion) are used internally by management to assess performance. Management believes that these measures provide useful information as they are used to evaluate performance of business units, to analyse trends in cash-based operating expenses, to establish operational goals and allocate resources. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortisation, exceptional costs and share based franchisees for all services provided to customers and is a meaningful measure of our growth in the markets we serve. EBITDA to cash conversion is an important metric for management as it measures both the efficiency of the Group to convert profits into cash and the effectiveness of our cash management activities. It is calculated by dividing EBITDA by net cash flow from operations (measured by earnings before interest, taxes, depreciation and amortisation divided by net cash flow from operations per the consolidated statement of cash flows). Deferred Revenue Group revenue for the year ended 31 December 2017 includes £0.6m (2016: £0.5m) which was released from brought forward deferred income during the year and we generated a further £1.0m of deferred revenue, of which £0.1m relates to opening package fees for franchises that will start in 2018, and will therefore be recognised in that year, and £0.9m relates to territory fees on both new and existing 18 franchises and will be recognised over the life of the franchise agreement. The deferred revenue balance grew by £0.2m to £2.9m but was impacted by the foreign exchange effect of a weakening dollar which had a £0.3m negative effect on the year-end balance. The following chart shows the components of the change in deferred revenue in 2017. £2,711,358 -£565,829 £876,312 £155,894 -£240,408 £225,969 £2,937,327 Deferred Revenue Added Foreign Exchange Change in Deferred Revenue Deferred Revenue Balance Deferred Revenue Balance Deferred Revenue Released Deferred Revenue Added Start of Current Period Franchise Territory Fees recognized to the P&L from Balance Sheet New Sales of Franchise Territories during current period added to the Balance Sheet Q4 2017 Delayed Starts added to the Balance Sheet Amount in the “Adjusted” section of the current period’s financial results End of Current Period At the end of 2017, the deferred income account totalled £2.9m, and will be recognized as income over the next 10 years as follows: £426,533 £419,278 £412,441 £397,440 £347,916 £307,425 £260,079 £190,266 £123,936 £52,008 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 19 Financial StatementsGovernanceStrategy and Operations Overview Chief Financial Officer’s Review Discontinued Operations Following an agreement to sell certain assets of the Group subsidiary, Filta Refrigeration Limited, the transaction was completed on 4 January 2018 and the Group has exited its refrigeration business. The results of Filta Refrigeration are therefore disclosed as a discontinued operation and will not make any measurable contribution to the Group’s future earnings. In 2017, Filta Refrigeration contributed a net profit of £0.03m (2016: £0.1m). The tax impact of discontinued operations is £Nil (2016: £Nil). Acquisitions On 22 August 2017, we acquired Grease Management Limited, a provider of drain-related services in the UK, for a total consideration of £1.2m. This business contributed £0.4m to group revenue and £0.2m to the group’s adjusted EBITDA during 2017. Taxation We manage all taxes, both direct and indirect, to ensure that we pay the appropriate amount of tax in each country while ensuring that we respect the applicable tax legislation and utilise, where appropriate, any legislative reliefs available. This tax strategy is reviewed, regularly monitored and endorsed by the Board. The effective tax rates on income were 38% in the U.S. and 19.3% in the U.K. The U.S. federal corporate income tax rate has reduced from 35% to 21% following the substantive enactment of US tax reform on 22 December 2017. This necessitated a re-measurement of the existing US deferred tax position in the period to 31 December 2017. As a result, the current year expense includes a non-cash tax accounting charge of £0.3m. Accordingly, the tax expense for the year was £0.8m (2016: £0.1m). Earnings per share The basic earnings per share for the year, from continuing operations, is 2.90p (2016: loss per share of 1.89p) while the basic and diluted earnings per share, from continuing and discontinued operations, is 2.99p (2016: loss per share of 1.89p). However, both earnings per share measures were significantly impacted by the effects of the £0.3m deferred tax charge related to the change in the U.S. tax rate. Cash flows and cash balance The Group is establishing a consistent record of cash generation with an EBITDA to cash conversion rate of 71%. Cash conversion measures our success in converting operating profit (measured by earnings before interest, tax, depreciation and amortisation (‘EBITDA’) to cash and reflects both the quality of our earnings and the effectiveness of our cash management activities. The net cash inflow from operations before certain acquisition and legal costs (note 29 to the financial statements) in 2017 was £1.5m (2016: £1.3m). The main cash outflows related to the acquisition of Grease Management Limited £1.2m (2016: £Nil), cash taxes £0.5m (2016: £0.3) and dividends £0.2m (2016: £Nil). At the year end the Group had cash balances of £4.0m (2016: £4.4m) and outstanding borrowings of £1.1m (2016: £1.2m). Brian Hogan Chief Financial Officer 16 April 2018 20 Principal Risks and Uncertainties The board has carried out an assessment of the principal risks facing the business, which are seen to be as follows: Risk How we manage the risk Change in risk during the year Comment Organisational risks Failure to attract new franchisees in line with the strategic targets may prevent the Group from achieving its operating targets The failure of a major franchisee may lead to a loss of revenue and/or a bad debt Brand or reputational damage may be caused by the actions of either franchisees or the company’s own employees Undue influence by a major shareholder on the Company and its Board may lead to decisions or actions which are not in the best interests of the business Operational risks incident An involving an employee or franchisee in the operation of an MFU may result in a fatal or serious injury A failure of the information or accounting systems employed by the Group or a cyber- attack or data security breach may cause a loss of vital information or render the Group unable to maintain adequate accounting records the USA, which represents In approximately 80% of the franchised operations, we have an increasing number of franchisees who are multi- unit operators, a trend which we are endeavouring to develop. Thus, there is an increasing number of our new MFUs which are being taken up by existing franchisees. We now have 184 franchisees, and this is increasing each year, with no franchisee accounting for more than 1% of the Group’s revenues, thus mitigating our business risk. franchisees and initial training We provide detailed for all new their operators. There are also refresher training programmes to ensure that all franchisees are fully cognisant of all procedures to be followed. There is a majority of the Board who are not associated with those members of the Board who are considered to be a concert party and whose obligations to act in the best interests of shareholders as a whole are unfettered. We provide regular and comprehensive training to employees and franchisees in the operation of MFU’s and other equipment supplied or used in the Group’s business and the procedures are reviewed regularly to ensure the highest safety levels. The Group has employed the same information system for several years with a strong reputation and has proved to be highly reliable. It has recently upgraded its accounting system to a “state-of- the-art” system which also has a good reputation and is used by many major organisations. No change in risk ➔ Strong pipeline in both the U.S. and Canada in place. No change in risk ➔ The composition of our franchise base continues to diversify. No change in risk ➔ Management focuses on positive brand awareness through and strongly monitors its results. training No change in risk ➔ The risk has not changed year. The the during composition has Board remained constant with strong oversight from the independent directors. No change in risk ➔ The risk has not changed during the year. The risk is monitored both internally and through third party inspections. Decrease in risk ➔ Our conversion to a new cloud-based, global, accounting platform supported by a tier one provider has enhanced reliability and data integrity. Additionally, we undertake a periodic review process to ensure we have adequate IT security measures in place. 21 Financial StatementsGovernance OverviewStrategy and Operations Principal Risks and Uncertainties Risk How we manage the risk The loss of key people may compromise the Group’s or any part of the Group’s ability to operate effectively. Failure to comply with new GDPR requirements in the U.K. and mainland Europe. Financial Risks A significant fall in the value of the US Dollar (which accounts for approximately 70% of the Group’s earnings) against £ sterling may have an adverse impact on the Group Strategic Risks Competition from new entrants to the market may create margin pressure or loss of customers Change in consumer tastes or habits, as a result, for example, of pressures from health watchdogs, may result in less demand for fryers. Improved fryer technology may reduce/ resolve deterioration of the oil and therefore require less frequent filtering and replacement. Franchisees may seek to impose commercial leverage on the Group, resulting in reduced margins and profitability 22 thereby ensuring We have widely spread knowledge of the Group’s operational systems and procedures, that there is not over-dependence on any single person. We also have continuous monitoring systems for the identification and progress with new business opportunities, ensuring that there is a broad knowledge of such opportunities. We have undergone a detailed assessment of the readiness of the business and an action plan is being developed with support of appropriate external advisors. the Change in risk during the year No change in risk ➔ Comment We have done considerable work this year to improve for talent our processes retention management, and succession planning. New risk ➔ have We assigned dedicated resources and are working with an external consultant to ensure we are in compliance. No change in risk ➔ The Group’s activities are such that, the US Dollar costs are covered by US Dollar revenues and, similarly, sterling costs are covered by sterling revenues. Furthermore, any third-party debt is able to be serviced by earnings in the currency of the debt and secured by appropriately denominated assets. While the uncertainty of the risk has changed slightly this year we do not see a material effect. The risk is monitored on a regular basis against both in-house and external mitigation options. We have established a market- leading position amongst the third- party providers of our services and we continually seek to improve our service offering to ensure that we have the best option available. The demand for fried food has always been and continues to be enormous. We consider that the services that we provide help to mitigate the health risks of eating fried foods. Whilst the technologies may improve, there will always be deterioration of the oil and, therefore, a need for filtering and replacement. The Board believes that any improvements in technology will simply drive standards to a higher required level. We devote a great deal of resource to protecting and assisting our franchisees, thereby building a strong bond of trust. We believe that, for as long as we provide the best option and the opportunity for franchisees to achieve success, there would be little reason for them to seek commercial advantage. No change in risk ➔ We have not witnessed any significant change in our competitive landscape. No change in risk ➔ The risk has not changed during the year. No change in risk ➔ changes The Group is continually reviewing in and works technology collectively its suppliers to ensure we fully understand future changes. with No change in risk ➔ franchise base Our to grow and continues diversify which helps us ameliorate any potential risk. Principal Risks and Uncertainties Governance Board of Directors 24 Corporate Social Responsibility Report 26 27 Corporate Governance Statement 30 Directors’ Remuneration Report 33 Directors’ Report 23 23 Financial StatementsGovernance OverviewStrategy and Operations Corporate Social Responsibility Report 2.1m lts Fuel Saved 600 mt Plastic Saved 28.4k mt Carbon Offset The whole concept of FiltaFry was built around sustainability. That, combined with its commitment to the community, demonstrates Filta’s social responsibility. Environment Filta services over 6,000 customers every week and to date has recycled almost ¼ million metric tonnes (‘mt‘) of oil! Filta has been helping the environment before “environmentally friendly” was called “being green.” To support Filta customer’s sustainability initiatives, measurable / quantifiable Environmental Impact Reports™, detailing their contribution to the environment are provided directly to customers on a regular basis. For samples go to www.gofilta.com/ go_green We believe it is our responsibility to contribute to the environment. We’re constantly in search of ways to be green internally and externally. We also every day, continue to do our part to preserve the environment. Every product and service we offer goes through rigorous testing to ensure we are increasing sustainability while saving our customers money. We believe it’s our responsibility to keep customers aware of what they can do to contribute. Environmental Impact Facts FiltaFry In 2017, FiltaFry customers saved over 8,500 mt of fry oil. Using the Environmental Impact Report app, available to all Franchise Owners, we calculate that this equates to the following savings for the environment due to the oil being reused: Fertilizer Lime Petrol & Diesel Plastic Cardboard Carbon offset 640 mt 5,500 mt 2.1m lts 600 mt 400 mt 11,100 mt FiltaBio In 2017, Filta collected 7,700 mt of waste oil from customers which was converted to biodiesel. The environmental savings for using biodiesel in place of diesel are shown below: Carbon Monoxide (Greenhouse Gas) Carbon Dioxide (Greenhouse Gas) 48 mt 17,500 mt 7,280 971 208 5,824 777 Fryertown Grille 123 Main Street, Fryertown, OK 12/01/2016 - 11/30/2017 7,280 pounds 5,824 pounds 13.9 9.8 15.6 582.4 4,963.7 249.6 166.4 156.2 55.5 17.5 91.8 10.1 810.0 4,662.1 233 3.9 4.4 43.2 3.4 15,802.5 790 Fryertown Grille 12/01/2016 - 11/30/2017 416 LBS 20,508 LBS 598 LBS 1,023 TREES 2424 Today, FiltaCares continues the corporate commitment. As a “Mavericks” level corporate sponsor our financial support and continued participation will aid The Oceans of Hope Foundation to unlock barriers that exist for individuals who have difficulty traversing the world of sun, sand, wind, and water by introducing individuals with limited mobility to adaptive surfing. See www.gofilta.com/company/filta-cares. Quick facts on Filta and Oceans of Hope: • First participated in the May 2014 New Smyrna Beach, FL surf event • Sponsored or participated in 13 events since 2014 • 405 participant athletes with limited mobility experienced adaptive surfing since 2014 • “Mavericks” level sponsorship 2016 and 2017 • FiltaCares Campaign to continue support through 2017 Community Since 2014, Filta has sponsored The Oceans of Hope Foundation with corporate volunteers and through ongoing charitable giving. Our Filta Corporate Office staff was inspired by the organization through our own Inside Sales Rep, Danny Paltjon. For those who do not know Danny’s story, on May 1, 2003, he sustained a serious spinal cord injury while playing in a Men’s softball game. An avid outdoorsman and athlete, he was unprepared to face his “new life” limited to a wheelchair. After years of therapy, Danny sought to recapture his adventurous spirit and realized anything is possible with determination and the help of others. In light of this, Danny started a non-profit organization called Oceans of Hope Foundation. It was established to offer individuals who are physically or mentally challenged the opportunity to get into the ocean water and experience the joy of riding ocean waves. The mission statement of Oceans of Hope is simple: To provide safe, secure and competent support of access to outdoor recreation resources for those who are physically or mentally challenged, which will instill a sense of personal self-confidence, self-reliance and hope. 25 Financial Statements OverviewStrategy and OperationsGovernanceHEAD_0 1st line Board of Directors Tim Worlledge Non-Executive Chairman Tim is a Director of Evolution Securities China with 30 years’ experience in financial services. Tim is a former Director of the Quoted Companies Alliance and Head of Corporate Finance at Evolution Group and Williams de Broe. Jason Sayers Chief Executive Officer Jason founded Filta in the UK in 1996 and has been the driving force for the business. Jason moved to Florida in 2003 to successfully grow the US business. Jason has a degree in European Business System and Major Systems Analysis. Brian Hogan Finance Director Brian is a senior financial executive with 30 years’ experience including roles as the Corporate Controller at Andersen Distribution and Vice President of Finance Amkor Technologies (based in Asia). Since 1995 Brian has held various North American Vice President and Chief Financial Officer roles, most recently as Chief Financial Officer at Canada-based private equity firm Cobalt Capital Inc. Brian has a degree in Accounting, an MBA and Certified Public Accountant (inactive). Victor Clewes Executive Director Victor is a former land and property buyer for CCHA Housing Association, founded Emerson Richards estate agency and financial services (1987) and consequently in 2000 the first high street mortgage broking chain, The Mortgage Advice Shops, which were franchised throughout the UK. Victor joined Filta at inception as Managing Director (1996) to develop the franchise business model and has steered the US operation to date as Chairman. Jlubomir Urosevic Executive Director Jlubomir joined FiltaFry Ltd in 1999 as Commercial Director, becoming Managing Director of the UK operations in 2000 and currently serves in the role of Corporate Development Director for the UK. Jlubomir has overseen the FiltaFry UK franchise network, developed the internal franchise network and has introduced FiltaSeal and FiltaGMG services to the business. Jlubomir was formerly a Midlands Area Manager and Regional Developer Wales & South West for TNT, co-developing the successful TNT overnight business. Graham Woolfman Non-Executive Director Graham is a Fellow of the Institute of Chartered Accountants in England & Wales and s/b previously and Head of Corporate Finance at Levy Gee. Graham has over 25 years’ experience advising growth businesses and was a founder Director of Gateway VCT plc. Graham is currently Managing Director of Intrust Corporate Finance Limited. Roy Sayers Non-Executive Director Roy was appointed Non-Executive Director of Filta Group UK in 2000 serving the company from that date. RS has a background in civil engineering and property development, founding, operating and running his own companies in both sectors for many years. 2626 Corporate Governance Statement Compliance As the company is listed on the AIM Market of the London Stock Exchange, it is not required to comply with the provisions of the UK Corporate Governance Code (the “Code”). However, the Directors recognise the value and importance of meeting the principles of good corporate governance and have chosen to follow the provisions of the Corporate Governance Code for small and mid-sized quoted Companies, published by the Quoted Companies Alliance (the ‘QCA Code’). Adoption of the QCA Code is not mandatory and therefore this report does not seek to follow the ‘comply or explain’ approach with respect to each departure from the Code. This part of the Report describes how Filta complies with the Guidelines set out in the QCA Code and the corporate governance arrangements that are in place. The Board At the date of this Report, the Board has seven members, whose biographies are set out on page 26 and whose roles are set out below: Director’s Name Position(s) Tim Worlledge Jason Sayers Brian Hogan Victor Clewes Jlubomir Urosevic Roy Sayers Graham Woolfman Non-Executive Chairman – member of Audit Committee and Chairman of Remuneration Committee Executive Director – Group Chief Executive Officer Executive Director – Group Chief Financial Officer Executive Director Executive Director Non-Executive Director – member of Audit Committee and of Remuneration Committee Non-Executive Director – Chairman of Audit Committee and member of Remuneration Committee. Responsibilities The Board, as a whole, is responsible for the overall management of the Group and for its strategic direction, including approval of the Group’s strategy, its annual business plans and budgets, the interim and full year financial statements and reports, any dividend proposals, the accounting policies, major capital projects, any investments or disposals, its succession plans and the monitoring of financial performance against budget and forecast and the formulation of the Group’s risk appetite including the identification, assessment and monitoring of Filta’s principal risks. In accordance with best practice, Filta has adopted a policy of Matters Reserved for the Board. These are reviewed annually, and any items not included within the policy (such as responsibility for implementing the Board’s strategy and day- to-day management of the business) are delegated to the management team. The Chairman’s principal responsibilities are to ensure that the Company and its Board are acting in the best interests of shareholders. His leadership of the Board is undertaken in a manner which ensures that the Board retains integrity and effectiveness. The Group Chief Executive Officer has, through powers delegated by the Board, the responsibility for leadership of the management team in the execution of the Group’s strategies and policies and for the day-to-day management of the business. The Board has regular contact with its advisers to ensure that it is aware of changes in normal corporate governance procedures and requirements and that the Group is, at all times, compliant with applicable rules and regulations. The Company holds appropriate insurance cover in respect of possible legal action against its Directors. Non-Executive Directors and Independence The Directors are satisfied that the balance of Executive and Non-Executive Directors is appropriate and that no individual or group may dominate the Board’s decisions. The Non-Executive Directors, together, have a range of experience which enables them to provide the necessary guidance, oversight and advice to enable the Board to operate effectively. Tim Worlledge and Graham Woolfman, Chairman and Non-Executive Director, are considered to be independent of management. Roy Sayers, as a significant shareholder and being related to the Group Chief Executive, is not considered to be independent. The Chairman and the Non-Executive Directors have letters of appointment, which set out their duties and responsibilities. They are not eligible to participate in incentive arrangements or to receive pension provision. The following table shows details of their terms of appointment in place at the date of this Report: Director Tim Worlledge Roy Sayers Graham Woolfman Date Current Term Commenced Expected Expiry Date of Current Term 04/11/2016 04/11/2016 04/11/2016 03/11/2019 03/11/2019 03/11/2019 2727 Financial Statements OverviewStrategy and OperationsGovernance Corporate Governance Statement All Directors may receive independent professional advice at Filta’s expense, if necessary, for the performance of their duties. This is in addition to the access every Director has to the Company Secretary. The Company Secretary is responsible for advising the Board on all matters of corporate governance, ensuring that all Board procedures are followed and facilitating training. Attendance at Board and Committee meetings Supported by the Company Secretary, the Board has ten scheduled meetings per year and its agendas are set to focus on strategy and key decisions and to enable proper monitoring and oversight of the business to be undertaken. There is a schedule of matters which are reserved for the Board and documentation in place to clarify the nature and extent of delegations. In particular, the division of responsibility between the Chairman, who is responsible for leading the Board and its governance of the Company, and the Chief Executive Officer, who is responsible for management of the business and delivery of the Company’s strategy, is clear. Appointment and Resignation of Directors Jason Sayers and Roy Sayers were appointed as Directors on 31 March 2016, upon the formation of the Company and the remaining Directors were appointed on 10 June 2016. At the forthcoming AGM, Roy Sayers and Brian Hogan will be retiring by rotation under the Articles of Association and standing for reappointment. There is a programme of regular reviews of performance and developing best practice in matters such as employment, health and safety, environmental and social and community interests (including human rights and ethical issues). Filta believes that Corporate Social Responsibility is necessary to support responsibly-grounded business decision making that considers the broad impact of corporate actions on people, communities, and the environment. Accordingly, the Board takes account of the significance of environmental, social and governance matters (ESG) when making decisions. The Board has adopted principles of good boardroom practice which set out procedures on how Directors are given accurate, timely and clear information and how they can seek and obtain information or advice necessary for them to discharge their duties and these arrangements are reviewed annually as part of the Board’s evaluation process referred to above. Under the Companies Act 2006, a director must avoid a situation where he/she has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interest. The Companies Act 2006 allows directors of public companies to authorise conflicts and potential conflicts where appropriate and where the articles of association contain a provision to this effect, as Filta’s Articles do. Accordingly, the Board has adopted procedures for the Directors to report any potential or actual conflict to the Board for their authorisation where appropriate. Each Director is aware of the requirement to seek approval of the Board for any new conflict situations, as they may arise. The process of reviewing conflicts disclosed, and authorisations given, is repeated both annually and following the appointment of any new Director. Any conflicts or potential conflicts considered by the Board and any authorisations given are recorded in the Board minutes and in a register of Director’s conflicts which is maintained by the Company Secretary. Financial Risk Management The Group and the Company are exposed, through its operations, to the following risks: • Market risk • Foreign currency risk • Interest rate risk • Credit risk • Liquidity risk In common with all other businesses, the Group and the Company are exposed to risks that arise from their use of financial instruments. Further quantitative information in respect of these risks is presented in note 28 to the financial statements. Board Committees The Board has delegated specific responsibilities to two standing committees of the Board: Audit and Remuneration. The membership of these committees and a summary of their main duties under their Terms of Reference are set out below. The full Terms of Reference may be viewed on the Group’s website (www.filtaplc.com). The Terms of Reference for each of the Committees were set at the time of the admission to AIM but they are reviewed continuously to ensure ongoing compliance with best practice and in response to amendments to FRC guidance. 28 HEAD_0 1st line The Board has elected not to establish a Nominations Committee, preferring instead that the Board should, itself, deal with such matters, including succession planning and the balance of the Board. Audit Committee The Board has established an Audit Committee comprising the Company’s three Non-Executive Directors, which is chaired by Graham Woolfman, FCA, who has recent and relevant financial experience, both as a result of his formal qualifications and his roles elsewhere. The Committee is responsible for oversight of the Company’s financial statements, risk management, audit and auditor relationship, and internal controls and procedures. The Audit Committee, supported by the Company Secretary, plans appropriately on an annual basis to enable it to discharge its duties as set out in its terms of reference. The Group’s external auditors and Executive Directors attend the Committee’s meetings by invitation and the Committee ensures that the auditors also have an opportunity to speak to the Committee in the absence of management. Remuneration Committee The Board has also established a Remuneration Committee to oversee remuneration policy and determine the remuneration and benefits of the Company’s Executive Directors as well as other terms relevant to their appointment. This Committee also comprises the Company’s three Non-Executive Directors and is chaired by Tim Worlledge. A Remuneration Report from the Chairman of the Remuneration Committee is set out on pages 25 to 27. Board Attendance The Directors of the Company are committed to sound governance of the business and each devotes sufficient time to ensure this happens. The table below sets out attendance statistics for each Director at Board, Special, and where relevant, Committee meetings held during the financial year. Director Tim Worlledge Graham Woolfman Roy Sayers Jason Sayers Victor Clewes Jlubomir Urosevic Brian Hogan Board attendance 13 meetings held Audit Committee attendance 3 meetings held Remuneration Committee attendance 2 meetings held 13 13 13 13 13 13 13 3 3 3 - - - - 2 2 2 - - - - Relations with shareholders Filta places a great deal of importance on communication with its stakeholders and is committed to establishing constructive relationships with investors and potential investors in order to assist it in developing an understanding of the views of its shareholders. Filta maintains a dialogue with shareholders through formal meetings such as the AGM and through presentations to institutional shareholders, typically by the Group Chief Executive and the Group Finance Officer, following the full year and interim results. A main purpose of such meetings is to appreciate better shareholders’ views and expectations and to enhance investors’ understanding of the Company’s strategy and how that strategy is to be implemented. The views of the shareholders expressed during these meetings are reported to the Board, ensuring that all members of the Board understand the views of major shareholders. Information on the Investor Relations section of the Group’s website (www.filtaplc.com) is kept updated and contains details of relevant developments, regulatory announcements, financial reports and results presentations. Securities Dealing Code Filta has adopted a code on securities dealings in relation to its Ordinary Shares and related securities which is compliant with AIM rule 21 and the EU Market Abuse Regulation. This code applies to Directors and relevant employees of Filta. 29 Financial Statements OverviewStrategy and OperationsGovernanceHEAD_0 1st line Directors’ Remuneration Report The Directors present their Remuneration Report for the year ended 31 December 2017. Committee Details of the Remuneration Committee’s composition and responsibilities are set out in the Corporate Governance Statement on pages 27 to 29. During the year ended 31 December 2017, the committee met twice. The terms of reference of the Committee are available from the Company Secretary or the Group’s website at: www.filtaplc.com. Company’s policy on remuneration of Directors The Board recognises that the Directors’ remuneration is of legitimate concern to Shareholders and is committed to following current best practice. The Remuneration Committee has responsibility for determining, within agreed terms of reference, the Group’s policy on the remuneration of senior executives and specific remuneration packages for Executive Directors including pension payments and compensation rights. It is also responsible for making recommendations for grants of options under the Share Option Plan. The remuneration of Non-Executive Directors is a matter for the Board. It comprises fees in connection with their services provided to the Group, to the Board and to Board Committees. No Director may be party to the approval process of their own remuneration. The main components of their remuneration are: Basic salary or fees The basic salary or fees for each Director are determined by the Remuneration Committee, taking into account the performance of the individual and information, where available, on the rates of salary for similar posts in comparable businesses. Annual bonus Bonuses paid to Directors in 2017 were £0.02m (2016 pre-admission: £0.7m). Pension There were no contributions made by the Group to Directors’ pension plans during the year. Share options plans Upon the recommendation of the Committee, the Board established the Filta Group Holdings Enterprise Management Incentive Plan (‘EMI’ or ‘The Plan’) and it has offered options to all qualifying U.K. employees. Additionally, all qualifying U.S. employees were awarded Share Acquisition Rights (‘SAR’s’) which follow the structure of the EMI Plan to provide holders of SAR’s the same reward value as if the SAR’s were share options. The Plan includes both time and performance-based criteria. Due to the size of their existing beneficial holdings, Jason Sayers, Victor Clewes and Jlubomir Urosevic are not permitted to participate in the Share Option Plan. The Non-Executive Directors are also not permitted to participate in the Plan. Brian Hogan, who has been awarded SAR’s, is the only director currently participating in the Company’s share options plans. Taxable benefits Four of the Directors are provided with company cars and three with company paid medical insurance but, apart from these benefits, none of the Directors receives any other taxable benefits. 3030 Directors’ emoluments The Directors’ emoluments during the year are set out below: Executive Directors Jason Sayers Brian Hogan Victor Clewes Jlubomir Urosevic Non-Executive Directors Tim Worlledge Roy Sayers Graham Woolfman Total Salary/Fees £ Bonus £ Pension £ Benefits £ 193,698 96,849 193,698 85,000 35,000 30,000 30,000 664,245 – 19,370 – – – – – 19,370 – – – – – – – – 23,963 4,017 11,850 6,769 – 2,453 – 49,052 2017 Total £ 217,661 120,236 205,548 91,769 35,000 32,453 30,000 723,667 2016 Total £ 539,298 99,124 529,248 101,159 5,833 17,333 5,000 1,296,994 Company’s policy on contracts of service The Executive Directors have service contracts whose notice periods may not exceed 12 months in length. Their service contracts do not contain any provisions which provide for pre-determined compensation on termination which exceeds 12 months’ salary and benefits. Non-Executive Directors are appointed under letters of appointment which may be terminated on 3 months’ notice. Details of notice periods for each of the Directors under their contracts of service or letters of appointment are: Executive Directors Jason Sayers Brian Hogan Victor Clewes Jlubomir Urosevic Non-Executive Directors Tim Worlledge Roy Sayers Graham Woolfman Date of contract 26 October 2016 26 October 2016 26 October 2016 26 October 2016 26 October 2016 26 October 2016 26 October 2016 Notice period 6 months 6 months 6 months 6 months 3 months 3 months 3 months Directors’ interests The interests and beneficial interests of the Directors in the shares of the Company at 31 December 2017 are set out below: No of Shares No of Share options/SAR’s Executive Directors Jason Sayers * Brian Hogan Victor Clewes Jlubomir Urosevic Non-Executive Directors Tim Worlledge Roy Sayers * Graham Woolfman 11,614,680 – 4,558,750 1,309,690 30,000 9,688,720 18,000 – 90,000 – – – – – * includes 7,926,560 shares held by The Meredian Settlement Trust. Roy Sayers is the settlor and a trustee of the Trust. Jason Sayers is a life tenant and he and Mrs. Dawn Sayers, wife of Roy Sayers, are the beneficiaries of the Trust. 31 Financial Statements OverviewStrategy and OperationsGovernanceHEAD_0 1st line Directors’ Remuneration Report Consideration of Shareholder Views The Remuneration Committee considers feedback received from Shareholders during any meetings or otherwise from time to time, when undertaking the Group’s annual review of its Policy. In addition, the Remuneration Committee will seek to engage directly with institutional Shareholders and their representative bodies should any material changes be made to the Policy. Consideration of Employment Conditions elsewhere in the Group The Remuneration Committee considers any general basic salary increase for the broader employee population when determining the annual salary increases for the Executive Directors. The Remuneration Committee did not consult with other employees with regard to remuneration of the Executive Directors. 32 HEAD_0 1st line Directors’ Report The Directors present their report and the audited financial statements for the year ended 31 December 2017. Principal Activity The Strategic Report, which is set out on pages 6 to 13 provides a comprehensive review of the development, performance and future prospects of the business for the year ended 31 December 2017 including a description of the Company’s strategy, business models and business overview. Results and Dividends The profit for the year was £0.8m (2016: loss of £0.3m). Further details are set out on Page 40. First and second interim dividends of 0.19p and 0.65p respectively were paid during the year. The Board has proposed a final dividend for the year, subject to approval at the Annual General Meeting, of 0.65p. No dividend was paid in the prior year. Annual General Meeting The Annual General Meeting of the Company will take place on 5 June 2018 at The Locks, Hillmorton, Rugby, Warwickshire, CV21 4PP, commencing at 10:00 a.m. Details of the resolutions and voting procedures are set out in the Notice of Annual General Meeting which is being posted to shareholders and can be found on the Company’s website. Directors The names of the Directors who served during the year were: Executive directors Jason Sayers Brian Hogan Victor Clewes Jlubomir Urosevic Non-Executive Directors Tim Worlledge Roy Sayers Graham Woolfman Appointed 31 March 2016 10 June 2016 10 June 2016 10 June 2016 10 June 2016 31 March 2016 10 June 2016 The profiles of the Directors of the Company serving at the date of issue of this report are set out on page 26. No Director during the year had a material interest in any contract of significance to which either the Company or any of its subsidiaries were a party. Share Capital The Company’s issued share capital comprises a single class, which is divided into ordinary shares of 10 pence each, details of which are set out in Note 26 of the financial statements. All the Company’s issued ordinary shares are fully paid up and rank equally in all respects. As at 31 December 2017, there were 27,132,660 ordinary shares in issue. The rights and obligations attached to these shares are detailed in the Articles of Association of the Company, copies of which can be obtained from the Companies House in the UK, or by writing to the Company Secretary, at the registered office of the Company. 3333 Financial Statements OverviewStrategy and OperationsGovernance Directors’ Report Substantial Interests As at 31 December 2017, the shareholders of the Company holding interests amounting to 3% or more of the ordinary share capital of the Company were as follows: Shareholder Name Meredian Settlement Trust * Victor Clewes Jason Sayers Roy Sayers Jlubomir Urosevic Livingbridge VC LLP Ennismore Fund Management Limited Blackrock, Inc Number of ordinary shares Percentage of issued ordinary shares 7,926,560 4,558,750 3,688,120 1,762,160 1,309,690 2,644,000 1,538,480 850,000 29.2 16.8 13.6 6.5 4.8 9.7 5.7 3.1 * Roy Sayers is the settlor and a trustee of the Meredian Settlement Trust. Jason Sayers is a life tenant and he and Mrs. Dawn Sayers, wife of Roy Sayers, are the beneficiaries of the Trust. The percentage of the ordinary shares that are not held in public hands is 71.1%. There are no restrictions on the transfer of Filta Group Holdings plc’s AIM securities. Filta Group Holdings plc has not applied or agreed to have any of its securities (including its AIM securities) admitted to or traded on any other exchanges or trading platforms. Political Contributions It is the Group’s policy not to make political donations, accordingly there were no political donations made during the year (2016 – £ Nil). Going Concern The directors have prepared the financial statements on the going concern basis, full details of which are set out in note 2 to the financial statements. Independent Auditors Our auditor, Crowe Clark Whitehill LLP has indicated its willingness to continue in office as auditor of the Company. In accordance with section 489 of the Companies Act 2006, the Board has decided to re-appoint Crowe Clark Whitehill LLP as auditor and a resolution concerning its re-appointment will be tabled to the members at the forthcoming Annual General Meeting. Post Year-End Developments On 4 January 2018, the Group announced the sale of its subsidiary, Filta Refrigeration Limited. Additionally, on 31 January 2018 the Group announced the acquisition of FiltaFry Deutschland GmbH, the company which owns the master franchise licence for Filtafry in Germany. Review of the Business The Group is required to set out a fair review of the business and future developments of the Group during the financial year ended 31 December 2017 and the position of the Group at the year end. This information can be found in the Chairman’s Statement on pages 2 to 4, the Chief Executive Officer’s Review on pages 14 to 17 and the Chief Financial Officer’s Review on pages 18 through 20. Financial Risk Management Details are set out in the Corporate Governance Report and in note 28 to the financial statements. Statement of Directors’ Responsibilities The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. 34 HEAD_0 1st line Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable IFRSs as adopted by the EU have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company’s website, which includes compliance with AIM Rule 26; the work carried out by the auditor does not involve the consideration of these matters and, accordingly, the auditor accepts no responsibility for any changes that may have occurred in the accounts since they were initially presented on the website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Each of the Directors, whose names and functions are disclosed on page 26 and who were in office on the date of approval of these financial statements have confirmed that, as far as they are aware, there is no relevant audit information of which the auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the auditor. Approval The Report of the Directors’ was approved by the Board on 16 April 2018 and signed on its behalf by: Brian Hogan Chief Financial Officer 16 April 2018 35 Financial Statements OverviewStrategy and OperationsGovernanceHEAD_0 1st line Financial Statements 39 42 43 44 45 46 47 Independent Auditor’s Report to the Members of Filta Group Holdings PLC Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Parent Company Statement of Financial Position Parent Company Statement of Changes in Equity Parent Company Statement of Cash Flow Notes to the Financial Statements 48 49 72 Corporate Information 36 Independent Auditor’s Report to the Members of Filta Group Holdings PLC year ended 31 December 2017 Opinion We have audited the financial statements of Filta Group Holding plc (the “parent company”) and its subsidiaries (the “group”) for the year ended 31 December 2017, which comprise: • the group statement of comprehensive income for the year ended 31 December 2017; • the group and parent company statements of financial position as at 31 December 2017; • the group and parent company statements of cash flows for the year then ended; • the group and parent company statements of changes in equity for the year then ended; and • the notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. In our opinion: • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2017 and of the group’s profit for the year then ended; • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: • The directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • The directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Overview of our audit approach Materiality In planning and performing our audit we applied the concept of materiality. An item is considered material if it could reasonably be expected to change the economic decisions of a user of the financial statements. We used the concept of materiality to both focus our testing and to evaluate the impact of misstatements identified. Based on our professional judgement, we determined overall materiality for the group financial statements as a whole to be £90,000 based on a percentage of profit before tax. We use a different level of materiality (‘performance materiality’) to determine the extent of our testing for the audit of the financial statements. Performance materiality is set based on the audit materiality as adjusted for the judgements made as to the entity risk and our evaluation of the specific risk of each audit area having regard to the internal control environment. Where considered appropriate performance materiality may be reduced to a lower level, such as, for related party transactions and directors’ remuneration. We agreed with the Audit Committee to report to it all identified errors in excess of £5,000. Errors below that threshold would also be reported to it if, in our opinion as auditor, disclosure was required on qualitative grounds. 37 Financial StatementsGovernance OverviewStrategy and Operations Independent Auditor’s Report to the Members of Filta Group Holdings PLC year ended 31 December 2017 Overview of the scope of our audit The finance functions of the parent company and its UK subsidiaries are based in the US and UK, respectively. A member firm of Crowe Horwath International network in the US (the ‘component auditor’) undertook a full scope audit of Filta Group Inc., under our direction. Filta Group Inc., accounts for approximately 80% of the group’s profit before tax and 75% of the group’s revenue. We were involved in the audit of Filta Group Inc., from the planning stage through to completion. This involved a combination of conference call meetings, detailed working paper review and meetings and discussions with the audit committee. We reviewed a complete set of working papers for Filta Group Inc. and challenged the findings of the component auditor and discussed matters with management. Our audit of the group’s UK operations was performed at the UK headquarters in Rugby. The consolidation and annual report are prepared by management in the US and we audited these through regular conference call meetings with management, the use of a file sharing platform and challenging management’s assumptions and conclusions throughout the audit. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. Key audit matter Revenue recognition Revenue is recognised in accordance with the accounting policy set out in the financial statements. The accounting policy contains a number of judgements in respect of franchise sales where a portion of the revenue generated is deferred and recognised over the term of the franchise agreement. Acquisition of Grease Management Limited Grease Management Limited (‘GMG’) was acquired by the group in August 2017 for a total consideration of £1,150,000 in cash. Management has performed a valuation of the net assets acquired and identified intangible assets of £374,000 and residual goodwill of £631,000. The valuation of intangible assets contains a number of key judgments. How the scope of our audit addressed the key audit matter Our audit procedures consisted of the following: • Substantive testing of a sample of transactions throughout the year to determine whether the company’s accounting policy on revenue recognition had been correctly applied. • Testing a sample of transactions from the point of origin to the financial statements, covering royalty income, franchising and other revenues. • Testing the deferred revenue balance in the financial statements to assess if this is fairly stated. • Performing a series of procedures to determine if revenue has been recognised in the correct accounting period. • Assessing the appropriateness of the related disclosures in the financial statements. Our audit procedures consisted of the following: • Obtaining management’s detailed valuation report and challenged the assumptions used to calculate the intangible assets, namely the discount rate, customer attrition rate and growth rate. • Comparing the resulting allocation of the purchase price to expectations. • Assessing the appropriateness of the related disclosures in the financial statements. Our audit procedures in relation to these matters were designed in the context of our audit opinion as a whole. They were not designed to enable us to express an opinion on these matters individually and we express no such opinion. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are 38 required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Opinion on other matter prescribed by the Companies Act 2006 In our opinion based on the work undertaken in the course of our audit • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Responsibilities of the directors for the financial statements As explained more fully in the directors’ responsibilities statement the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Leo Malkin (Senior Statutory Auditor) for and on behalf of Crowe Clark Whitehill LLP Statutory Auditor London 16 April 2018 39 Financial StatementsGovernance OverviewStrategy and Operations Consolidated Statement of Comprehensive Income year ended 31 December 2017 Continuing Operations Revenue Cost of sales Gross profit Other income Distribution costs Administrative costs Operating Profit/(loss) Analysed as: Adjusted EBITDA Acquisition, legal and IPO costs Depreciation and amortisation Share based payments Finance costs Profit/(loss) before tax Income tax expense Profit/(loss) from continuing operations Discontinued operations Profit from discontinued operations Net profit/(loss) attributable to owners Other comprehensive income Exchange differences on translation of foreign operations Total other comprehensive income for the year Profit/(loss) and total comprehensive income for the year Earnings/(loss) per share From continuing operations – Basic (pence) – Diluted (pence) From continuing and discontinued operations – Basic (pence) – Diluted (pence) Notes 5 6 17,18 31 9 10 2017 £ 2016 £ 11,547,299 (5,870,449) 5,676,850 38,377 (124,690) (3,891,858) 1,698,679 2,115,953 (120,280) (209,912) (87,082) 1,698,679 (90,952) 1,607,727 (824,268) 783,459 8,468,687 (4,449,246) 4,019,441 25,186 (80,283) (4,213,597) (249,253) 1,193,318 (1,260,539) (182,032) – (249,253) (79,738) (328,991) (100,755) (429,746) 32,858 816,317 87,165 (342,581) (94,174) (94,174) 722,143 (185,557) (185,557) (528,138) 13 13 13 13 2.90 2.87 3.03 2.99 (1.89) (1.89) (1.51) (1.51) 40 Consolidated Statement of Financial Postion year ended 31 December 2017 Non-current assets Property, plant and equipment Deferred tax assets Intangible assets Goodwill Deposits Trade receivables Current assets Trade and other receivables Inventories Cash and cash equivalents Assets classified as held for sale Total assets Current liabilities Trade and other payables Borrowings Deferred income Non-current liabilities Deferred tax liability Borrowings Deferred income Non-current liabilities classified as held for sale Total liabilities Equity Share capital Share premium Retained profits/(accumulated losses) Translation reserve Other reserves Total equity Total equity and liabilities Notes 12,18 11 17 17 19 19 20 21 12 22 23 23 12 26 26 27 2017 £ 2016 £ 1,216,388 652,131 484,821 631,380 2,344 302,163 3,289,227 2,506,060 437,716 4,031,174 6,974,950 74,372 10,338,549 1,190,651 755,965 166,624 – 2,572 379,405 2,495,217 1,960,693 288,350 4,392,350 6,641,393 87,665 9,224,275 2,142,906 107,786 532,682 2,783,374 1,989,885 103,812 400,881 2,494,578 95,185 931,765 2,404,645 3,431,595 66,425 6,281,394 – 1,017,506 2,310,477 3,327,983 33,486 5,856,047 2,713,266 131,400 1,862,967 (354,577) (295,901) 4,057,155 10,338,549 2,695,266 3,480,191 (2,256,539) (260,403) (290,287) 3,368,228 9,224,275 The financial statements were approved and authorised for issue by the board on 16 April 2018 and were signed on its behalf by: Brian Hogan, Chief Financial Officer 41 Financial StatementsGovernance OverviewStrategy and Operations Consolidated Statement of Changes in Equity year ended 31 December 2017 Share Capital £ – – Share Premium £ – – Other Reserves £ – – Merger Reserve £ 380,100 – – – 519,050 – – – 3,789,064 (308,873) – – – – – – – – Foreign Exchange Reserve £ (74,846) – (185,557) (185,557) – – Retained Earnings £ (1,913,958) (342,581) Total Equity £ (1,608,704) (342,581) – (342,581) – – (185,557) (528,138) 4,308,114 (308,873) – – 2,176,216 2,695,266 – – – 3,480,191 – 49,400 – 49,400 – – (719,787) (339,687) – – – 49,400 49,400 1,456,429 (260,403) (2,256,539) 3,368,228 – – – 2,695,266 – 3,480,191 – 49,400 – (339,687) – (260,403) (2,256,539) 3,368,228 816,317 816,317 – – – – 18,000 – – – 2,713,266 – – – 131,400 – (3,480,191) – 131,400 – – – – (49,400) – 43,786 43,786 – – – – – – – (339,687) (94,174) (94,174) – – – – – – 816,317 (226,402) – 49,400 3,480,191 – (354,577) 1,862,967 (94,174) 722,143 (226,402) 149,400 – – 43,786 4,057,155 Balance at 1 January 2016 Loss for the year Foreign exchange translation differences Total comprehensive income Issue of share capital (note 26) Share issue expenses Share premium reduction (note 26) Share based payments (note 27) Group reconstruction (note 26) Balance at 31 December 2016 Balance at 1 January 2017 Profit for the year Foreign exchange translation differences Total comprehensive income Dividends paid (note 16) Issue of share capital (note 26) Transfer between reserves Share premium reduction (note 26) Share based payments (note 27) Balance at 31 December 2017 42 Consolidated Statement of Cash Flows year ended 31 December 2017 Operating activities Profit/(loss) before taxation for the year Adjustments for non-cash operating transactions: Finance costs Depreciation Amortisation Gain on disposal of tangible fixed assets Share based payment charge Movements in working capital: Increase in trade and other receivables Increase in trade and other payables Increase in inventories Increase in deferred revenue Cash flow from operations Taxes paid Net cash flow from operations Investing activities Purchase of property, plant and equipment Proceeds from disposals of property, plant and equipment Purchase of subsidiary undertakings, net of cash acquired Purchase of other intangible assets Net cash used in investing activities Financing activities Repayment of borrowings Net proceeds from issue of share capital Dividends paid to shareholders Interest paid Net cash (used in)/from financing activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of the year Exchange differences on cash and cash equivalents Cash and cash equivalents, end of year Notes 2017 £ 2016 £ 1,640,585 (218,244) 9 18 17 27 18 15 15 16 16 9 21 21 90,952 109,911 100,001 9,992 87,082 2,038,523 (526,864) 210,973 (106,743) 225,969 1,841,858 (510,187) 1,331,671 (112,941) 24,836 (1,137,901) (55,480) (1,281,486) (47,058) 149,400 (226,402) (90,952) (215,012) (164,827) 4,392,350 (196,349) 4,031,174 79,738 118,855 63,177 – 49,400 92,926 (964,536) 160,041 (76,636) 827,962 39,757 – 39,757 (43,269) – – (153,716) (196,985) (146,065) 3,999,241 – (104,828) 3,748,348 3,591,120 978,939 (177,709) 4,392,350 43 Financial StatementsGovernance OverviewStrategy and Operations Parent Company Statement of Financial Position year ended 31 December 2017 Assets Non-current assets Investments in subsidiaries Amount due from subsidiaries Current assets Trade and other receivables Amount due from subsidiaries Cash and cash equivalents Total assets Current liabilities Trade and other payables Total liabilities Equity Share capital Share premium Other reserves Retained earnings Total equity Total equity and liabilities Notes 2017 £ 2016 £ 14 19 18 21 26 26 27 2,293,426 1,704,716 3,998,142 25,802 438,496 1,162,035 1,626,333 5,624,475 2,176,216 674,573 2,850,789 25,808 – 3,048,174 3,073,982 5,924,771 61,653 61,653 4,074 4,074 2,713,266 131,400 43,785 2,674,371 5,562,822 5,624,475 2,695,266 3,480,191 49,400 (304,160) 5,920,697 5,924,771 No statement of comprehensive income is presented by the company as permitted by section 408 of the Companies Act. The loss dealt within the financial statements of the parent Company for the year ended 31 December 2017 is £324,658 (2016: £304,160). The financial statements were approved and authorised for issue by the board on 16 April 2018 and were signed on its behalf by: Brian Hogan, Chief Financial Officer 44 Parent Company Statement of Changes in Equity year ended 31 December 2017 On incorporation Issue of share capital (note 26) Share issue expenses Loss for the year Share based payment (note 27) Balance at 31 December 2016 Balance at 1 January 2017 Loss for the year Dividends paid (note 16) Issue of share capital (note 26) Transfer between reserves Share premium reduction (note 26) Share based payments (note 27) Balance at 31 December 2017 Share Capital £ – 2,695,266 – – – 2,695,266 2,695,266 – – 18,000 – – – 2,713,266 Share Premium £ – 3,789,065 (308,874) – – 3,480,191 3,480,191 – – 131,400 – (3,480,191) – 131,400 Other reserve £ – – – – 49,400 49,400 49,400 – – – (49,400) 43,785 43,785 Retained Earnings £ – – – (304,160) – (304,160) (304,160) (324,658) (226,402) – 49,400 3,480,191 – 2,674,371 Total Equity £ – 6,484,331 (308,874) (304,160) 49,400 5,920,697 5,920,697 (324,558) (226,402) 149,400 – – 43,785 5,562,822 45 Financial StatementsGovernance OverviewStrategy and Operations Parent Company Statement of Cash Flows year ended 31 December 2017 Operating activities Loss before tax Movements in working capital: Decrease/(Increase) in trade and other receivables Increase in trade and other payables Share based payment charge Net cash used in operations Investing activities Advances to subsidiaries Net cash used in investing activities Financing activities Proceeds from issue of share capital, net of costs Increase in investment in subsidiary Dividends paid to shareholders Net cash (used in)/from financing activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of year 2017 £ 2016 £ (324,658) (304,160) 6 14,282 87,082 (223,288) (25,808) 4,074 49,400 (276,494) (1,468,539) (1,468,539) (674,573) (674,573) 149,300 (117,210) (226,402) (194,312) (1,886,139) 3,048,174 1,162,035 3,999,241 – 3,999,241 3,048,174 – 3,048,174 46 Notes to the Financial Statements year ended 31 December 2017 1. General information Filta Group Holdings plc was incorporated in England and Wales on 31 March 2016. Its registered office is at The Locks, Hillmorton, Rugby, Warwickshire, England, CV21 4PP. The Company is listed on the AIM market of the London Stock Exchange. The Company acts as the holding company of a group of subsidiaries that are involved in the franchising of on-site environmental kitchen solutions to restaurants, catering establishments and institutional kitchens. The services include microfiltration of cooking oil, fryer cleaning, temperature calibration, waste oil disposal and specially designed filters for refrigeration units and coolers. The Filta Group sells franchises and operates in the UK, the United States and Canada. Additionally, the Company operates two direct sale businesses including refrigeration seal replacement and the installation, repair and maintenance of drain dosing and grease recovery units. Further details of the Company’s subsidiaries are provided in Note 14. 2. Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union including interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention except for financial instruments that have been measured at fair value through profit and loss. The presentational and functional currency of the Company is Pounds Sterling. The functional currency of the subsidiaries is determined by the primary economic environment in which they operate. Group reconstruction in prior year Filta Group Holdings plc entered into an agreement to acquire the entire issued share capital of each of The Filta Group Limited and The Filta Group, Inc. on 26 October 2016 from Cookband Limited for Nil consideration. The reorganisation was affected by way of share for share exchanges whereby each of The Filta Group Limited and The Filta Group, Inc. became wholly-owned subsidiaries (the “Subsidiaries”) of Filta Group Holdings plc as it is currently constituted. The directors consider the substance of the acquisition of the Subsidiaries by Filta Group Holdings plc is that of a combination of entities under common control and therefore it fell outside the scope of IFRS 3 (revised 2008). In accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, in developing an appropriate accounting policy, the Directors have considered the pronouncements of other standard setting bodies and specifically looked to accounting principles generally accepted in the United Kingdom (“UK GAAP”) for guidance (FRS 102) which does not conflict with IFRS and reflects the economic substance of the transaction. Under UK GAAP, the assets and liabilities of both entities are recorded at book value, not fair value. Intangible assets and contingent liabilities are recognised only to the extent that they were recognised by the legal acquirer in accordance within applicable IFRS. No goodwill is recognised, any expenses of the combination are written off immediately to the income statement and comparative amounts, if applicable, are restated as if the combination had taken place at the beginning of the earliest accounting period presented. Therefore, although the Group reconstruction completed in October 2016, and Filta Group Holdings plc was incorporated on 31 March 2016, the consolidated financial statements are presented as if the Group structure has always been in place, including the activity from incorporation of the Group’s principal subsidiaries. All entities had the same management as well as controlling shareholders. The Directors have decided that it is appropriate to reflect the combination using merger accounting principles as a group reconstruction under FRS 102 in order to give a true and fair view. No fair value adjustments have been made as a result of the combination. 4747 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2017 2. Basis of preparation (continued) Basis of consolidation The consolidated financial statements comprise the financial information of the Company and its subsidiaries (the “Group”) made up to the end of the reporting period. The consolidated financial statements present the results of the Company and its subsidiaries and joint arrangements as if they formed a single entity. Subsidiaries are consolidated from the date of their acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. Control comprises the power to govern the financial and operating policies of the investee to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights; currently exercisable or convertible potential voting rights; or by way of contractual agreement. Where necessary, adjustments are made to the financial statements of subsidiaries to align with the Group accounting policies. All intercompany transactions and balances between Group entities, including unrealised profits arising from them, are eliminated upon consolidation. Going concern The Directors have at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and therefore continue to adopt the going concern basis of accounting in preparing the financial statements. Parent Company The parent company has taken advantage of s.408 of the Companies Act 2016 not to publish the parent company profit and loss account. 3. Summary of principal accounting policies The principal accounting policies of Filta Group Holdings plc and its subsidiaries are set out below. These policies have been consistently applied unless otherwise stated. 3.1 Foreign currencies Functional and presentation currency The consolidated financial statements are presented in Pounds Sterling, which is also the functional currency of the parent company. Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency of the respective Group entity, using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and form the remeasurement of monetary items denominated in foreign currency at year-end exchange rates are recognised in profit or loss. Non-monetary items are not retranslated at year-end and are measured at historical cost (translated using the exchange rates at the transaction date), except for non-monetary items measured at fair value which are translated using the exchange rates at the date when fair value was determined. Foreign operations In the Group’s financial statements, all assets, liabilities and transactions of Group entities with a functional currency other than Pounds Sterling are translated into Pounds Sterling upon consolidation. The functional currency of the entities in the Group has remained unchanged during the reporting period. On consolidation, assets and liabilities have been translated into Pounds Sterling at the closing rate at the reporting date. Income and expenses have been translated into Pounds Sterling at the average rate, as an approximation of rates on the dates of the transactions over the reporting period. Exchange difference are charged/credited to other comprehensive income and recognised in the currency translation reserve in equity. 3.2 Segment reporting The results of operating segments are reported in a manner consistent with internal reporting. The Group has four operating segments. In identifying these operating segments, management follows the Group’s service lines representing its main products and services. Further details of segment reporting are provided in Note 5. 4848 3. Summary of principal accounting policies (continued) 3.3 Revenue The Filta Group executes franchise agreements for each franchise area which set out the terms of the arrangement with the franchisee. These agreements require the franchisee to pay an initial, non-refundable franchise fee and royalties based upon the number of filtration machines operating in each franchise area. The franchise fee consists of two distinct components: • the opening package; and • the territory fee The revenue associated with the opening package is recognised when substantially all initial services required by the franchise agreement are performed, which is generally upon the completion of training of the franchisee. Therefore, there is no deferral of this revenue unless the training period spans the year-end. The territory fee represents the exclusive right to operate in a designated territory for a stated length of time. The territory fee is deferred over the length of the franchise agreement and released to the combined statements of comprehensive income on a straight- line basis. In circumstances where franchise territories are resold, on an arm’s length basis, between our franchisee and a third party, it is our policy to continue to recognise the deferred revenue over the life of the original franchise agreement. Should there be an additional opening package, or territory sale, as part of the resale, these components will follow the aforementioned revenue recognition process under the new franchise agreement policy. Royalty income is recognised as earned with an appropriate provision for estimated uncollectible amounts, which is included in operating expenses. Supplies and other revenues are recognised when the product or service is delivered or shipped to customers. Provision for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period in which the related sales are recorded. 3.4 Investments in subsidiaries Investments in subsidiaries are valued at cost less provision for any impairment, and an impairment review is carried out annually by the directors. 3.5 Property, plant and equipment All items of property, plant and equipment are initially recorded at cost. All repair and maintenance expenses are recognised in profit or loss when incurred. After initial recognition, property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment loss. All items of property, plant and equipment are depreciated to write off the cost of the assets over their estimated useful lives as follows: Freehold property Plant and machinery Motor vehicles Fixtures and fittings Annual rate 2% 10-15% 25% 20% The estimated useful life and depreciation method are reviewed, and adjusted as appropriate, at each reporting date. Fully depreciated assets are retained in the financial statements until they are no longer in use. 3.6 Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the group in exchange for control of the acquiree. Acquisition costs are expenses and included in Administrative expenses. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition are recognised at their fair value at the acquisition date. 4949 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2017 3. Summary of principal accounting policies (continued) any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of any contingent consideration deemed to be an asset or liability will be recognised in accordance with IAS 39, either in profit or loss or in other comprehensive income. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of cost of the business combination over the group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. It is reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash generating units (or groups of cash generating units) that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Each unit or group of units to which goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. On disposal of a subsidiary the attributable amount of goodwill is included in the determination of the profit or loss on disposal. 3.7 Intangible assets Intangible assets identified in a business combination are capitalised at fair value as at the date of the acquisition and their costs are amortised over a straight-line basis over their expected useful lives. Software and development expenditure is capitalised as an intangible asset if the asset created can be identified, if it is probable that the asset created will generate future economic benefits and if the development cost of the asset can be measured reliably. Amortisation expense is charged to administrative expenses in the income statement on a straight-line basis over its useful life. The expected useful lives of the assets are as follows: Customer relationships Customer contracts Software development – over 5 years – over 5 years – over 3 years Those costs associated with maintaining computer software programmes are recognised as an expense as incurred. 3.8 Impairment of tangible and intangible assets At each reporting end date, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). 3.9 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term liquid investments with original maturities of three months or less. Bank overdrafts are shown within borrowings in current liabilities. 3.10 Financial assets The Group has only a single category of financial assets, being loans and receivables. All financial assets are recognised when the Group becomes a party to the contractual provisions of the instrument. All financial assets are initially recognised at fair value, plus transaction costs. Derecognition of financial assets occurs when the rights to receive cashflows from the instruments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. An assessment for impairment is undertaken, at the least, at each reporting date. Interest and other cash flows resulting from holding financial assets are recognised in the Consolidated Income Statement when receivable. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. Loans and receivables are subsequently measured at amortised cost using the effective interest rate method, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the Consolidated Income Statement. A provision against trade receivables is made when objective evidence is received that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write-down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. 5050 3. Summary of principal accounting policies (continued) 3.11 Financial liabilities Financial liabilities are obligations to pay cash or other financial instruments and are recognised when the Group becomes a party to the contractual provisions of the instrument. All interest-related charges are recognised as an expense in “finance costs” in the Consolidated Income Statement. Loan notes are raised for support of long-term funding of the Group’s operations. The financial liability arising on the loan notes is carried at amortised cost. Finance charges and direct issue costs are charged to the Consolidated Income Statement on an accruals basis using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. 3.12 Equity Equity comprises the following: • “Share capital” represents the nominal value of equity shares. • “Share premium” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. • “Other reserves” represent the equity element in the form of share options and warrants, see notes 27 and 31 for additional information on these instruments. • “Retained earnings” represents retained profits and accumulated losses. • “Merger reserve” arises on business combination (Note 2). Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs. 3.13 Taxation The income tax expense for the year comprises current and deferred tax. Current tax The charge for current taxation is the tax currently payable based on taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting end date. Deferred tax Deferred tax is provided using the liability method on differences between the carrying amounts of assets and liabilities in the consolidated balance sheet and the tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition of other assets and liabilities in a transaction which is not a business combination and at the time of the transaction affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each reporting end date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset is realised based on tax rates that have been enacted or substantively enacted by the reporting end date. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax arising from a business combination is included in the resulting goodwill or excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the business combination costs. Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority. 5151 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2017 3. Summary of principal accounting policies (continued) 3.14 leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessees. All other leases are classified as operating leases. Rentals payable under operating leases, less any lease incentives received, are charged to income on a straight-line basis over the term of the relevant lease except where another more systematic basis is more representative of the time pattern in which economic benefits from the lease asset are consumed. 3.15 Adjusted EBITDA Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortisation, exceptional items and share based payment expense. The separate reporting of these items helps provide a better picture of the Group’s underlying performance. Items which may be included within this category include: • Costs associated with the Group’s listing on AIM; • Excess compensation paid prior to the Group’s listing on AIM; • Costs associated with acquisitions; and • Other particularly significant or unusual items. Adjusted EBITDA is presented separately in the statement of comprehensive income as the Directors believe that it needs to be considered separately to gain an understanding of the underlying profitability of the trading businesses. 3.16 Critical accounting judgments and key sources of estimation uncertainty Revenue recognition As outlined in note 3.3, the Group generates revenue from a range of contractual arrangements. A degree of judgement arises with respect to the recognition of revenue on initial franchise fees, giving rise to estimation uncertainty. Management reviews on a regular basis the allocation within an initial franchise fee between the opening package and the territory fee. Whereas the opening package fee is recognised, as explained in note 3.3, generally upon the completion of the training of the franchisee, the portion related to the territory fee is deferred and recognised over the life of the franchise agreement. The total amount currently in deferred income in this respect amounts to £2,937,327 (2016: £2,711,358). The revenue recognised in respect of the opening package and the apportioned territory fee in the current year was £1,348,193 (2016: £1,235,983). The Group is furthermore reviewing this application as disclosed further in note 4 with the upcoming implementation of IFRS 15. Business combinations Where the Group undertakes business combinations, the cost of acquisition is allocated to identifiable net assets and contingent liabilities acquired and assumed by reference to their estimated fair values at the time of acquisition. The remaining amount is recorded as goodwill. The valuation of identifiable net assets involves an element of judgement related to projected results. Fair values that are stated as provisional are not finalised at the reporting date and final fair values may be determined that are materially different from the provisional values stated. In undertaking this assessment, the Group has performed a valuation of the intangible fixed assets acquired, on the excess earnings method, being customer relationships and customer contracts. In performing this assessment, it has obtained a third-party assessment of the fair values of these intangibles, based on the expected cashflows arising from the existing customer relationships at the time of acquisition, discounted for depletion in contract revenue. An unchanged revenue profile would have estimated the fair value of the customer relationships and customer contracts to be £346,210 and £28,071 respectively. Furthermore, an additional source of estimation uncertainty arises on the assessment of goodwill impairment. Further disclosure in included in note 17. Bad and doubtful debts Recoverability of trade receivables is a key area of focus given the material nature of these balances and the working capital needs of the Group. The profile of the Group’s trade receivables covers balances from a considerable number of customers. Management must therefore apply judgement in determining the amount of provision required for possible non-collection of bad or doubtful debts. This is performed on a case-by-case basis across the Group considering differences between countries and service lines. 5252 3. Summary of principal accounting policies (continued) The Group assessed the appropriateness of the provisioning by considering the level and ageing of debtors and the consistency of provisioning assumptions year-on-year and past experience of bad debt exposure. They concluded that the level of provisioning and carrying value of trade receivables is appropriate. Taxation Judgement is required when determining the provision for taxes as the tax treatment of some transactions cannot be finally determined until a formal resolution has been reached with the tax authorities. Tax benefits are not recognised unless it is probable that the benefit will be obtained. Tax provisions are made if it is expected that a liability will arise. The Group reviews each significant tax liability or benefit to assess the appropriate accounting treatment. 4. Adoption of new and revised standards The following standards are effective for this financial year but have not had significant impact on the reported financial performance or position of the Group: • Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations; • Amendments to IAS 1 Disclosure Initiative; • Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation; and • Amendments to IAS 27 Equity Method in Separate Financial Statements. New standards and interpretations not applied. At the date of the approval of these financial statements, the following standards and interpretations that are relevant to the Group, which have not been applied in these financial statements, were in issue but not yet effective. International Financial Reporting Standards (IFRS’s) Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions IFRS 9 Financial Instruments: Classification and Measurement IFRS 15 Revenue from Contracts with Customers IFRS 16 Leases Effective for period beginning on or after 1 January 2018 1 January 2018 1 January 2018 1 January 2019 The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group in future periods, with the possible exception of those noted below: • IFRS 9 Financial Instruments replaces IAS 39, covering the classification, measurement and derecognition of financial assets and financial liabilities, together with a new hedge accounting model and the new expected credit loss model for calculating impairment. Impairment Previously under IAS 39, impairment or credit losses are only recognised when a credit loss event occurs (‘incurred loss model’). Under IFRS 9, the new impairment requirements are based on expected credit losses (‘expected credit loss model’). Expected credit losses (ECLs) are an estimate of credit losses over the life of a financial instrument and are recognised as a loss allowance or provision. The main difference between the two accounting standards is that the new standard (IFRS 9) requires a recognition of credit loss allowances on initial recognition of financial assets, whereas previously under IAS 39, impairment is recognised at a later stage, when a credit loss event has occurred. The full impact of IFRS 9 is currently under review, including the practical application of the principles of the standards. Additionally, without foresight into the type, amount and specifics of those financial assets at the next financial statement date, it is not practical to provide a reasonable estimate of the financial effects until this review is complete. • IFRS 15 introduces a new five-step approach to the timing of revenue recognition based on performance obligations in customer contracts and is effective for periods beginning on or after 1 January 2018. Based on a preliminary review by the Board, it has been determined that IFRS 15 may have an impact on revenue recognition and related disclosures. Management is completing the review and is developing appropriate systems, internal controls, policies and procedures necessary to collect information for the purposes of accounting and disclosure under IFRS15. 5353 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2017 4. Adoption of new and revised standards (continued) Management’s review of the impact of IFRS 15 will be concluded in the second quarter. The key impact identified to date is: • Financing Component – Under IFRS 15 when determining the contract price an entity must consider the existence of a significant financing component in the contract. Where one exists, the company shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract exceeds one year. The Group does, in certain situations, provide for extended payment terms to its franchisees. This change could affect both; (i) the amount of revenue recognised under the contract; and (ii) the recognition of interest income to be realized over the period of the extended terms. 5. Segment analysis Operating segments have been identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker (which takes the form of the Board of Directors), in order to allocate resources to the segment and to assess its performance. The Directors consider that the Group currently has four reportable segments: the marketing and execution related to Franchise Development; provision of services and supplies to the fryer management sector; servicing the refrigerator seal replacement market; and the provision of design, installation and services provided to the refrigeration and cold stores market. The Group also has two geographic segments: U.K. and North America. Revenue and non-current assets by origin of geographical segment for all entities in the Group is as follows: Revenue U.K. North America Total continuing operations Discontinued operations Total Non-current assets U.K. North America Total Product and services revenue analysis Revenue Franchise Development Fryer Management FiltaSeal FiltaGMG Total continuing operations Discontinued operations Total 2017 £ 3,197,973 8,349,325 11,547,299 2016 £ 2,580,674 5,888,013 8,468,687 1,937,440 13,484,739 1,606,502 10,075,239 2017 £ 1,544,785 1,673,329 3,218,114 2016 £ 510,854 1,984,363 2,495,217 2017 £ 1,348,193 8,434,262 1,327,835 437,008 11,547,299 2016 £ 1,235,983 6,217,772 1,014,932 – 8,468,687 1,937,440 13,484,739 1,606,552 10,075,239 Management measures revenues by reference to the Group’s core services and products and related services, which underpin such income. No customer has accounted for more than 10% of total revenue during the periods presented. Assets and liabilities are not fully allocated to the individual categories as such information is not provided to the chief operating decision maker. 5454 5. Segment analysis (continued) Operating segment performance for the year ended 31 December 2017: Sales to external customers Adjusted EBITDA Acquisition, legal and IPO costs Share based payments Depreciation and amortisation Operating profit Net finance costs Profit before taxation Taxation Profit from discontinued operations Other comprehensive income Profit and total comprehensive income Franchise Development £m 1.3 0.3 (0.0) (0.0) (0.0) 0.2 (0.0) 0.2 Fryer Management £m 8.4 1.5 (0.1) (0.1) (0.2) 1.2 (0.1) 1.1 Operating segment performance for the year ended 31 December 2016: Sales to external customers Adjusted EBITDA Acquisition, legal and IPO costs Share based payments Depreciation and amortization Operating profit Net finance costs Profit before taxation Taxation Profit from discontinued operations Other comprehensive income Profit and total comprehensive income Franchise Development £m 1.2 0.2 (0.2) – (0.0) (0.0) (0.0) (0.1) Fryer Management £m 6.3 1.0 (0.9) – (0.1) (0.1) (0.1) (0.1) FiltaSeal £m 1.3 0.2 (0.0) (0.0) (0.0) 0.2 (0.0) 0.2 FiltaSeal £m 1.0 0.1 (0.2) – (0.0) (0.1) (0.0) (0.2) FiltaGMG £m 0.4 0.1 (0.0) (0.0) (0.0) 0.1 (0.0) 0.1 FiltaGMG £m – – – – – – – – Total £m 11.5 2.1 (0.1) (0.1) (0.2) 1.7 (0.1) 1.6 (0.8) 0.0 (0.1) 0.7 Total £m 8.5 1.2 (1.3) – (0.2) (0.2) (0.1) (0.3) (0.1) 0.1 (0.2) (0.5) 6. Operating profit and adjusted EBITDA The following have been included in arriving at operating profit and adjusted EBITDA: Depreciation of property, plant and equipment (note 17) Amortisation of intangible assets (note 16) Profit on disposal of plant and equipment Staff costs, including directors (Note 7) Cost of acquisition Foreign exchange gains/(losses) Profit before tax is stated after charging: Auditors remuneration Fees payable to the company’s auditor and their associates for the audit of the company’s financial statements Subsidiary audit fees Fees payable to the company’s auditor for other services to the Group Total auditors remuneration Inventory expensed Operating lease rental expense 2017 £ 109,911 100,001 9,992 2,993,670 34,000 (22,238) 2016 £ 118,855 63,177 – 3,079,535 – (62,038) 61,920 – – 61,920 5,870,449 24,399 39,500 23,638 122,500 185,638 4,449,246 13,459 5555 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2017 6. Operating profit and adjusted EBITDA (continued) Exceptional items consist of the following: Acquisition related Legal and professional Costs of IPO Pre-IPO bonus to shareholders 2017 £ 65,402 54,878 – – 120,280 2016 £ 580,603 679,936 1,260,539 Acquisition related costs are primarily attributable to the Grease Management Limited acquisition while the legal and professional costs relate primarily to the cancellation of the share premium, share option scheme and staffing. 7. Staff costs Gross salaries Social security costs Pension contributions Share based payment charge Other staff benefits The average number of employees of the Group during the year was as follows: Directors Staff Administration Customer Services/Network Support Business Development/Marketing Sales Other 8. Remuneration of key management personnel Remuneration for qualifying services Details of directors’ remuneration are provided in the Remuneration Report. 9. Finance costs Bank and other loans Hire purchase and finance lease charges 5656 2017 £ 2,602,507 195,084 9,062 87,082 99,935 2,993,670 2016 £ 2,859,320 139,364 2,391 – 78,460 3,079,535 2017 No. 7 10 11 6 7 26 67 2016 No. 7 12 12 8 4 19 62 2017 £ 732,667 732,667 2016 £ 1,296,994 1,294,994 2017 £ 78,452 12,500 90,952 2016 £ 72,891 6,847 79,738 10. Income tax expense Corporation Tax Charge for the year Deferred tax Origination and reversal of temporary differences Tax charge related to change in U.S. tax rate Total tax charge Reconciliation of corporation taxation: Profit/(loss) before tax on continuing operations Tax at domestic rates applicable Expenses disallowed for tax Loss relief Overseas taxes Total current tax Deferred tax Origination and reversal of timing differences Total tax expense 2017 £ 2016 £ 775,151 265,723 215,878 264,995 824,268 (164,968) 100,755 2017 £ 1,607,727 310,934 19,690 (42,959) 487,486 775,151 2016 £ (328,991) (64,811) 110,744 (32,067) 251,857 265,723 49,117 824,268 (164,968) 100,755 The Filta Group’s effective tax rate for the year ended 31 December 2017 was 51.3% (2016: 19.7%). The effective rate is an amalgamation of UK, US and Canadian rates for the periods reported. The change from year to year has been particularly affected by the non-recurring/non-cash tax charge related to the revaluation of U.S. deferred tax assets due to the U.S. rate reduction, availability of loss reliefs and recognition of deferred tax assets and liabilities. The effective tax rate excluding the tax charge on the U.S. rate reduction is 35.1%. The Filta Group has tax losses of approximately £516,227 (2016: £667,480) to carry forward against future profits. The tax value of such losses amounted to £98,083 (2016: £133,496). The UK tax losses have no expiry date and a deferred tax asset of £124,249 (2016: £133,496) has been recognised in respect of them. The U.S. subsidiary has no available tax losses. 11. Deferred tax assets / liabilities The movement in the Group’s deferred tax asset during the year is as follows: At start of year Addition for the year Charge related to reduction in U.S. tax rate Foreign exchange differences At end of year 2017 £ 755,965 210,735 (264,995) (49,574) 652,131 2016 £ 520,439 164,968 70,558 755,965 The deferred tax balances relate to temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial information as summarised below. Tax losses Deferred revenue Others At end of year 2017 £ 124,249 524,658 3,224 652,131 2016 £ 133,496 596,134 26,335 755,965 5757 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2017 11. Deferred tax assets / liabilities (continued) The movement in the Group’s deferred tax liability during the year is as follows: At start of year Acquired with subsidiaries Intangible Assets acquired in business combination (Credit) / charge for the year At end of year 12. Discontinued operations 2017 £ – 29,215 71,113 (5,143) 95,185 2016 £ – – – – – In December 2017, the Group agreed terms to sell its Filta Refrigeration business to Scotia Cooling Solutions Ltd (‘Scotia’). The deal completed on 4 January 2018. Consideration for the disposal is a combination of £0.1m cash and Scotia agreed to take on all employees and to novate and/or refinance certain Filta Refrigeration vehicles. The results of the discontinued operations, which have been included in the consolidated income statement, were as follows: Revenues Expenses Profit before tax Income tax expense Net profit attributable to discontinued operations 2017 £ 1,937,101 (1,868,489) 68,612 (35,754) 32,858 2016 £ 1,606,552 (1,495,805) 110,747 (23,582) 87,165 Certain assets and liabilities of the operation have been classified as a disposal group held for sale and presented separately on the balance sheet. The major classes of assets and liabilities comprising the operations classified as held for sale are as follows: Property, plant and equipment Inventories Total classified as held for sale Total liabilities associated with assets held for sale (borrowings) Net assets of disposal group 13. Earnings per share Basic weighted average number of shares Dilutive effect of share options and awards Diluted weighted average number of shares 2017 £ 25,114 49,258 74,372 66,425 7,947 2017 26,971,892 288,081 27,259,973 2016 22,700,716 – 22,700,716 5858 14. Investments in subsidiaries Cost at the beginning of the year Additions Cost at end of year 2017 £ 2,176,216 117,210 2,293,426 2016 £ – 2,176,216 2,176,216 The subsidiaries of Filta Group Holdings plc, all of which are included in the consolidated Annual Financial Statements, are as follows: Company The Filta Group Limited The Filta Group Incorporated Filta Refrigeration Limited FiltaFry Limited Bio Depot Limited Filta Seal Limited Filta Environmental Canada Limited Class Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 2017 ownership interest 100% 100% 100% 100% 100% 100% 100% 2016 ownership interest 100% 100% 100% 100% 100% 100% – Nature of business Environmental Services Environmental Services Discontinued Support Services Dormant Dormant Environmental Services The registered office of all subsidiaries is The Locks, Hillmorton, Rugby, Warwickshire, CV21 4PP, apart from the following: Company The Filta Group Incorporated Filta Environmental Canada Limited 15. Business combinations Registered Office address 7075 Kingspointe Parkway, Suite 1, Orlando, Florida 32819 United States 27th floor, P.O. Box 49123, 595 Burrard Street, Vancouver, British Columbia, V7X 1J2 Canada On 21 August 2017, the Group acquired 100 per cent of the voting equity interests of Grease Management Limited, a company whose principal activity is that of a provider of drain related services including live bacteria drain dosing and the installation and servicing of grease recovery units. The acquisition will broaden the product offering of Filta’s specialist grease and drain management business, FiltaDrain, and provide additional sales opportunities by the cross-selling of its services into FiltaGMG’s customer base and vice versa. Details of the provisional fair values of the identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows: Customer relationships (intangible asset) Customer contracts (intangible asset) Property, plant and equipment Inventory Trade and other receivables Cash Trade and other payables Deferred tax liability Total provisional fair value Consideration paid in cash Goodwill Book value £ – – 135,440 54,089 307,425 12,729 (264,386) (29,215) 216,082 Adjustment £ 346,210 28,071 – – – – – (71,113) 303,168 Fair value £ 346,210 28,071 135,440 54,089 307,425 12,729 (264,386) (100,328) 519,250 1,150,630 631,380 The provisional fair values include the recognition of intangible assets related to the value of Grease Management’s customer relationships and customer contracts. Both assets will be amortised over a 5-year period with a full year’s amortisation recorded in the current year. Regarding the acquired Trade and other receivables in the transaction of £307,425, the amount estimated to be potentially uncollectible at the acquisition date was £21,508. At 31 December 2017, £15,991 of this balance had been collected. 5959 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2017 15. Business combinations (continued) Deferred tax has been calculated on the value of the intangible assets acquired at a corporation tax rate of 19% and a corresponding amount recognised as goodwill. The amount recognised as goodwill will not be deductible for tax purposes. Acquisition costs relating to this transaction totalled £34,000 and are disclosed within the statement of comprehensive income. Since the acquisition date, Grease Management Limited has contributed £413,000 to Group revenues and profit of £121,000 to Group income. If the acquisition had occurred on 1 January 2017, Group revenue would have increased by £1,263,000 and Group income for the period would have increased by £252,000. The net cash sum expended on the acquisition is as follows: Cash paid as consideration on acquisition Less cash acquired on acquisition Net cash movement 16. Dividends Distributions to equity holders in the year: First interim dividend, in lieu of 2016, for the year ended 31 December 2017 of 0.19p per share Second interim dividend for the year ended 31 December 2017 of 0.65p per share Proposed final dividend for the year ended 31 December 2017 of 0.65p per share 2017 £ 1,150,630 (12,729) 1,137,901 2017 £ 2016 £ 51,210 175,192 226,402 176,362 – – – – The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. 17. Intangible assets Cost Balance at 1 January 2017 Additions Foreign exchange Balance at 31 December 2017 Amortisation and impairment Balance at 1 January 2017 Amortisation Foreign exchange Balance at 31 December 2017 Net book value at 31 December 2017 Cost Balance at 1 January 2016 Addition, internally developed Foreign exchange Balance at 31 December 2016 Amortisation and impairment Balance at 1 January 2016 Amortisation Foreign exchange Balance at 31 December 2016 Net book value at 31 December 2016 6060 Computer Software £ Goodwill £ Customer Relationships £ Customer Contracts £ Total £ 391,350 55,480 (34,713) 412,117 224,726 72,930 (23,150) 274,506 137,611 218,351 128,097 44,902 391,350 128,686 63,177 32,863 224,726 166,624 – 631,380 – 631,380 – – – – 631,380 – 346,210 – 346,210 – 25,110 – 25,110 321,100 – 28,071 – 28,071 – 1,961 – 1,961 26,110 391,350 1,061,141 (34,713) 1,417,778 224,726 100,001 (23,150) 301,577 1,116,201 – – – – – – – – – – – – – – – – – – – – – – – – – – – 218,351 128,097 44,092 391,350 128,686 63,177 32,863 224,726 166,624 17. Intangible assets (continued) The Group is obliged to test goodwill and indefinite life intangible assets for impairment, at least annually, or at any time if there are indications that the goodwill or indefinite life assets might be impaired. In order to perform this test, management is required to compare the carrying value of the relevant cash generating unit (‘CGU’) including the goodwill with its recoverable amount. The CGU to which the goodwill has been attributed is FiltaGMG. The recoverable amount of the CGU is determined through the completion of a value in use calculation. The key assumptions for the calculation are discount rates, gross margin and expected changes in future cash flows of the CGU. The pre-tax rates used to discount the forecast cash flows from CGUs was 9.7% derived from the Company’s post-tax Weighted Average Cost of Capital, which was 8.8% at 31 December 2017, and adjusted for the risks specific to the market in which the CGU operates. All CGUs have the same access to the group’s treasury functions and borrowing lines to fund their operations. The growth rate of the Filta GMG segment is estimated to be 5% pa., and the EBIT used is 25%, derived from the most recent one-year financial budgets approved by the Board, extrapolated for four future years by the expected growth rate applicable to the CGU with a terminal value using an inflationary growth rate assumption of 3%. A sensitivity analysis has been performed and the Directors have concluded that no reasonably foreseeable change in the key assumptions would result in an impairment of the goodwill. In particular, a 1% increase in the discount rate or a 1% decrease in the terminal value growth rate would not result in material impairment. 18. Property, plant and equipment Details of the Group’s property, plant and equipment and their carrying amounts are as follows: Cost At 1 January 2017 Additions Acquired with subsidiaries Reclassification to assets held for sale Disposals Foreign exchange At 31 December 2017 Depreciation At 1 January 2017 Depreciation charge Reclassification to assets held for sale Disposals Foreign exchange At 31 December 2017 Net Book Values At 31 December 2017 At 31 December 2016 Freehold Property £ Fixture and Fittings & Equipment £ Plant and Machinery £ Motor Vehicles £ Total £ 1,640,785 4,496 2,815 – – (128,506) 1,519,590 641,013 39,202 – – (56,551) 623,664 895,926 999,771 93,095 16,394 5,349 – – (3,388) 111,450 88,529 12,096 – – (3,417) 97,208 14,242 4,566 183,632 13,285 5,567 – (820) (3,608) 198,056 99,166 9,175 – (367) (3,016) 104,958 214,643 78,766 121,709 (84,825) (83,150) (594) 246,549 112,795 49,437 (59,711) (68,759) (335) 33,427 2,132,155 112,941 135,440 (84,825) (83,970) (136,096) 2,075,645 941,504 109,911 (59,711) (69,127) (63,320) 859,257 93,098 84,465 213,122 101,849 1,216,388 1,190,651 Certain of the property, plant and equipment listed above are held as security against bank facilities referred to in note 23. The net book value of vehicles held under finance lease was £0.2m. 6161 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2017 19. Trade and other receivables Trade and other receivables consist of the following: Total Trade receivables Prepayments and other receivables Franchise payment plans Current Trade receivables Prepayments and other receivables Franchise payment plans Non-current Trade receivables Prepayments and other receivables Franchise payment plans 2017 £ 2016 £ 2,028,107 395,677 384,439 2,808,223 1,647,665 313,028 379,405 2,340,098 2017 £ 2016 £ 1,984,569 395,677 125,814 2,506,060 1,647,665 313,028 99,232 2,059,925 2017 £ 2016 £ 43,538 – 258,625 302,163 – – 280,173 280,173 Accounts receivable include amounts that the Filta Group has agreed may be settled over extended repayment terms. The amount due from related parties in the parent company of £2.1m consist of £1.7m of loans to subsidiaries to fund debt repayment and acquisitions and is repayable after more than twelve months while the balance of £0.4m is comprised of £0.1 of management service charges and £0.3m of funding of normal working capital requirements. The loans to subsidiaries bear interest at commercial rates. All amounts are eliminated on the Group Consolidated Statement of Financial Position. Other than the debts described above, the Filta Group’s normal credit terms range between 30 and 90 days. In assessing the recoverability of these debts, the Directors have given due consideration to all pertinent information relating to the ability of the customers to settle. If an account balance is deemed uncollectible, the account is impaired in full. If an account is potentially uncollectible, the Group makes an impairment provision for such amounts. The impairment provision was £56,255 at 31 December 2017 (31 December 2016: £10,302). Movement in the allowance for doubtful debt: At start of year Impairment loss recognised Amounts written off as uncollectable Foreign exchange differences At end of year UK £ 10,302 24,884 (7,271) – 27,915 2017 US £ – 28,340 – – 28,340 Total £ 10,302 53,224 (7,271) – 56,255 UK £ 5488 4,814 – – 10,302 2016 US £ 51,877 – (62,545) 10,668 – Total £ 57,365 4,814 (62,545) 10,668 10,302 6262 20. Inventories Finished goods Inventory included in assets held for sale Total 2017 £ 486,974 (49,258) 437,716 2016 £ 376,015 (87,665) 288,350 Inventories primarily consists of filtration machines and filters and are stated at the lower of cost (on a first-in, first-out basis) and net realisable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realisable value. 21. Cash and cash equivalents Group Cash at bank and in hand Company Cash at bank and in hand 22. Trade and other payables Trade payables Taxes and social security Accruals and other payables Analysis of trade and other payables These are classified as short term and are expected to be settled within 12 months from the reporting date. 23. Loans and other borrowings Total Bank loans Hire purchase and finance leases Current Bank loans Hire purchase and finance leases Non-current Bank loans Hire purchase and finance leases 2017 £ 2016 £ 4,031,174 4,392,350 1,162,035 3,048,174 2017 £ 846,564 804,922 491,420 2,142,906 2016 £ 1,178,105 360,120 451,660 1,989,885 2017 £ 2016 £ 928,236 111,315 1,039,551 1,037,022 84,296 1,121,318 2017 £ 2016 £ 64,102 43,684 107,786 2017 £ 864,134 67,631 931,765 65,530 38,282 103,812 2016 £ 971,492 46,014 1,017,506 6363 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2017 24. Operating lease commitments The amounts of future minimum lease payments under non-cancellable operating leases are as follows: Minimum lease payments due: Within 1 year 1 to 5 years Total 25. Reconciliation of movements in net debt 2017 £ 2016 £ 10,687 2,360 13,047 8,554 11,305 19,859 1 January 2017 £ 1,037,022 – 84,296 1,121,318 Cash flows £ (36,585) – (10,473) (47,058) Non-cash changes Foreign exchange movements £ (72,200) – (72,200) Acquisition £ – 37,492 37,492 Fair value changes £ – – 31 December 2017 £ 928,236 – 111,315 1,039,551 Long term borrowings Short term borrowings Lease liabilities Total 26. Share capital The share capital of Filta Group Holdings plc consists of fully paid ordinary shares with a nominal value of 10 pence. All shares are equally eligible to receive dividends and the repayment of capital and represent one vote. Allotted and fully paid Total shares in issue at 1 January Share for share exchange Issue of ordinary shares Share buyback Issued under share option scheme Total shares in issue at 31 December 2017 Number 2016 £ Number £ 26,952,660 2,695,266 180,000 – – 27,132,660 18,000 – – 2,713,266 – 21,762,161 5,190,499 – – 26,952,660 – 2,176,216 519,050 – – 2,695,266 On incorporation, the issued share capital of the Company was £1 comprising one Ordinary Share of £1.00. The Ordinary Share was issued, credited as fully paid, to Jason Sayers as the subscriber to the memorandum of association of the Company. The Company does not have an authorised share capital. On 26 October 2016, the Company acquired the entire issued share capital of Cookband Limited in consideration of the issue, credited as fully paid, of 2,176,215 Ordinary Shares of £1 each to the then shareholders in Cookband Limited. On 26 October 2016, the Company acquired the entire issued share capital of The Filta Group Inc. and The Filta Group, Inc. from Cookband Limited for Nil consideration. By resolution of the members passed on 26 October 2016, each of the Ordinary Shares of £1 each in the capital of the Company was sub-divided into 10 New Ordinary Shares of 10 pence each. On 27 October 2016, pursuant to a share placing, 5,190,499 shares of 10 pence were issued at a price of 83 pence, giving rise to a share premium, net of issuance costs, of £3,480,191. The Company, as contemplated in its admission document, completed a reduction of capital, whereby the entire amount standing to the credit of the Company’s share premium account was cancelled to create distributable reserves (the “Reduction of Capital”). The Reduction of Capital was formally approved by the High Court of Justice, Chancery Division, and the High Court order was filed with the Registrar of Companies on 18 January 2017. The purpose of the Reduction in Capital was to create distributable reserves to support the Board’s dividend policy. On 22 November 2017, pursuant to a share option agreement with Cenkos Securities plc (“Option Holder”), 180,000 shares of 10 pence each were exercised, and issued, to the Option Holder at a price of 83 pence each, giving rise to a share premium of £131,400. 6464 27. Other reserves Group Merger reserve Share based payment reserve Company Share based payment reserve 2017 £ 2016 £ (339,687) 43,785 (295,901) (339,687) 49,400 (290,287) 43,785 49,400 Merger reserve The directors consider the substance of the acquisition of the Subsidiaries by Filta Group Holdings plc is that of a combination of entities under common control and therefore it fell outside the scope of IFRS 3 (revised 2008). Share based payment reserve The Company entered into a share option agreement (“Option Deed”) with Cenkos Securities plc (“Option Holder”), its nominated advisor and broker, whereby the Company has granted to the Option Holder the right, exercisable at any time during the Option Period, to subscribe for all, or some, of the Option Shares (180,000 ordinary shares) at the Option Price of 83 pence per Option Share, subject to the terms and conditions of the Option Deed. Pursuant to this share option agreement the Option Holder exercised and subscribed for all 180,000 ordinary shares which were issued on 22 November 2017. As a result, the share-based payment reserve of £49,400 was charged to Retained Earnings in the current year. The Company established the Filta Group Holdings Enterprise Management Incentive Scheme in 2017 to award U.K. employees with equity settled share options. The options were granted on 5 May 2017 and vest equally over a three-year period beginning on 5 May 2019. The total charge recognised for share-based payments in respect of employee services received for the year ended 31 December 2017 was £43,785 (2016: £Nil). 28. Financial instruments Risk Management objectives and policies The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Filta Group’s competitiveness and flexibility. Further details regarding these policies are set out below. Management reviews its monthly reports through which it assesses the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets. Market risk management Management do not consider the company exposed to interest rate or inflation risks significant enough to have a material effect on the profitability of the company. Foreign currency sensitivity The Filta Group is exposed to foreign currency risk on transactions and balances that are denominated in currencies other than Pounds Sterling. The currency giving rise to this risk is primarily the US Dollar. Foreign currency risk is monitored closely on an ongoing basis to ensure that the net exposure is at an acceptable level. A majority of the Filta Group’s financial assets and liabilities are held in Dollars and movements in the exchange rate against Sterling has an impact on both the results for the year and equity. The Filta Group maintains a natural hedge whenever possible, by matching the cash inflows (revenue streams) and cash outflows in foreign currencies. 6565 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2017 28. Financial instruments (continued) The following table demonstrates the sensitivity to a reasonably possible change in sterling against the US Dollar and Canadian Dollar with all other variables held constant. USD USD CAD CAD Change in rate +10% –10% +10% -10% Effect on profit before tax £ (138,791) 169,633 (1,608) (1,965) Effect on equity £ 10,283 (12,568) (11,920) 14,569 Interest rate sensitivity The interest rate sensitivity has been determined based on the exposure at the balance sheet date. For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding at the balance sheet date was outstanding for the full year. All financial liabilities, other than financing liabilities, are interest free. If interest rates had been 1% higher/lower and all other variables were held constant, the group’s profit after tax for the year ended 31 December 2017 and reserves would decrease/increase by £0.009m (2016: £0.01m). Credit risk management: The Filta Group’s exposure to credit risk, or the risk of counterparties defaulting, arises mainly from trade and other receivables. The Filta Group manages its exposure to credit risk by the application of credit approvals, credit limits and monitoring procedures on an ongoing basis. For other financial assets (including cash and bank balances), the Filta Group minimises credit risk by dealing exclusively with high credit rating counterparties. As the Filta Group does not hold any collateral, the maximum exposure to credit risk is represented by the carrying amount of the financial assets as at the end of each reporting period. Liquidity risk management: The Filta Group currently holds cash balances to provide funding for normal trading activity. The Filta Group also has access to both short-term and long-term borrowings to finance capital expenditure requirements. Trade and other payables are monitored as part of normal management routine. Categories of financial instruments: The table below sets out the Group’s IAS39 classification of each of its financial assets and liabilities at 31 December 2017. All amounts are stated at their carrying value. Financial Assets Loans and receivables: Cash and cash equivalents Trade and other receivables (excluding prepayments) Deposits Financial Liabilities Trade and other payables Deferred Income Borrowings 6666 2017 £ 2016 £ 4,031,174 2,451,072 2,344 6,484,590 4,392,350 2,169,130 2,572 6,564,052 2,142,906 2,937,327 1,105,976 6,186,209 1,989,885 2,711,358 1,154,804 5,856,047 28. Financial instruments (continued) The table below summarises the maturity profile (representing undiscounted contractual cash flows) of the Group’s financial liabilities: At 31 December 2017 Trade and other payables Deferred income Borrowings Total At 31 December 2016 Trade and other payables Deferred income Borrowings Total Less than 3 months £ 3 to 12 months £ 1 to 5 years £ Over 5 years £ Total £ 2,095,601 71,089 21,828 2,188,518 16,038 355,445 109,140 480,622 31,267 1,884,502 809,815 2,725,585 – 626,291 165,193 791,484 2,142,906 2,937,327 1,105,976 6,186,209 Less than 3 months £ 3 to 12 months £ 1 to 5 years £ Over 5 years £ Total £ 1,886,028 66,814 17,302 1,970,144 32,217 334,068 86,510 452,795 71,639 1,708,091 724,998 2,504,727 602,386 325,994 928,380 1,989,885 2,711,358 1,154,804 5,856,047 29. Adjusted cash flow from operations * Profit/(loss) before tax Adjustments for non-cash operating transactions Movements in working capital Impact of items on operating cash flow – Note 3.15 * Adjusted cash flow from operations includes the addition of items disclosed in Note 3.15. 30. Retirement benefit schemes 2017 £ 1,607,727 387,500 (646,531) 120,280 1,468,976 2016 £ (328,991) 447,007 (78,259) 1,260,539 1,300,296 Defined contribution scheme Since October 2016 the Group has operated a defined contribution retirement benefit scheme for all eligible employees in its U.K. subsidiary. The assets of the scheme are held separately from those of the group in funds under the control of the trustee. The subsidiary is required to contribute 1% of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefit scheme is to make the specified contributions. The total cost charged to income of £9,062 (2016: £2,391) represents contributions payable to the scheme by the Group at specified rates. Any contributions unpaid at the balance sheet date are included as an accrual at that date. The Group has no further payment obligations once the contributions have been paid. 6767 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2017 31. Share option scheme The Company has, on 5 May 2017 (“Grant Date”), introduced a Share Option Scheme to incentivise executives and employees of Filta Group Holdings and its subsidiaries. For U.K. employees, Options have been awarded over a total of 442,500 ordinary shares, equivalent to 1.6% of the Company’s current issued share capital. The options vest, subject to the satisfaction of certain conditions, over a period of 4 years from the date of grant. All options issued will meet the vesting conditions between 2019 and 2021 and are exercisable at any time after vesting and within 10 years from the grant date. Additionally, all qualifying U.S. employees have been awarded share acquisition rights (SAR’s). The SAR’s are conditional bonuses whose value will be calculated by reference to the amount by which the price of the Company’s ordinary shares has risen above the base price at the date of exercise, thus providing holders of SAR’s the same reward value as if the SAR’s were share options. The qualifying conditions and timing of vesting are identical to those within the share option scheme for UK employees. All SAR’s are settled in cash when exercised. A total of 360,000 SAR’s has been awarded. In the ordinary course of business, an option will normally only be exercisable to the extent it has fully vested, and any applicable non- market performance conditions have been satisfied or waived. Options shall lapse to the extent unexercised on the tenth anniversary of the date of grant or such earlier date as specified by the Board at the date of grant. Movement in the number of share options outstanding during the year, including grant dates and grant price were as follows: Outstanding at 1 January 2017 Granted on 5 May 2017 (0.97p) Granted on 16 October 2017 (1.74p) Total granted during the year Forfeited during the year (0.97p) Forfeited during the year (1.74p) Total forfeited during the year Outstanding at 31 December 2017 (0.97p) Outstanding at 31 December 2017 1.74p) Total Outstanding 31 December 2017 Exercisable at 31 December 2017 Share options – 345,000 97,500 442,500 (157,500) (52,500) (210,000) 187,500 45,000 232,500 – Share acquisition| rights – 360,000 360,000 (30,000) – (30,000) 330,000 – 330,000 – Total – 705,000 97,500 802,500 (187,500) (52,500) (240,000) 517,500 45,000 562,500 – During the year ended 31 December 2017, the Company issued share options with fair value of £267,776. During the year, the Company recognised an expense of £87,082 related to the fair value of the share-based payment arrangements (2016: £Nil); this was determined using the Black Scholes model, with the following assumptions: 2017 133.4p 97.0p 0.59% 0.9% 55.05% Weighted average share price Exercise price Risk free rate Dividend yield Volatility 6868 32. Related party transactions Remuneration of Directors and other transactions The remuneration, interests and related party transactions with the directors of Filta Group Holdings plc and its subsidiaries (the “Directors”) who are considered to be the key management personnel of the entity, are disclosed in Note 8. Directors loan accounts The following amounts were due from the directors at the end of each reporting period: • Mr. R C Sayers: Nil as at 31 December 2017 (2016: £77,236) All amounts are unsecured, interest-free and repayable on demand. The amounts are classified within current liabilities under ‘Amounts due to directors.’ Franchise rights In 2012, The Filta Group, Inc. granted franchise rights for a prescribed territory to Roxanna Holdings Inc. Roxanna Holdings Inc., a company owned by Jason Sayers and Victor Clewes, directors of The Filta Group, Inc. The rights were then assigned to EKS North Atlantic LLC, which is 50% owned by Roxanna Holdings and 50% by an unrelated 3rd party. During 2017, the related franchise operator purchased £Nil of equipment and supplies from the company (2016: £10,165). The amounts are classified within trade receivables. On 16 January 2017 the franchise rights were sold by the related party entity to a non-related third party. Amounts due to related parties – management fees For the twelve months ended 31 December 2017, management fees of £Nil are included in administrative expense (2016: £736,170) for services provided to The Filta Group, Inc. by Roxanna Holdings, Inc. At 31 December 2017 and 2016, £Nil of this total was payable to the related party. Notes payable to related party From 2013 to 2015, the Filta Group, Inc. entered into notes totaling £501,553, bearing interest at 1.5% with a related party. The notes were to mature in December 2016 through 2018. In 2016, the Company repaid the notes in full. These amounts are classified within borrowings and had a balance of £Nil at 31 December 2017 (2016: £Nil). Interest paid on these loans amounted to £Nil at 31 December 2017 (2016: £8,533). 33. Events after the reporting date On 4 January 2018, the Group announced the sale of its Filta Refrigeration subsidiary for cash and other considerations and further conveyed their intention to exit the refrigeration and HVAC market. The Board believes that the disposal of the refrigeration business is an important strategic step in allowing the Group to focus on its higher margin and higher growth businesses. On 31 January 2018 the Group announced the acquisition of FiltaFry Deutschland GmbH, the company which owns the master franchise license for Filtafry in Germany. The Group paid initial consideration of €0.2m (£0.2m) satisfied by a mix of cash and shares. There is also a deferred consideration component of €0.1m (£0.1m) to be satisfied by the issue of Filta shares in two equal installments following on at the end of years one and two. There are no other matters that occurred between the reporting date and the date of approval of these financial statements that the Directors believe are necessary to draw attention to. 6969 Financial StatementsGovernance OverviewStrategy and Operations Notes 7070 About Filta Filta Group Holdings plc is a multi-service B2B provider to commercial kitchens, primarily operating in the UK, North America and now Mainland Europe. The Company has over 180 Franchise Owners, and teams of corporate vans, providing services to over 6,000 commercial kitchens and restaurants every week. Filta has an impressive blue chip customer base that underlies a recurring revenue, cash generative business model that supports a strong dividend commitment. Index Overview 1 2 Highlights Chairman’s Statement Major Markets Services The Franchise Model Business Model Strategy and Operations 6 8 9 10 11 Our Market 12 14 Chief Executive’s Operating Review 18 Chief Financial Officer’s Review Principal Risks and Uncertainties 21 Strategy Governance 24 26 27 30 Directors’ Remuneration Report 33 Directors’ Report Corporate Social Responsibility Report Board of Directors Corporate Governance Statement Financial Statements 39 Independent Auditor’s Report to the Members of Filta Group Holdings PLC Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Parent Company Statement of Financial Position Parent Company Statement of Changes in Equity Parent Company Statement of Cash Flows Notes to the Financial Statements 42 43 44 45 46 47 48 49 71 Corporate Information Further information and investor updates can be found on our website at www.FiltaPlc.com Nominated Advisor and Broker: Cenkos Securities plc 6.7.8. Tokenhouse Yard London, EC2R 7AS Auditors: Crowe Clark Whitehill LLP St Bride’s House 10 Salisbury Square London EC4Y 8EH Corporate Information Directors: Timothy (Tim) John Worlledge Non-Executive Chairman Jason Charles Sayers Chief Executive Officer Brian Joseph Hogan Finance Director Victor Clewes Executive Director Jlubomir (Roscoe) Urosevic Executive Director Roy Charles Sayers Non-Executive Director Graham Jeffrey Woolfman Non-Executive Director Secretary: Brian Hogan Registered Office: The Locks Hillmorton, Rugby Warwickshire CV21 4PP Company Number: Registered in England with Company Number 10095071 Bankers: HSBC Bank PLC 6th Floor, 165 Fleet Street London, EC4A 2DY Solicitors: Howard Kennedy LLP No. 1 London Bridge London, SE1 9BG Registrar: Computershare Investor Services plc The Pavilions Bridgwater Road Bristol BS13 8AE Designed and produced by london@blackandcallow.com www.blackandcallow.com 020 3794 1720 71 www.FiltaPlc.com Registered in England. Company Number 10095071 Registered Office: The Locks Hilmorton Rugby Warwickshire CV21 4PP Tel: +44 1788 550100 Email: Enquiries@FiltaPlc.com Annual Report & Accounts 2017 F l i l t a G r o u p H o d n g s p c A n n u a l i l R e p o r t a n d A c c o u n t s 2 0 1 7
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