Filta Group Holdings plc
Annual Report 2018

Plain-text annual report

Annual Report & Accounts 2018 F i l t a G r o u p H o l d i n g s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 8 About Filta Filta Group Holdings plc is a multi-service B2B provider to commercial kitchens, primarily operating in North America, the UK and mainland Europe. The Group, through its 199 Franchise Owners and own team of technicians and fleet of corporate vans, provides services to over 6,000 commercial kitchens, restaurants and supermarkets every week. Filta has an impressive blue chip customer base underlying a recurring revenue, cash generative business model that supports a strong dividend commitment. Index Overview Highlights 1 Chairman’s Statement 2 Major Markets Services The Franchise Model Business Model Strategy and Operations 6 8 9 10 11 Our Market 12 14 18 21 Strategy Chief Executive’s Operating Review Chief Financial Officer’s Review Principal Risks and Uncertainties Governance 24 26 27 30 32 35 38 Corporate Governance Statement Board of Directors Board Governance and Activities Audit Committee Report Remuneration Committee Report Directors’ Report Corporate Social Responsibility Report Further information and investor updates can be found on our website at www.FiltaPlc.com 45 46 47 48 49 50 51 52 83 Financial Statements 41 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 Corporate Information Highlights Financial Highlights - continuing operations Revenue £14.2m +23% Gross Profit £7.1m +25% Adjusted EBITDA* £2.6m +25% Deferred Income Balance £3.7m +25% Revenue £m 14.2 11.5 8.5 Gross profit £m 7.1 5.7 4.0 Adjusted EBITA* £m 2.6 2.1 1.2 2017 £11.5m 2017 £5.7m 2017 £2.1m Deferred Income Balance £m 3.7 2.9 2.7 2017 £2.9m 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2016 *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 199. • • • • Number of MFUs (mobile filtration units) increased from 394 to 450. Fryer Management revenue, primarily recurring in nature, grew 11% to £9.3m. 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 o Jan 2018 Exit from Refrigeration; Jan 2018 Buy-in of German master franchise; and o Dec 2018 Acquisition of Watbio Holdings Limited. 1 Financial StatementsGovernance OverviewStrategy and Operations Chairman’s Statement £14.2m Group Revenue +23% 2017: £11.5m £2.6m Adjusted EBITDA +25% 2017: £2.1m 4.86p Basic Earnings Per Share 2017: 2.90p 4.82p Diluted Earnings Per Share 2017: 2.87p Full Year 2018 Operating Revenue 10% 24% £14.2m 66% ■ Franchise Development ■ Fryer Management ■ Company Owned 2 ■ FiltaDrain ■ Filter Refrigeration ■ Filta-Seal 11 7 31 2016 2015 2014 Introduction 2018 saw two significant developments for the Group, being the buy-in, in January, of our master franchise in Germany, which provided us with the base to expand our franchise activities into mainland Europe, and the acquisition, in December, of Watbio, one of the leading operators in the Fats, Oils and Grease (“FOG”) market, which in combination with FiltaGMG has established Filta as a major force in that market. I am pleased to report that, alongside these developments, we enjoyed another year of growth across all of our core businesses, with the addition of 25 new franchises, including eight in mainland Europe, 56 additional MFUs, an increase of 23% in the number of seals fitted and a significant increase in the number of FiltaGMG jobs performed, prior to any acquisition effect of Watbio. We have continued to invest in business systems, infrastructure and personnel both to take advantage of market opportunities and to ensure the highest level of support to our growing and diverse customer base. Results Reported profit before tax for the year ended 31 December 2018 was £1.7m (2017: £1.6m) on revenue up by 23% at £14.2m (2017: £11.5m) and net attributable profit was £1.3m (2017: £0.8m). Gross profit for the year was up by £1.4m at £7.1m, with a slightly improved gross margin of 49.8% (2017: £5.7m and 49.2%). The EBITDA, adjusted to exclude acquisition-related costs and share-based payments, was £2.6m (2017: £2.1m), an increase of 25%. The Group also increased its deferred revenue balance by a net amount of £0.7m, including a £0.2m positive impact from a stronger US dollar, to a year-end balance of £3.7m. Operating costs were up by £1.3m, supporting the increased size of the business and level of activity, but also reflecting the acquisition-related costs of £0.2m (2017: £0.1m) being legal and other costs related primarily to the acquisitions of the German master franchise and Watbio Holdings Limited, a £0.3m charge in relation to awards made under the Company’s Share Schemes, specifically the US Stock Appreciation Rights (2017: £0.1m) and a greatly increased depreciation and amortisation charge, primarily related to intangible assets, of £0.4m (2017: £0.2m). Divisional Performances The £0.5m increase in adjusted EBITDA reflects strong performances in all areas of our business and was achieved from both higher turnover and improved gross profit margins. FiltaFry, our franchised fryer management business, has continued to expand its number of territories as demonstrated by a net increase in our Franchise Owner base to 199 whilst realising a 14% increase in the number of MFUs (mobile filtration units) from 394 to 450. FiltaFry remains the core of our business and it provides the platform for further growth across the Group. Revenues and gross profits from Fryer Management Services grew 11% and 10% respectively to £9.3m and £4.1m. We are particularly encouraged by our European and Canadian operations, where our franchise counts have grown to twelve and three respectively. The Company-owned activities, which are UK-based, have also had a good year. FiltaSeal, whose revenues for the year were £1.6m, has enjoyed growth of some 24% and started the new year with a strong order book. FiltaGMG contributed £1.7m in revenue but, more importantly, it grew 41% against the prior year on an annualised basis. Watbio was under our ownership for only ten days of the year and its contribution was, therefore, not significant. Strategic Developments As stated above, we bought in the German master franchise at the beginning of the year and, at the end of the year, acquired Watbio. Both acquisitions align with existing platforms and continue to support our strategy of focusing Filta on businesses with high margins and low working capital requirements. FiltaFry GmbH was acquired for a total consideration of €250,000, satisfied as to €175,000 in cash and €25,000 by the issue of 10,971 new Ordinary Shares. Further consideration of €25,000 was paid by the issue of 9,225 Filta shares on 30 January 2019, with a final payment of €25,000 remaining to be satisfied by the issue of Filta shares on 30 January 2020. FiltaFry GmbH is being developed along the same lines as our North American business with the aim being to establish a strong foothold in Germany before extending into other European countries. We have been delighted at the momentum that has already been built up with six new franchises in Germany, one in Austria and one in Spain, giving us a total franchise count in Europe of twelve already. The acquisition of Watbio for a total consideration of up to £6.4m represents a significant step in building our FOG business, which we consider, due to the nature and timing of the service, to be more suitable to direct ownership than to a franchise structure. The consideration for Watbio has been satisfied by the payment of £5.3m in cash and as to £0.8m by the issue to the vendors of 400,000 Filta shares. Additional cash consideration of up to £0.3m million is contingent on certain debtor collections before 31 May 2019. The cash element of the consideration was funded by a placing of 1,500,000 new Filta 3 Financial StatementsGovernance OverviewStrategy and OperationsI also take this opportunity to recognise our Franchise Owners, whose own performance and client commitment are critical to our success and reputation. Finally, our Business Model and Strategy is contained on pages 6 to 13. It was approved by the Board on 12 April 2019. Tim Worlledge Chairman 12 April 2019 Chairman’s Statement shares to raise £3.0m (gross) and a fixed term bank loan of £4.0m. We envisage continuing to pursue an infill strategy to acquire and develop 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. The Board is therefore proposing a final dividend of 0.92 pence per share, which together with the interim dividend of 0.72 pence paid on 28 September 2018 makes a total dividend of 1.64 pence per share in respect of the year and represents an increase of 26% over prior year. The proposed final dividend, if approved by shareholders, will be paid on 14 June 2019 to shareholders on the register at the close of business on 31 May 2019. Current trading and outlook We saw growth in all our core businesses in 2018 and this has continued into 2019. We have secured four new franchisees, allocated six further territories and added ten MFUs 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 11% up on the same period last year and FiltaGMG has continued to gain new clients, thus increasing the repeat revenue base. With the additional business to be derived from the acquisition of Watbio and the encouraging activity that we are seeing from our new European operations your Board is confident of achieving further growth through the remainder of the year. 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. 4 Strategy and Operations Major Markets Services The Franchise Model Business Model 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 5 5 Financial StatementsGovernance OverviewStrategy and OperationsStrategy and Operations Major Markets Filta operates principally in North America, the UK and mainland Europe, providing a range of commercial kitchen-related services through franchise networks and Company-owned operations. Filta Group Holdings Plc North America United Kingdom Mainland Europe Business growth drivers: • Fleet expansion by Franchise Owners • New Franchise Sales & Resales • National Accounts • New services and products offered through Franchise Network Corporate HQ in Orlando, Florida, USA • Franchise network business Franchisees mostly multi-MFU 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 humidity control and FiltaDrain kitchen drain solution • Revenues generated mainly from franchise sales, franchise services and oil resales North America (USA & Canada) Number of vans 392 Franchise Operated 6 UK Business growth drivers: • Expanding existing Company-owned services organically and by infill acquisitions • Development of additional related services • Increased focus on national accounts Corporate HQ in Rugby, England • Company-owned Operations: Revenues derived principally from FiltaSeal and FiltaGMG FiltaSeal, replacement of refrigeration seals FiltaGMG, incorporating Watbio, kitchen drain solutions and maintenance • Franchise network business: Franchisees mostly single MFU operators Services are solely fryer management under FiltaFry brand Revenue generated mainly from franchise sales and services Number of vans 43 Franchise Operated 90 Company Owned Mainland Europe Business growth drivers: Number of vans 15 Franchise Operated • New Franchise Sales • Fleet expansion by Franchise Owners • Adapted North America model in Germany and have started expanding into surrounding countries. Corporate HQ in Debbeshoek, the Netherlands • Franchise network business Franchisees both single and multi-MFU 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 Financial StatementsGovernanceStrategy and Operations OverviewStrategy and Operations Services One customer – multi-services • FiltaFry – Fryer Management • FiltaSeal – First Time Seal Replacement • FiltaGMG – Fats Oil and Grease (“FOG”) Drain and Pump Management 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 mainland Europe. 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. ordering and fitting delays following an initial engineer’s visit. The benefit of this service, apart from avoiding the disruption that multiple engineer visits causes, 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, the installation and servicing of Grease Recovery Units, and wastewater pump servicing. The majority of FiltaGMG’s revenue is recurring in nature, with work typically being carried out quarterly under scheduled maintenance programmes. • 6,000+ restaurant and food service customers receive FiltaFry services on a weekly basis. • Fryer Management also includes supplemental services such as FiltaCool and FiltaDrain provided by our Franchise Owners to customers. • Franchisees operate a total of 450 MFUs of which 392 are in North America, 43 in the UK and 15 in mainland Europe 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 Fryer Management Single visit Seal Replacement FiltaFry FiltaSeal FiltaGMG FOG & Drain 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 mainland Europe. 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 and care 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-MFU operations, while, in the UK, they more often remain as single MFU operators. Mainland Europe is being developed as a multi-MFU 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 (5 year in UK and mainland Europe) 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 (2018 – repeat revenues at 94%) • 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 services under contract to commercial kitchens • Key objective is to build repeat revenues, providing high revenue-visibility maintenance contract customers Repeat Revenues Underpinned by Growing Royalty Income A significant base of the Group’s total revenues (80%) are earned by way of royalties and other income from an existing customer base which requires continuing and regular service. It provides strong cash flow and, together with a large deferred revenue position, provides good revenue visibility into future years. Repeat revenue includes those revenues earned from existing customers, which are recurring in nature, and consist of our Fryer Management revenue, FiltaSeal revenue and non-installation related FiltaGMG revenue. 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 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 $833bn for 2018 (National Restaurant Association), having grown in each of the last 9 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 4% 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 staff and Franchise Owners possible 2. Drive and support the growth of the Franchise Owners and the Company operated business 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 UK Expand through Franchise Sales & Additional MFUs Organic Growth Organic Growth & Acquisitions Growth Opportunities North America Fryer Management Services are the cornerstone of our business and we continue to seek to grow this activity 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. UK Continue to support our Fryer Management franchisees and continue to grow the Company Owned Operations, FiltaSeal and FiltaGMG, through gaining key accounts and through infill acquisitions which add both customers and further services. Mainland Europe With the recent expansion into Germany, we spent 2018 perfecting the same model that we have developed in North America. Growth in mainland Europe will come from both the sale of new franchises and by helping our existing and new franchisees to expand their customer bases. New Markets Now 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 delivered a strong performance with an operating profit of £1.8 m, adjusted EBITDA of £2.6m, an increase of 25% over the previous year, and profit before tax of £1.7m. We have also increased our deferred revenue balance and therefore go into 2019 with higher revenue visibility than at the start of 2018. As our franchise base grows, we are experiencing an increased demand and opportunity for franchise resales with nine Filta franchise owners selling their businesses during 2018, generating fees of £0.1m. We expect resale transactions to grow in number and value in the coming years, which will not only generate increasing fees but will also provide opportunities to strengthen the franchise network. Fryer Management Services delivered a 11% increase in revenue, driven by both organic growth and new franchises which, in turn, provide the platform for increased Fryer Management Services revenue in the future. Filta’s plan has been to expand organically and through acquisitions of high margin, repeat revenue businesses in the grease management market. In line with this, our Company owned operations experienced robust organic revenue growth. FiltaSeal revenues were £1.6m, up 24%, and FiltaGMG completed its first full year with revenue of £1.7m, an annualised growth of 41%. Additionally, the business took a significant step forward at the end of the year with the acquisition of Watbio Limited which brings additional revenue of over £10m. Franchise Development 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. Development in North America remained relatively strong in 2018 and, although the UK continued to be weak, mainland Europe gathered momentum with sales in Germany, Austria and Spain. With the increasing coverage in North America, we will see a reduction in the number of available territories for sale which will result in a decrease in the number of new franchise sales in North America. However, we expect Franchise Development in mainland Europe to strengthen during the next few years. Fryer Management Services Fryer Management Services contributed £9.3m of revenues in the year (2017: £8.4m). 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 performance. 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-MFU franchisees, which helps to allay financial risk and also provides owners with higher investment returns. In 2018, our two highest grossing franchise owners achieved over $2m (£1.6m) in revenue and six (2017: 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 $42m (£33m) of revenues in 2018 (2017: $36m/£28m). In supporting our franchise owners, we endeavour to lower as many barriers as possible for them with programmes 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 2018. • Tech recruitment – with 450 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 has a full- time recruiter 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. • Coaching – ongoing assigned coaching for franchise owners at key stages of their growth. Europe We spent 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-MFU franchise owners in the years to come. In fact, we quickly expanded into Austria and, towards the end of the year, started our first pilot franchise owner in Spain. The plan is to prove the model in Spain before expanding further in Europe. Company Owned Operations (UK) FiltaSeal Revenue from FiltaSeal was £1.6m (2017: £1.3m), reflecting a 23% increase in the number of seals fitted. The increase was driven by higher volumes from our existing customers alongside several new key account wins. The fundamentals of the business remain strong and this, along with FiltaSeal’s compelling market proposition, should support further growth opportunities. FiltaGMG Revenue from FiltaGMG was £1.7m (2017: £0.4m in 4 months). With a solid customer base and experienced team, Grease Management Limited was integrated into our existing FiltaDrain business to create FiltaGMG in 2017, sharing the existing call- centre resources and implementing new operational systems. The integration was relatively straightforward, and the results fully justified our enthusiasm for expansion into this market. The aim was to grow this activity through organic growth and further infill acquisitions 14 water industry. Lloyd recently retired from his role as Chief Executive of British Water, the leading association supporting the UK water industry. believe that with the ever-increasing health, safety and food hygiene requirements the demand for our services is unlikely to diminish. One of the benefits of taking Filta public was that it enabled us to offer all employees share options in the business (SARs in the US), thereby helping to align all goals and giving everybody the opportunity to share in the long-term success of the business. All employees, including the recently acquired Watbio staff, have been offered share options. Market Conditions The strength of the US economy has led to very low unemployment and, whilst this helps in service sales, it has the potential to reduce the number of people looking to buy franchises. However, we have experienced a steady level of enquiries from potential franchise owners, with many superior quality candidates coming forward, through the course of the year. In mainland Europe, we have experienced a good level of interest from potential franchisees, as is evidenced by the fact that we added eight in the year, and service revenue from existing franchises continues to grow. We are excited by the prospect of further progress, both in Germany and Austria as well as in Spain and other territories, in the years ahead. The market for each of Filta’s services has been largely unaffected by economic swings in our operating territories and we Current Trading & Outlook 2018 was an active year for the Group as we continued to experience strong organic growth whilst undertaking two acquisitions. The acquisition of FiltaFry Deutschland GmbH ushered us into the German market and, more broadly, the mainland Europe franchise market where we are experiencing good initial results with the US franchise model. The acquisition, late in the year, of Watbio Holdings Limited was also a significant move for us. Importantly, both transactions fit squarely with our strategy of increasing high margin recurring revenue business and will support further growth in the years ahead. We are focused on the successful integration of Watbio in the first half of 2019 and we anticipate an acceleration in revenue and profitability as it builds its client base and we begin to realise identified and significant synergy benefits. Whilst we anticipate a gradual slowdown in new franchise sales in the US over time, our European operation has picked up the mantle and we are encouraged both by the strength of the new business pipeline and the market opportunity that will come from the broader geographic base. Additionally, we are experiencing strong growth in FiltaSeal and our other and, in December, we acquired one of the largest operators in this market, Watbio Limited. Watbio Acquisition and Integration The majority of Watbio’s revenue is derived from the same services as those being offered by FiltaGMG and, similarly, they are mostly in the nature of repeat business. With revenues of over £10m, an experienced team and a high-quality customer base, the acquisition of Watbio at the end of the year was a significant step for the Group. The additional revenue will change the geographic split of the revenue towards the UK in 2019 but keep the key attributes of being high margin and repeat by nature. We are well on the way to having the two businesses fully integrated and expect, by mid-year, to be realising some of the efficiency benefits with the full-year impact of these being seen in 2020. 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 that they have developed with customers and franchise owners alike. In North America, the management team remains stable with Tom Dunn, Chief Executive Officer North America, continuing to run the day to day business, enabling us to continue executing on our plans. In the UK, Edward Palin, former Watbio Managing Director, was recently appointed as Managing Director of Filta’s UK operations, strengthening the experience and skills needed for our expansion in the coming years. Jos van Aalst, Managing Director of Filta’s mainland Europe business, proved a great addition last year and continues to drive growth in Europe. Lloyd Martin recently joined the Filta Board as a non-executive director and brings with him more than 35 years of experience in the 15 Financial StatementsGovernanceStrategy and Operations OverviewChief Executive’s Operating Review company operated offerings and, with the implementation of a new scheduling system, anticipate improved efficiencies and gross margin. Jason Sayers Chief Executive Officer 12 April 2019 16 Operational Performance & KPIs The key performance indicators for our Fryer Management Services are:- • The number of new franchisees and territories that we are able to add each year • The number of operating MFU’s in the Group 1 – Franchise Development Franchise Sales North America UK Europe 16 15 19 25 1 8 5 4 9 2018 2017 2016 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 year Our performance against each of these indicators is summarized in the charts: 25 Franchise Sales 450 MFUs at y/e 35,000 Seals Replaced 3,400 GMG Jobs Performed North America UK Europe 392 351 300 250 43 15 2018 2017 2016 43 41 30 3 – Company Owned Operations Seals Replaced 35,451 28,906 21,345 19,089 FiltaGMG Jobs Performed 3,386 1,067 2018 2017 2016 2018 2017 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 23% to £14.2m (2017: £11.5m) • Revenue grew across each service offering with a Group gross margin of 49.8% (2017: 49.2%) • Profit from continuing operations increased 69% to £1.3m (2017: £0.8m) • Adjusted EBITDA from continuing operations was up 25% • Deferred income balance grew by £0.7m to £3.7m • Basic earnings per share from continuing operations of 4.86p (2017: 2.90p) up 68% Revenue Group revenue from continuing operations grew by 23% to £14.2m (2017: £11.5m). Revenue from North America was £9.2m, 65% of Group revenue (2017: £8.3m, 72%); the U.K. delivered £4.7m of revenue, 33% (2017: £3.2m, 28%); and, in its first year, Europe had revenue of £0.3m, 2% of Group revenue (2017: Nil). The 23% increase in revenue was a result of robust growth across each of our core service offerings of Franchise Development, Fryer Management, FiltaSeal and FiltaGMG, whilst we had a very modest £0.2m contribution from our most recent acquisition Watbio Holdings Limited. Fryer Management Services continues to be the key driver of the business, contributing £9.3m of revenue (2017: £8.4m) on higher royalty, national account and waste oil revenues whilst FiltaSeal experienced a 24% increase in revenue growing to more than £1.6m (2017: £1.3m). We continue to be encouraged by the opportunity that FiltaGMG provides and in our first full year of ownership following its acquisition in August 2017 revenues were £1.7m. The Franchise Development activities also performed solidly, growing 11% strengthened by the rollout in Europe, while maintaining a strong pipeline entering the new year. Gross Profit Gross profit increased by £1.4m or 25% to £7.1m (2017: £5.7m) primarily on higher volume. These results further support the strength of the Group’s position in the markets it serves which enabled a 23% revenue gain whilst also delivering improved gross margins. Strong revenue growth contributed £1.3m whilst an increase in gross profit margins to 49.8% (2017: 49.2%) added an additional £0.1m. Adjusted EBITDA Adjusted EBITDA increased 25% to £2.6m (2017: £2.1m) whilst the Adjusted EBITDA margin increased to 18.6% (2017: 18.3%) despite higher spend on people and infrastructure to support a 29% annual growth rate in revenue over the last three years. Spending increases were concentrated in two primary areas; payroll costs represented 1/3rd of the increase and were evenly distributed between legacy and acquired businesses; and facility related spend grew on additional facilities associated exclusively with our acquisitions. Despite higher spending in the current year, the adjusted overhead base as a percentage of revenue remains in line with prior year. Adjusted EBITDA reconciliation Adjusted EBITDA has been arrived at as follows: Profit before tax Acquisition, legal and IPO related costs Share-based payments Depreciation and amortisation Finance costs, net Adjusted EBITDA 2018 £ 1,741,838 158,598 302,506 399,055 40,439 2,642,436 2017 £ 1,607,727 120,280 87,082 209,912 90,952 2,115,953 Alternative Performance Measures In addition to performance measures 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 operational performance. EBITDA to cash conversion is an important metric for management as it measures both the efficiency 18 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. Deferred Income Group revenue for the year ended 31 December 2018 includes £0.8m (2017: £0.6m) which was released from brought forward deferred income during the year. We generated a further £1.5m of deferred revenue, of which £0.2m originated from the Watbio acquisition; £0.2m relates to opening package fees for franchises that will start in 2019, and will therefore be recognised in that year; and £1.1m relates to territory fees on both new and existing franchises and will be recognised over the life of the franchise agreement. The deferred revenue balance grew by £0.7m to £3.7m and was favourably impacted by the foreign exchange effect of a strengthening dollar which had a £0.2m effect on the year-end balance. The following chart shows the components of the change in deferred income in 2018. £2,937,327 -£815,992 £1,128,148 £236,241 £174,196 £722,593 £3,659,919 Foreign Exchange Deferred Revenue Added Change in Deferred Revenue Deferred Revenue Added Deferred Revenue Released Deferred Revenue Balance Deferred Revenue Balance 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 2018 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 2018, the deferred income account totalled £3.7m, and will be recognized as income over the next 10 years as follows: £868,788 £513,897 £499,294 £451,861 £394,511 £315,802 £249,918 £188,422 £126,230 £51,196 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 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 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 2018, Filta Refrigeration contributed a net profit of £0.02m (2017: £0.03m). The tax impact of discontinued operations is £Nil (2017: £Nil). Acquisitions On 31 January 2018, we acquired FiltaFry Deutschland GmbH, the entity that held the master franchise license for Germany, for a total consideration of €0.25 (£0.2m). Consideration will be satisfied by the payment of €0.2m in cash and €0.1m through the issue of new ordinary shares in Filta to the vendor. This business contributed £0.2m to group revenue, £0.003m to the group’s adjusted EBITDA and £0.2m to the group’s deferred revenue at 31 December 2018. On 22 December 2018, we acquired Watbio Holdings Limited, a provider of grease and drain management solutions to commercial kitchens across the UK, for a total consideration of £6.4m. Consideration was satisfied as to £0.8 million by the issue of 400,000 new Ordinary Shares in Filta to the vendors and by the payment of up to £5.6m in cash, of which £0.3m remains contingent on the collection of certain debtor balances by 31 May 2019. The business contributed £0.2m to Group revenue, £0.02m to the Group’s adjusted EBITDA and £0.2m to the Group’s deferred revenue at 31 December. 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 blended effective tax rate was 24.2% and the total tax charge was £0.4m (2017: £0.8m). Earnings per share The basic and diluted earnings per share for the year, from continuing operations, were 4.86p and 4.82p (2017: 2.90p and 2.87p) whilst the basic and diluted earnings per share, from continuing and discontinued operations, were 4.93p and 4.89p (2017: 3.03p and 2.99p) respectively. Cash flows and cash balance The Group generated cash flow from operations of £2.0m (2017: £1.8m) reducing to £0.8m (2017: £1.3m) after the payment of taxes. These were increased in 2018 by the transition in the US of corporate tax liability previously being paid in arrears to now being estimated and paid in advance. This effectively resulted in the payment of both 2017 and 2018 US tax liabilities in 2018. The main cash outflows related to the acquisition of FiltaFry Deutschland GmbH of £0.2m (2017: £Nil), cash taxes £1.2m (2017: £0.5) and dividends £0.4m (2017: £0.2). At the year end the Group had cash balances of £6.8m (2017: £4.0m) and outstanding borrowings of £4.7m (2017: £1.1m), including a term loan of £4m drawn down to provide part of the consideration paid for the Watbio acquisition. Brian Hogan Chief Financial Officer 12 April 2019 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 Trend on year: Comment Failure to attract new franchisees or to grow the number of MFUs in line with the strategic targets may prevent the Group from achieving its operating targets In the USA, which represents approximately 70% of the franchised operations, we have an increasing number of franchisees who are multi-MFU operators, a trend which we are endeavouring to develop. Thus, an increasing number of new MFUs are being taken up by existing franchisees. Stable ➔ Strong pipeline across our operating territories. 2017: Stable The failure of a major franchisee may lead to a loss of revenue and/or a bad debt We now have 199 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. Stable ➔ 2017: Stable Brand or reputational damage may be caused by the actions of either franchisees or the company’s own employees We provide detailed initial training for all new franchisees and their operators. There are also refresher training programmes to ensure that all franchisees are fully cognisant of all procedures to be followed. Stable ➔ 2017: Stable its Board may Undue influence by a major shareholder on the Company and lead to decisions or actions which are not in the best interests of the business There is a majority of the Board who are not associated with the founding shareholder group and whose obligations to act in the best interests of shareholders as a whole are unfettered Stable ➔ 2017: Stable Stable ➔ 2017: Stable Increasing ➔ 2017: Decreasing incident involving An 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 loss of key people may compromise the Group’s or any part of the Group’s ability to operate effectively. We provide regular and comprehensive training to employees and franchisees in the operation of MFUs 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 both its CRM and Accounting software for a number of years and both have a strong reputation and have proved to be highly reliable. We also have dedicated IT personnel who are tasked with ensuring the security and availability of the systems. Finally, in the new year we have engaged our current accounting system provider to partner with us on an overall review of our current accounting platform focused on setup, processes and controls. We have widely spread knowledge of the Group’s operational systems and procedures, thereby ensuring 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. composition our The franchise base continues to diversify. of focuses on Management positive awareness through training and strongly monitors its results. brand The risk has not changed during the year. The Board has added a new independent director post year end which further independent strengthens oversight. The risk has not changed during the year. The risk is monitored internally and through both third party inspections. With two acquisitions during the year we are operating on a number of different platforms. This places additional burdens on systems and people. We currently working on are migrating all Group companies to our chosen operating and accounting platforms which should be complete by 30 June. Stable ➔ 2017: Stable We have done considerable improve work this year our processes talent management, retention and succession planning. to for Failure to comply with new GDPR requirements We have undergone a detailed assessment of the readiness of the business and an action plan was developed to ensure compliance. Stable ➔ 2017: New We have assigned dedicated resources and are working with an external consultant to ensure we are in compliance. 21 Financial StatementsGovernance OverviewStrategy and OperationsPrincipal Risks and Uncertainties Risk How we manage the risk Trend on year: Comment Acquisition and integration of new businesses New Risk All potential acquisitions are rigorously assessed and evaluated, both internally and by external advisors, to ensure any potential acquisition meets the Group’s strategic and financial criteria. This process is underpinned by extensive integration procedures and the close monitoring of performance post acquisition by both local and Group management. is Filta’s management team developing a track record of success in integrating acquisitions and this builds with each acquisition. strong A significant fall in the value of the US Dollar (which has accounted for approximately 75% of the Group’s operating profits) against £ sterling may have an adverse impact on the Group 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. Stable ➔ 2017: Stable The risk is monitored on a regular basis against both in- house and external mitigation options. Following the recent acquisitions less than 50% of the revenues will be in US dollars 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, health of watchdogs, may result in less demand for fryers. pressures from 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. Stable ➔ 2017: Stable 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. Stable ➔ 2017: Stable Improved fryer technology may deterioration reduce/resolve of the oil and therefore require less filtering and replacement. frequent 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. Decreasing ▼ ➔ 2017: Stable Stable ➔ 2017: Stable New Risk 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. Many years of exposure to fluctuating markets have given us experience of operating and developing our business successfully during periods of economic and political volatility. We continually monitor and analyse economic and demand indicators to ensure that our supply chain remains flexible and our portfolio of service offerings remains relevant. This analysis provides a key input to our business planning and go to market strategies. The Group’s international footprint and a diversifying portfolio also provide a mitigating balance in our exposure to both EU and non-EU markets. Franchisees may seek to impose the commercial Group, reduced margins and profitability leverage on in resulting Economic Risk arising political uncertainty from 22 We have not witnessed any significant in our change competitive landscape. This risk is monitored through with ongoing periodic franchisees reviews of the markets we operate in. discussions and is changes and, continually The Group in reviewing working technology closely with our long term supplier, recently introduced a 4th generation Mobile Filtration Unit to the market. Our franchise base continues to grow and diversify which helps us ameliorate any potential risk. Relationships are developed and maintained with all our key customers and suppliers to ensure we stay apprised of uncertainties in the market and how those uncertainties are impacting their business. Additionally, Group has a commercially astute management and Board who maintain ongoing discussion on economic risks to the business. team the Governance Corporate Governance Statement Board of Directors Board Governance and Activities 24 26 27 30 Audit Committee Report 32 35 Directors’ Report 38 Remuneration Committee Report Corporate Social Responsibility Report 23 23 Financial StatementsGovernance OverviewStrategy and OperationsCorporate Governance Statement Dear Shareholders, As Chairman of the Board of Directors of Filta, it is my responsibility to ensure that Filta has both sound corporate governance and an effective Board. The Chairman’s principal responsibilities are to ensure that the Company and its Board are acting in the best interests of shareholders. My leadership of the Board is undertaken in a manner which ensures that the Board retains integrity and effectiveness, whilst creating the right Board dynamic for ensuring that all important matters, in particular, strategic decisions, receive adequate time and attention at Board meetings. Filta adopted the Quoted Companies Alliance Corporate Governance (QCA Code) in September 2018, in line with the London Stock Exchange’s changes to the AIM Rules earlier in the year. This report follows the QCA Code guidelines and explains how we have applied the guidance. The Board considers that the Group complies with the QCA Code in all respects, and details of the Company’s compliance can be found on the Company’s website. The Board believes that application of the QCA Code supports the Company’s medium to long-term development whilst managing risks, as well as providing an underlying framework of commitment and transparent communications with stakeholders. It also seeks to develop the knowledge shared between the Company and its stakeholders. Filta seeks to constantly improve its corporate governance practices, illustrated this year through the appointment of an additional Independent Non-Executive Director, a change in the composition of the Remuneration Committee (all members are now Independent Non-Executive Directors), and the implementation of an official Board evaluation. Strategy, Risk Management and Responsibility The Board is responsible for 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. The Audit Committee (see page 30) has delegated responsibility for the oversight of the Company’s risk management and internal controls and procedures, as well as determining the adequacy and efficiency of internal control and risk management systems. The Board continuously monitors and upgrades its internal control procedures and risk management mechanisms and conducts an annual review, when it assesses both for effectiveness. This process enables the Board to determine if the risk exposure has changed during the year and these disclosures are included in the Annual Report. In setting and implementing the Company’s strategies, the Board, having identified the risks, seeks to limit the extent of the Company’s exposure to them having regard to both its risk tolerance and risk appetite. An internal audit function is not yet considered necessary as day to day control is sufficiently exercised by the Executive Directors. However, the Board will continue to monitor the need for an internal audit function. Board Evaluation This year, Filta introduced a formal Board evaluation process, which will be repeated annually and will be undertaken by an independent third party every third year. The evaluation addressed the performance and capability of the Board as a whole and individually (using a 360-degree peer review). Each Director was also asked to evaluate the Chairman, and the Non-Executive Directors conducted a self-appraisal. The questionnaires, comments and ratings were collated by the Chairman, and results (having been anonymised) were circulated to the Directors. The Board subsequently reviewed the evaluation results and appropriate actions were determined and will be followed up over the course of the year. As a result of the evaluation, the Board has concluded that, in general, it works effectively, cohesively and in a co-operational manner, with the executive team providing strong operational management, reliable and timely information and demonstrating a clear understanding of the Group’s risks, challenges and opportunities, whilst the non-Executive Directors provide valuable oversight, challenge and advice. The Board is aware of the need to develop its financial systems and controls in line with the organic and acquisition growth that it is currently enjoying and has strengthened the finance team with a number of appointments over the last 6 months. It also identified the need for a non-executive director with specific knowledge of the water industry to support the management team as the Group’s exposure to that industry expands. The appointment of Lloyd Martin since the year-end has addressed this matter and also increased the number of independent directors to three. 24 Conclusion I hope this report clearly sets out how your company is run, and how we align governance and our Board agenda with the strategic direction of Filta. We always welcome questions or comments from shareholders, either via our website (www.filtaplc.com) or in person at our AGM. Tim Worlledge Chairman 25 Financial Statements OverviewStrategy and OperationsGovernanceHEAD_0 1st lineBoard of Directors Tim Worlledge, FCA Independent Non-Executive Chairman Tim has over 30 years’ experience in the financial services industry working with and advising growth companies. He was formerly Head of Corporate Finance at each of Evolution Group and Williams de Broe and has previously been a director of the Quoted Companies Alliance. He is currently a director of Evolution Securities China Limited. Jason Sayers Executive Director – Group 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 Executive Director – Group Chief Financial Officer 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 subsequently in 1990 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. Roy Sayers Non-Executive Director Roy was appointed Non-Executive Director of Filta Group UK in 2000 serving the company from that date. He has a background in civil engineering and property development, founding, operating and running his own companies in both sectors for many years. Graham Woolfman, FCA Independent Non-Executive Director Graham is a Fellow of the Institute of Chartered Accountants in England & Wales and previous partner 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, and a non-executive director of two other companies. Lloyd Martin Independent Non-Executive Director – Appointed 18 February 2019 Lloyd is a Fellow of Chartered Institution of Water & Environmental Management and has more than 35 years’ experience of the water industry. He recently retired as Chief Executive of British Water, the leading association supporting the UK water industry. Lloyd was formerly the UK water industry’s international trade advisor to the UK Government, Regional Director at Severn Trent Services International and Business Development Manager at Anglian Water International. 26 Board Governance and Activities Board Governance and Activities The Board At the date of this Report, the Board has eight members, whose biographies and roles are set out below: Director’s Name Position(s) Tim Worlledge Jason Sayers Brian Hogan Victor Clewes Jlubomir Urosevic Roy Sayers Graham Woolfman Lloyd Martin 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 and member of Audit Committee Non-Executive Director – Chairman of Audit Committee and member of Remuneration Committee. Non-Executive Director and member of Remuneration Committee Non-Executive Directors and Independence The Directors believe that the Board, as a whole, has a broad range of commercial and professional skills, enabling it to discharge its duties and responsibilities effectively and that the Non-Executive Directors, together, have a sufficient range of experience and skills to enable them to provide the necessary guidance, oversight and advice for the Board to operate effectively. All Directors are encouraged to use their independent judgement and to challenge all matters, whether strategic or operational. The Board is satisfied that there is a suitable balance between independence, on the one hand, and direct managerial and operational knowledge of the Company, on the other, to ensure that no individual or group may dominate the Board’s decisions. Tim Worlledge, Graham Woolfman and Lloyd Martin are considered to be independent of management. Roy Sayers, as a significant shareholder and relative of 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 the commencement and expiry dates of their current periods of appointment: Director Tim Worlledge Roy Sayers Graham Woolfman Lloyd Martin Date Current Term Commenced 04/11/2016 04/11/2016 04/11/2016 18/02/2019 Expected Expiry Date of Current Term 03/11/2019 03/11/2019 03/11/2019 17/02/2022 27 Financial Statements OverviewStrategy and OperationsGovernanceBoard Governance and Activities Attendance at Board and Committee meetings All of the Executive Directors work full time for the Company, except Jlubomir Urosevic and Victor Clewes, who each devote a minimum of 24 hours per week. The Chairman is expected to devote not less than 32 days per annum and the Non-Executive Directors are each expected to dedicate not less than 18 days per annum to the Company’s affairs. The Chairman and Non-Executive Directors endeavour to ensure that their knowledge of best practices and regulatory developments is continually up to date by attending relevant seminars and conferences. There were 11 scheduled Board meetings and 4 additional Board meetings held during 2018. The table below sets out attendance statistics for each Director at Board, 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 Lloyd Martin (2019 appointment) Board (15 meetings held) Audit Committee (3 meetings held) Remuneration Committee (1 meeting held) 15 15 15 15 14 15 15 – 3 3 3 – – – – – 1 1 – – – – – – 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. 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 for each of the Committees were set at the time of the admission to AIM but they are reviewed continuously to ensure continued compliance with best practice and in response to amendments to FRC guidance. They may be viewed on the Group’s website (www.filtaplc.com). 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 Audit Committee is made up of Roy Sayers, Tim Worlledge, FCA and Graham Woolfman, FCA (Chair) who has recent and relevant financial experience, both as a result of his formal qualifications and his roles elsewhere. It has responsibility for monitoring the integrity of the financial statements and related narrative to ensure that they properly represent the Company’s financial position and trading results, that they have been prepared in accordance with appropriate accounting standards and that the auditors have been provided with the necessary information to carry out their audit procedures. 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. A report by the Chairman of the Audit Committee is included on pages 30 to 31. Remuneration Committee The Remuneration Committee comprised Tim Worlledge (Chairman) and Graham Woolfman during 2018 but now, following his appointment as a Director, also includes Lloyd Martin. The Remuneration Committee’s principal responsibilities include the setting of remuneration levels and structure for the Executive Directors, monitoring the level of remuneration for senior management and overseeing the design and application of share options and rewards plans. A Remuneration Report from the Chairman of the Remuneration Committee is set out on pages 32 to 34. 28 HEAD_0 1st lineShareholder objectives and Communication The corporate governance arrangements that the Board has adopted are designed to ensure that the Company delivers long-term value to its shareholders and that shareholders are able to express their views and expectations for the Company in a manner that encourages open dialogue with the Board. In addition to the publication of half-year and full year results statements, the Company provides frequent trading updates and makes its senior management team available to meet with shareholders, when there is opportunity for shareholders to voice their concerns, thoughts or needs. The Company has recently appointed an independent research company to publish reports on the Company, in order that more of its shareholders may obtain access to such information. Culture and Social Responsibility The Board recognises the importance of displaying an ethical corporate culture and of having regard to its social responsibilities in so far as its actions may impact upon society, its local communities and the environment. It is aware that the tone set by the Board and by its decisions regarding strategy and risk may impact the corporate culture of the Company as a whole and on the way that employees and other stakeholders behave. The Company operates in a manner that encourages an open and respectful dialogue with employees, customers and other stakeholders and the Board considers that sound ethical values and behaviours are crucial to the ability of the Company to achieve its corporate objectives. The Board places great importance on this aspect of corporate life and seeks to ensure that this flows through all that the Company does. The Directors believe that the Company has an open culture facilitating comprehensive dialogue and feedback and enabling positive and constructive challenge. 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 in taking Corporate Social Responsibility to support responsibly-grounded business decision-making by having regard to 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 Company conducts annual employee engagement surveys to determine if ethical values and the Company’s corporate culture are recognised and respected and seeks to understand any underlying issues or dissatisfactions within the workforce. Additionally, employee- management meetings and the use of Perform Yard provide the Company with the opportunity for continual dialogue with employees. The Company seeks to impart its corporate culture to staff through an employee handbook. Filta publicises information on its Corporate Social Responsibility and actively seeks to promote ethical corporate culture. The Company’s Corporate Social Responsibility Report is included on pages 38 to 39. 29 Financial Statements OverviewStrategy and OperationsGovernanceHEAD_0 1st lineAudit Committee Report Overview The Audit Committee met three times during the year. The external auditors attended each of these meetings at the invitation of the Committee Chairman. The Committee also met with the external auditors without the presence of Executive Directors or management. In the coming year, in addition to the Committee’s ongoing duties, the Committee plans to: • keep the need for an internal audit function under review, having regard for the Company’s strategy and resources; and, • undertake assessments of the external auditor’s performance. The Committee will assess the external auditor’s performance and effectiveness alongside the Group’s senior finance team. The output from the process will be reviewed and discussed by the Audit Committee and with the external auditor in 2019. • perform a periodic assessment of its own performance in 2019 to ensure it is operating at maximum effectiveness. The Committee will recommend any changes it considers necessary to the Board. Objectives and Responsibilities The Committee, operating under its Terms of Reference, discharged its responsibilities by, amongst other things, reviewing and monitoring: • the consistency of, and any changes to, accounting policies both on a year-on-year basis and across the parent Company and the Group; • the methods used to account for significant or unusual transactions; • whether the Company has followed appropriate accounting standards and made appropriate estimates and judgments, taking into account the views of the external auditors; • the effectiveness of the external auditors and considering and making recommendations on the appointment, reappointment and removal of the external auditors; • the adequacy and effectiveness of the Company’s internal financial controls and internal control and risk management systems; • the clarity of disclosure in the Company’s financial reports and the context in which statements are made; and • all material information presented with the financial statements, such as the operating and financial review including the audit and risk management statements within the corporate governance report. The full terms of reference are available at the Company’s website www.filtaplc.com Financial Reporting During the year, the Committee concluded that the Annual Report and financial statements, taken as a whole, were fair, balanced and understandable and provided the information necessary for shareholders to assess the Company’s and the Group’s financial position, performance, business model and strategy. The principal matters the Committee considered concerning the 2018 financial statements were recognition of revenue, acquisition accounting, profit and provisioning, in accordance with International Financial Reporting Standards. A particular focus for the Committee during the year was the Company’s approach to the implementation of IFRS 9 and IFRS 15 and related briefings on their impact on the financial statements. Adjustments related to IFRS 9 were reviewed and disclosure of impact in 2018 was deemed appropriate whilst assumptions underlying revenue recognition were reviewed and considered appropriate. It was concluded that IFRS 15 would not have an effect on the financial statements, whilst IFRS 9 resulted in a £0.1m transition adjustment to opening retained earnings. Further information on both is provided in notes 3 and 4 to the accounts. With respect to the 2019 financial year, the Committee has focused on IFRS 16 scheduled for adoption on 1 January 2019. Prior to the acquisition of Watbio Holding Limited on 22 December 2018, the anticipated effects were not expected to be material to the Group. However, management now anticipates that the implementation of IFRS 16 will have a more significant effect on the financial statements as it is estimated that, on transition, the Group will recognize a right-of-use asset and corresponding lease liability of approximately £0.5m. The Committee will continue to monitor the impact on both financial performance and reporting. The Committee reviewed the 2018 full-year and half-year results announcements and considered matters raised by the external auditors identifying certain issues requiring its attention, The Committee also reviewed the Strategic Report and concluded that it presented a useful and fair, balanced and understandable review of the business. The Committee has continued its monitoring of the financial reporting process and its integrity, risk management systems and assurance. 30 Auditor’s Independence The Committee approves the external auditor’s terms of engagement, scope of work, the process for the interim review and the annual audit. It also meets with the auditor to review the written reports submitted and the findings of their work. It has primary responsibility for making recommendations to the Board on the appointment, reappointment and removal of the external auditor. The Committee, at least annually, assesses the independence, tenure and quality of the external auditor. Graham Woolfman Chair Audit Committee 12 April 2019 31 Financial Statements OverviewStrategy and OperationsGovernanceHEAD_0 1st lineRemuneration Committee Report Committee Details of the Remuneration Committee’s composition and responsibilities are set out in the Corporate Governance Section on page 28 and its terms of reference can be found on the Group’s website at: www.filtaplc.com The Committee, which comprises only independent Non-executive Directors, meets as required during the year and invites recommendations as to remuneration levels, incentive arrangements for senior executives and proposals regarding share option awards from the Chief Executive Officer. The meetings are also attended by Roy Sayers (as an observer), who, because of his significant shareholding interest and as a relative of the Chief Executive, is not considered to be independent but has a long involvement with the Company and therefore has helpful knowledge of both the capabilities of key staff and of appropriate performance measurement criteria. Responsibilities The Remuneration Committee’s principal responsibilities include: • establishing, within agreed terms of reference, the Group’s policy on the remuneration of Executive Directors and senior executives and monitoring the policy for the remuneration of staff, generally; • the setting of remuneration structure and level for the Executive Directors; • monitoring the level of remuneration for senior executives, including the setting of appropriate targets for performance related pay; and • overseeing the design and application of share options and rewards plans Company’s policy on remuneration of Directors Our policy is to ensure that the remuneration of Directors and senior executives is aligned with performance and that all employees are rewarded for the delivery of long-term value to shareholders. The main components of the remuneration packages for Executive Directors are: Basic salary or fees The basic salary or fees for each Director are determined by considering the performance of the individual and information, where available, on the rates of salary for similar posts in comparable businesses. Annual bonus There were not any bonuses paid in 2018 (2017: £0.02m paid to Brian Hogan but his fixed salary for 2018 was increased to include the bonus element). In the future, cash bonuses representing up to approximately one third of total remuneration will be available to Executive Directors and Senior Executive Managers on the attainment of stretching performance targets, save that it is considered that Jason Sayers, Victor Clewes and Jlubomir Urosevic, all of whom are significant shareholders, are adequately incentivised by way of dividends and, therefore, do not receive performance-related bonuses. Benefits in kind Presently, three of the Executive Directors are provided with company cars and medical insurance. Share options The Company’s policy is that, in addition to their salaries and bonuses, Executive Directors and Senior Executive Managers should be awarded share options or, in the case of US employees, Share Acquisition Rights (SARs) in order that their interests may be more closely aligned with those of shareholders. Owing to the Company being engaged in corporate activity during the year and, therefore, in long periods of restricted share trading, there were limited opportunities for options and SARs to be awarded. Accordingly, no options or SARs were awarded in 2018 but SARs over 30,000 shares, representing his 2018 allocation, have been awarded to Brian Hogan during the current year. Due to the size of their existing beneficial holdings, Jason Sayers, Victor Clewes and Jlubomir Urosevic are not permitted to participate in the share options plans. The Non-Executive Directors, whose remuneration is determined by the Board as a whole, receive fees in connection with their services provided to the Group, to the Board and to Board Committees. Additionally, Roy Sayers, is provided with a company car. Senior executives receive basic salaries, annual bonuses according to performance against defined targets, benefits in kind, which may include company cars and health insurance, and participation in share option plans. 32 Share options plans We believe that all employees should have the opportunity to participate, alongside shareholders, in the long-term growth and success of the Group. This is effected by giving all employees the opportunity to participate in either the Filta Group Holdings Enterprise Management Incentive Plan (‘EMI’ or ‘The Plan’), for all qualifying UK employees, or by being awarded Share Acquisition Rights (‘SARs’), for all qualifying US employees. The awards of SARs follow the structure of the EMI Plan to provide holders of SARs with the same reward value as if the SARs were share options, save that the reward is provided in cash and does not involve the issue of shares. Both of the Plan and SARs include time criteria, whereby the awards are normally only capable of being crystallised after a minimum of two years of continuous employment, and, for senior employees, performance-based criteria which are set when the awards are made and may be either financial or operational. Directors’ emoluments The Directors’ emoluments during the year are set out below: Executive Directors Jason Sayers Brian Hogan Victor Clewes (note 1) Jlubomir Urosevic (note 2) Non-Executive Directors Tim Worlledge Roy Sayers Graham Woolfman Lloyd Martin (2019 appointment) Total Notes Salary/Fees £ Bonus £ 196,618 115,569 196,618 51,667 44,167 30,000 30,000 - 664,639 – – – – – – – – – Benefits £ 25,102 4,077 12,010 4,682 – 2,094 – – 47,965 2018 Total £ 221,720 119,646 208,627 56,349 44,167 32,094 30,000 – 712,604 2017 Total £ 217,661 120,236 205,548 91,769 35,000 32,453 30,000 – 723,667 1. Victor Clewes, who was one of the founders of the business, indicated that he would like to reduce his day-to-day involvement with the business in order to pursue other unrelated and non-competing interests. Accordingly, the Board has agreed that he should reduce his time commitment to 3 days per week with effect from 1 January 2019 on an annual salary of $125,000 and the benefits in kind remain unchanged. He remains on the Board and retains overall responsibility for the franchise development activities in North America. 2. Jlubomir Urosevic, who has been Managing Director of the UK business for the last 15 years, also reduced his day-to-day involvement to 3 days per week during the year and has become Corporate Development Director, in which role the has principal responsibility for the sourcing of acquisition opportunities. His annual salary is now £45,000 and the benefits in kind remain unchanged. His role as UK Managing Director has been taken on by Ed Palin, formerly Managing Director of Watbio. 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 Lloyd Martin Date of contract 26 October 2016 26 October 2016 26 October 2016 26 October 2016 26 October 2016 26 October 2016 26 October 2016 18 February 2019 Notice period 6 months 6 months 6 months 6 months 3 months 3 months 3 months 3 months 33 Financial Statements OverviewStrategy and OperationsGovernanceHEAD_0 1st line Remuneration Committee Report Directors’ interests The interests and beneficial interests of the Directors in the shares of the Company at 31 December 2018 are set out below: No of Shares No of Share options/SARs 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. 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. Tim Worlledge Chair Remuneration Committee 12 April 2019 34 HEAD_0 1st line Directors’ Report The Directors present their report and the audited financial statements for the year ended 31 December 2018. 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 2018 including a description of the Company’s strategy, business models and business overview. Results and Dividends The profit for the year was £1.3m (2017: £0.8m). Further details are set out on Page 45. The final dividend for year ended 31 December 2017 of 0.65p and the 2018 interim dividend of 0.72p were paid during the year. The Board has proposed a final dividend for the year ended 31 December 2018, subject to approval at the Annual General Meeting, of 0.92p. Annual General Meeting The Annual General Meeting of the Company will take place on 12 June 2019 at The Locks, Hillmorton, Rugby, Warwickshire, CV21 4PP, commencing at 11:00 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 28 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 2018, there were 28,918,630 (2017: 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 Companies House in the UK, or by writing to the Company Secretary, at the registered office of the Company. 35 Financial Statements OverviewStrategy and OperationsGovernance Directors’ Report Substantial Interests As at 31 December 2018, 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 Gresham House Asset Management Roy Sayers Blackrock, Inc Ennismore Fund Management Limited Jlubomir Urosevic Canaccord Genuity Wealth Management Number of ordinary shares Percentage of issued ordinary shares 7,926,560 4,558,750 3,688,120 3,614,000 1,762,160 1,627,945 1,435,980 1,309,690 1,060,000 27.4 15.7 12.7 12.5 6.1 5.6 5.0 4.5 3.7 * 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 66.7%. All of the issued shares in the Company Filta Group Holdings plc are listed on AIM and it 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. There are no restrictions on the transfer of any of the issued shares. Political Contributions It is the Group’s policy not to make political donations, accordingly there were no political donations made during the year (2017 – £ 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 U.K. LLP has indicated its willingness to continue in office as auditors of the Company. In accordance with section 489 of the Companies Act 2006, the Board has decided to re-appoint Crowe U.K. 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 There are no post year-end developments to report. 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 2018 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 16 and the Chief Financial Officer’s Review on pages 18 to 20. Financial Risk Management Details are set out in note 30 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. 36 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 pages 26 to 27 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 12 April 2019 and signed on its behalf by: Brian Hogan Chief Financial Officer 12 April 2019 37 Financial Statements OverviewStrategy and OperationsGovernanceHEAD_0 1st lineCorporate Social Responsibility Report 2.44m lts The whole concept of FiltaFry was built around sustainability. That, combined with its commitment to the community, demonstrates Filta’s social responsibility. Fuel Saved 699 mt Plastic Saved 33.1k mt Carbon Offset Environment Filta services over 7,000 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 2018, FiltaFry customers saved over 9,908 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 746 mt 6,411 mt 2.44m lts 699 mt 466 mt 12,939 mt FiltaBio In 2018, Filta collected 8,975 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) 55.9 mt 20,399 mt 38 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, 2017 and 2018 • FiltaCares Campaign to continue support through 2018 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. 39 Financial Statements OverviewStrategy and OperationsGovernanceHEAD_0 1st lineFinancial Statements 41 45 46 47 48 49 50 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 51 52 83 Corporate Information 40 Independent Auditor’s Report to the Members of Filta Group Holdings PLC year ended 31 December 2018 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 2018, which comprise: • the group statement of comprehensive income for the year ended 31 December 2018; • the group and parent company statements of financial position as at 31 December 2018; • 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 2018 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 £130,000 based on a percentage of adjusted EBITDA. 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 £7,000. Errors below that threshold would also be reported to it if, in our opinion as auditor, disclosure was required on qualitative grounds. 41 Financial StatementsGovernance OverviewStrategy and OperationsIndependent Auditor’s Report to the Members of Filta Group Holdings PLC year ended 31 December 2018 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 Global in the US (the ‘component auditor’) undertook a full scope audit of Filta Group Inc., under our direction. Filta Group Inc., accounts for approximately 65% 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 How the scope of our audit addressed the key audit matter Acquisition of Watbio Holdings Limited During the year, the group acquired Watbio Holdings Limited for total consideration of £6.4m. Intangible assets of £6.6m were identified as part of the acquisition excluding goodwill of £0.9m, a deferred tax liability of £1.1m was recognised in respect of the intangibles. Accounting for business combinations is complex and requires management to assess the fair value of the assets and liabilities acquired including any identified intangible assets. We identified the acquisition as a risk because of the size of the acquisition and the judgement and assumptions applied by management in assessing the fair value of the assets and liabilities acquired including any identified intangible assets. There is a risk that inappropriate assumptions could result in material errors in the acquisition accounting. Revenue recognition Revenue is recognised in accordance with the accounting policy set out in the financial statements. This includes the transition to IFRS 15 – Revenue from contracts with customers. 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. 42 Our audit procedures consisted of the following: • Obtaining and assessing management’s acquisition accounting paper in relation to the acquisition. • Obtaining the share purchase agreement to understand the terms of the transaction and we agreeing the consideration paid. • Performing audit work on the acquisition balance sheet to ensure that assets and liabilities were appropriately recognised. • Challenging the assumptions used to calculate the fair value intangible assets, being the discount rate and customer attrition rate. • Assessing the appropriateness of the related disclosures in the financial statements. Our audit procedures consisted of the following: • Reviewing the Group’s assessment of the impact of IFRS 15 on the revenue streams in the business and the accounting policies. • Agreeing the performance obligations identified by management to a sample of contracts to ensure the adopted accounting policy was appropriate. This was considered at the transition date as well as at 31 December 2018. • Testing of a sample of transactions throughout the year to determine whether the company’s accounting policy on revenue recognition had been correctly applied, covering royalty income, franchising and other revenue. • 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 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. 43 Financial StatementsGovernance OverviewStrategy and OperationsIndependent Auditor’s Report to the Members of Filta Group Holdings PLC year ended 31 December 2018 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 U.K. LLP Statutory Auditor London 12 April 2019 44 Consolidated Statement of Comprehensive Income year ended 31 December 2018 Continuing operations Revenue Cost of sales Gross profit Other income Distribution costs Administrative costs Operating profit Analysed as: Adjusted EBITDA Acquisition related costs Depreciation and amortisation Share based payments Finance income Finance costs Profit before tax Income tax expense Profit from continuing operations Discontinued operations Profit from discontinued operations Net profit attributable to owners Other comprehensive income Items that may be reclassified subsequently to profit or loss Exchange differences on translation of foreign operations Total other comprehensive income for the year Profit and total comprehensive income for the year Earnings per share From continuing operations – Basic (pence) – Diluted (pence) From continuing and discontinued operations – Basic (pence) – Diluted (pence) Notes 5 6 17,18 32 9 10 12 13 13 13 13 2018 £ 2017 £ 14,213,204 (7,130,656) 7,082,548 24,507 (151,209) (5,173,569) 1,782,277 11,547,299 (5,870,449) 5,676,850 38,377 (124,690) (3,891,858) 1,698,679 2,642,436 (158,598) (399,055) (302,506) 1,782,277 1,545 (41,984) 1,741,838 (421,667) 1,320,171 2,115,953 (120,280) (209,912) (87,082) 1,698,679 – (90,952) 1,607,727 (824,268) 783,459 18,556 1,338,727 32,858 816,317 (29,388) (29,388) 1,309,339 (94,174) (94,174) 722,143 4.86 4.82 4.93 4.89 2.90 2.87 3.03 2.99 45 Financial StatementsGovernance OverviewStrategy and Operations Consolidated Statement of Financial Position year ended 31 December 2018 Non-current assets Property, plant and equipment Deferred tax assets Intangible assets Goodwill Deposits Contract acquisition costs Trade receivables Current assets Trade and other receivables Contract acquisition costs 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 Translation reserve Other reserves Total equity Total equity and liabilities Notes 2018 £ 2017 £ 18 11 17 17 20 19 19 20 21 22 12 23 24 25 24 25 12 28 28 29 1,493,180 754,728 7,186,432 1,639,523 2,491 342,557 324,865 11,743,776 4,821,194 51,718 1,386,383 6,789,968 13,049,263 – 24,793,039 1,216,388 652,131 484,821 631,380 2,343 157,197 302,163 3,446,423 2,311,192 37,671 437,716 4,031,174 6,817,753 74,372 10,338,548 6,510,302 840,641 868,788 8,219,731 2,142,906 107,786 532,682 2,783,374 1,291,318 3,909,311 2,791,131 7,991,760 – 16,211,491 95,185 931,765 2,404,645 3,431,595 66,425 6,281,394 2,891,863 3,372,351 2,711,352 (383,965) (10,053) 8,581,548 24,793,039 2,713,266 131,400 1,862,967 (354,577) (295,902) 4,057,154 10,338,548 The financial statements were approved and authorised for issue by the Board on 12 April 2019 and were signed on its behalf by: Brian Hogan, Chief Financial Officer 46 Consolidated Statement of Changes in Equity year ended 31 December 2018 Share Capital £ 2,695,266 – 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 28) Transfer between reserves Share premium reduction (note 28) Share based payments (note 29/32) – Balance at 31 December 2017 2,713,266 – – – 18,000 – – Share Premium £ 3,480,191 – – – – 131,400 – Other Reserves £ 49,400 – – – – – (49,400) (3,480,191) – Merger Reserve £ (339,687) – – – – – – – Foreign Exchange Reserve £ (260,403) – (94,174) (94,174) – – – Retained Earnings £ (2,256,539) 816,317 Total Equity £ 3,368,228 816,317 – 816,317 (226,402) – 49,400 (94,174) 722,143 (226,402) 149,400 – – 3,480,191 – – 131,400 43,786 43,786 – (339,687) – – (354,577) 1,862,967 43,786 4,057,155 Balance at 1 January 2018 Adjustment on initial application of IFRS 9 net of tax (note 4) At 1 January 2018 restated Profit for the year Foreign exchange translation differences Total comprehensive income Dividends paid (note 16) Issue of share capital (note 28) Share issue expenses Equity consideration due Share based payments (note 29/32) Balance at 31 December 2018 2,713,266 131,400 43,786 (339,687) (354,577) 1,862,967 4,057,155 – 2,713,266 – 131,400 – 43,786 – (339,687) – (354,577) (118,474) 1,744,493 (118,474) 3,938,681 – – – – – – – – – – 178,597 – – – 3,393,557 (152,606) – – – – 250,000 – – – – – – – – 1,338,727 1,338,727 (29,388) (29,388) – 1,338,727 – – – – (371,868) – – – (29,388) 1,309,339 (371,868) 3,572,154 (152,606) 250,000 – 2,891,863 – 3,372,351 35,848 329,634 – (339,687) – – (383,965) 2,711,352 35,848 8,581,548 47 Financial StatementsGovernance OverviewStrategy and OperationsConsolidated Statement of Cash Flows year ended 31 December 2018 Notes 2018 £ 2017 £ 1,760,393 1,640,585 9 18 17 32 18 12 15 17 16 9 22 22 41,984 186,582 212,474 7,051 302,506 2,510,990 (279,474) (199,407) (225,003) (508,421) 722,592 2,021,277 (1,216,177) 805,100 90,952 109,911 100,001 9,992 87,082 2,038,523 (396,073) (130,791) 210,973 (106,743) 225,969 1,841,858 (510,187) 1,331,671 (316,084) 49,288 (3,738,358) (104,913) (4,110,067) (112,941) 24,836 (1,137,901) (55,480) (1,281,486) (252,935) 3,790,737 2,870,000 (371,868) (41,984) 5,993,950 2,688,983 4,031,174 69,811 6,789,968 (47,058) – 149,400 (226,402) (90,952) (215,012) (164,827) 4,392,350 (196,349) 4,031,174 Operating activities Profit before taxation for the year Adjustments for non-cash operating transactions: Finance costs Depreciation Amortisation Loss on disposal of tangible fixed assets Share based payment charge Movements in working capital: Increase in trade and other receivables Increase in contract acquisition costs (Decrease)/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 borrowings Net proceeds from issue of share capital Dividends paid to shareholders Interest paid Net cash from/(used in) 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 48 Parent Company Statement of Financial Position year ended 31 December 2018 Assets Non-current assets Investments in subsidiaries Amount due from subsidiaries Deferred tax asset Current assets Trade and other receivables Amount due from subsidiaries Cash and cash equivalents Total assets Current liabilities Trade and other payables Borrowings Amount due to subsidiaries Non-current liabilities Borrowings Total liabilities Equity Share capital Share premium Other reserves Retained earnings Total equity Total equity and liabilities Notes 2018 £ 2017 £ 14 19 19 22 23 24 24 28 28 29 8,951,424 1,506,905 – 10,458,329 123,984 467,093 3,616,685 4,207,762 14,666,091 2,265,128 758,147 36,311 3,059,586 3,032,590 3,032,590 6,092,176 2,891,863 3,372,351 329,633 1,980,068 8,573,915 14,666,091 2,293,426 1,704,716 – 3,998,142 25,802 438,496 1,162,035 1,626,333 5,624,475 44,908 – 16,745 61,653 – – 61,653 2,713,266 131,400 43,785 2,674,371 5,562,822 5,624,475 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 2018 is £322,435 (2017: £324,658). The financial statements were approved and authorised for issue by the Board on 12 April 2019 and were signed on its behalf by: Brian Hogan, Chief Financial Officer 49 Financial StatementsGovernance OverviewStrategy and Operations Parent Company Statement of Changes in Equity year ended 31 December 2018 Balance at 1 January 2017 Loss for the year Total comprehensive income Dividends paid (note 16) Issue of share capital (note 28) Transfer between reserves Share premium reduction (note 28) Share based payments (note 29) Balance at 31 December 2017 Balance at 1 January 2018 Loss for the year Total comprehensive income Dividends paid (note 16) Issue of share capital (note 28) Share based payments (note 29) Purchase consideration Balance at 31 December 2018 Share Capital £ 2,695,266 – – – 18,000 – – – 2,713,266 2,713,266 – – – 178,597 – – 2,891,863 Share Premium £ 3,480,191 – – – 131,400 - (3,480,191) – 131,400 131,400 – – – 3,240,951 – – 3,372,351 Other reserve £ 49,400 – – – – (49,400) 43,785 43,785 43,785 – – – – 35,848 250,000 329,633 Retained Earnings £ (304,160) (324,658) (324,658) (226,402) – 49,400 3,480,191 – 2,674,371 2,674,371 (322,435) (322,435) (371,868) – – – 1,980,068 Total Equity £ 5,920,697 (324,558) (324,658) (226,402) 149,400 – – 43,785 5,562,822 5,562,822 (322,435) (322,435) (371,868) 3,419,548 35,848 250,000 8,573,915 50 Parent Company Statement of Cash Flows year ended 31 December 2018 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 Increase/(decrease) in advances to subsidiaries Purchase of subsidiary undertakings, net of cash acquired Net cash used in investing activities Financing activities Proceeds from issue of share capital, net of costs Proceeds from borrowings, net of costs Increase in investment in subsidiary Dividends paid to shareholders Net cash from/(used in) financing activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of year 2018 £ 2017 £ (322,435) (324,658) (17,222) 470,146 – 130,489 6 14,282 87,082 (223,288) 188,679 3,850,000) (3,661,321) (1,468,539) – (1,468,539) 2,870,000 3,790,737 (303,387) (371,868) 5,985,482 149,300 – (117,210) (226,402) (194,312) 2,454,650 1,162,035 3,616,685 (1,886,139) 3,048,174 1,162,035 51 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements year ended 31 December 2018 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 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 were made as a result of the combination. 52 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. Where a subsidiary undertaking is sold, the profit or loss on disposal is calculated as the difference between the aggregate of the fair value of the consideration received and the carrying amount of the assets and liabilities of the subsidiary on the date of disposal less any transaction costs relating to the disposal. Cash received on disposal of businesses is shown within investing activities in the Consolidated cash flow statement, net of cash and cash equivalents disposed of and transaction costs. 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. 53 Financial StatementsGovernance OverviewStrategy and OperationsNotes to the Financial Statements continued year ended 31 December 2018 3. Summary of principal accounting policies (continued) 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. 3.3 Revenue For the year ended 31 December 2018 the Group used the five-step model as prescribed under IFRS 15 on the Group’s revenue transactions. This included the identification of the contract, identification of the performance obligations under same, determination of the transaction price, allocation of the transaction price to performance obligations and recognition of revenue. The point of recognition arises when the Group satisfies a performance obligation by transferring control of a promised good or service to the customer, which could occur over time or at a point in time. Revenue represents the amount of consideration to which the Group expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. Revenue from goods and services provided to customers not invoiced as at the balance sheet date is recognised as accrued income within trade and other receivables. 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. There has been no significant change to the Group’s accounting policy for revenue as a result of the adoption of IFRS 15 from 1 January 2018. 3.4 Contract acquisition costs The incremental costs to directly obtain a contract with a customer are capitalised and recognised within contract assets where management expects to recover those costs. Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained are recognised as an expense in the period where incurred. Contract assets are subsequently amortised over the period consistent with the Group’s transfer of the related goods or services to the customer. 54 3. Summary of principal accounting policies (continued) The costs capitalised include sales commission paid to employees and broker fees paid to third parties where payment is identified as relating directly to the sale of a territory license and initially recognised upon the signing of a customer contract. The costs are amortised over the contract life. The Group was not impacted by the adoption of IFRS 15 on 1 January 2018 as the previous accounting policies also recognised an asset in relation to sales commissions costs and broker fees paid to third parties. Management is required to determine the recoverability of contract related assets at each reporting date. An impairment exists if the carrying amount of any asset exceeds the amount of consideration the Group expects to receive in exchange for providing the associated goods and services, less the remaining costs that relate directly to providing those goods and services under the relevant contract. An impairment is recognised immediately where such losses are forecast. The movement in the contract asset balance in the period therefore represents additional payments made, subsequent amortisation and any required impairment. 3.5 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. 3.6 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. 3.7 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. 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 IFRS 9, 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. 55 Financial StatementsGovernance OverviewStrategy and OperationsNotes to the Financial Statements continued year ended 31 December 2018 3. Summary of principal accounting policies (continued) 3.8 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 Supply contracts Reacquired Rights Software development – 5 to 10 years – 5 to 10 years – 15 years – 6.75 years – 3 years Those costs associated with maintaining computer software programmes are recognised as an expense as incurred. 3.9 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). 3.10 Inventories Inventories are stated at the lower of cost and net realisable value. Cost is based on the first in, first out principal and comprise direct materials and, where applicable, direct labour costs and overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. A provision is made, where necessary, in all inventory categories for obsolete, slow moving and defective items. 3.11 Financial instruments Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the relevant financial instrument. Upon adoption of IFRS 9 on 1 January 2018 the accounting policy for financial instruments is as follows: Financial assets (i) 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. For the purpose of the Consolidated Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. (ii) Trade and other receivables Trade receivables are recognised initially at the invoice amount and subsequently measured at amortised cost, less provision for impairment. Under IFRS 9, effective from 1 January 2018, the Group elected to use the simplified approach to measure the loss allowance at an amount equal to lifetime expected credit losses for trade receivables and contract assets that result from transactions that are within the scope of IFRS 15, irrespective of whether they contain a significant financing component or not. IFRS 9 requires the Group to consider forward looking information and the probability of default when calculating expected credit losses. The measurement of expected credit losses reflects an unbiased and probability weighted amount that is determined by evaluating the range of possible outcomes as well as incorporating the time value of money. The Group considers reasonable and supportable customer-specific and market information about past events, current conditions and forecasts of future economic conditions when measuring expected credit losses. 56 3. Summary of principal accounting policies (continued) The amount of the provision is the difference between the carrying amount and the present value of estimated future cash flows of the asset, discounted, where material, at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the Income Statement within ‘administrative costs’. When a trade receivable is uncollectable, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against ‘administrative costs’ in the Income Statement. Financial liabilities (i) Trade and other payables Trade payables are not interest-bearing and are initially measured at fair value. Subsequent to initial recognition these liabilities are measured at amortised cost. The Group has contract liabilities in the form of deferred income which arises from consideration received in advance of the satisfaction of performance obligations. (ii) Borrowings Interest-bearing loans and overdrafts are initially measured at fair value, net of direct issue costs. These financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised over the period of the relevant liabilities. 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 29 and 32 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 Share-based payments (I) Equity-settled share-based payments Equity-settled share-based payments are measured at the fair value of the awards based on the market value of the shares at the grant date. Fair value excludes the effect of non-market-based vesting conditions. The fair value is charged to the consolidated statement of income and credited to retained earnings on a straight-line basis over the period the estimated awards are expected to vest. At each balance sheet date, the Company revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in the consolidated statement of income such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to retained earnings. (II) Cash-settled share-based payments For cash-settled share-based payments, a liability is initially recognised at fair value based on the estimated number of awards that are expected to vest, adjusting for market and non-market-based performance conditions. Subsequently, at each reporting period until the liability is settled, it is remeasured to fair value with any changes in fair value recognised in the consolidated statement of income. 3.14 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. 57 Financial StatementsGovernance OverviewStrategy and OperationsNotes to the Financial Statements continued year ended 31 December 2018 3. Summary of principal accounting policies (continued) 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. 3.15 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. 3.16 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 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. 3.17 Critical accounting judgments and key sources of estimation uncertainty Revenue recognition (Judgement) Under IFRS 15, revenue recognition is based on the principle that revenue is recognised when control of a good or service transfers to a customer. Revenue is measured based on the consideration specified in a contract with a customer and is recognised when a customer obtains control of the services. The Group’s franchise contracts are defined as having two distinct performance obligations, the Opening Package and the Territory Fee. 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 £3,659,919 (2017: £2,937,327). The revenue recognised in respect of the opening package and the apportioned territory fee in the current year was £1,374,324 (2017: £1,348,193). 58 3. Summary of principal accounting policies (continued) Recoverability of trade receivables (Judgement) The Group provides credit to customers and as a result there is an associated risk that the customer may not be able to pay outstanding balances. Under IFRS 9 the Group uses an allowance matrix to measure Expected Credit Loss (ECL) of trade receivables from customers. Loss rates are calculated based on the probability of a receivable progressing through successive chains of non-payment to write-off. The rates are calculated at a business unit level which reflects the risks associated with geographic region, age mix of customer relationship and type of product purchased. Business combinations (Judgement and estimates) 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 multi-period excess earnings method, for customer relationships and customer contracts. For supply contracts, the royalty relief model has been used. 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. The multi-period excess earnings methodology is based on expected income streams of the cash generating unit, the significant assumptions used in the model were the discount rate (12%) and the attrition rates (2.5%-5%). If the attrition rates were increased by 10% the intangible asset value would decrease by £93,000. If the discount rate was increased by one percentage point the intangible asset would be £195,000 lower. The key assumptions in the royalty relief calculation is the royalty rate (2.5%), if this was reduced by one percentage point then the asset would be £289,000 lower. Given the proximity to the year-end no amortisation charge has been recognised on the intangible assets identified. The expected amortisation charge for the year ended 31 December 2019 relating to the customer relationships and contracts is £583,000 and £48,000 for the supply contract. Impairment (Judgement and estimates) The Group is required to review assets for objective evidence of impairment. It does this on the basis of a review of the budget and rolling forecasts, which by their nature are based on a series of assumptions and estimates. The Group has performed impairment tests on those cash generating units which contain goodwill, and on any assets where there are indicators of impairment. The key assumptions associated with these reviews are detailed in Note 17. Taxation (Judgement and estimates) The Group is subject to income tax in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions for which the ultimate tax determination is uncertain. The Group recognises liabilities based on estimates of whether additional taxes will be due. Once it has been concluded that a liability needs to be recognised, the liability is measured based on the tax laws that have been enacted or substantially enacted at the end of the reporting period. The amount shown for current taxation includes an estimate for tax uncertainties and is based on the Directors’ best probability weighted estimate of the probable outflow of economic resources that will be required to settle the liability. Where the final tax outcome of these matters is different from the amounts that were initially estimated, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised. The Group estimates the most probable amount of future taxable profits, using assumptions consistent with those employed in impairment calculations, and taking into consideration applicable tax legislation in the relevant jurisdiction. These calculations also require the use of estimates. 59 Financial StatementsGovernance OverviewStrategy and OperationsNotes to the Financial Statements continued year ended 31 December 2018 4. Adoption of new and revised standards effective during 2018 Financial instruments The Group adopted IFRS 9 ‘Financial Instruments’ at 1 January 2018 and applied the new rules in accordance with the transitional provisions. Comparatives for 2017 have not been restated. The Group has assessed the impact of adopting IFRS 9 and the only adjustment is an increase in the provision for losses against trade debtors which was reflected as an adjustment to retained earnings at 1 January 2018 as shown below. Retained earnings Provision for losses against trade debtors Income tax Total impact at 1 January 2018 Non-current assets Deferred income tax assets Current assets Trade and other receivables Total impact at 1 January 2018 2018 1 January (157,834) 39,360 (118,474) 39,360 (157,834) (118,474) The adjustment arises from adoption of the expected credit loss model for impairments under IFRS 9. The adoption of this model requires the recognition of impairment provisions based on expected credit losses rather than only incurred credit losses, as is the case under IAS 39. Although there is a transition impact from adoption of the new model there was no material impact on profit before tax for 2018. The following table shows the original classification and measurement categories of financial assets and liabilities under IAS 39 and the new classification and measurement categories under IFRS 9 as at 1 January 2018. The effect of adopting IFRS 9 on the carrying amounts of financial assets and liabilities relates solely to the new impairment requirements as shown in the previous table, all other carrying values remained the same. Financial assets Cash & cash equivalents Trade & other receivables Financial liabilities Trade & other payables Bank loans Finance lease liabilities Classification-measurement under IAS 39 Classification-measurement under IFRS 9 Carrying amount under IAS 39 £ Carrying amount under IFRS 9 £ Difference £ Loans and receivables – amortised cost Loans and receivables – amortised cost Financial assets at amortised cost Financial assets at amortised cost 4,031,174 4,031,174 - 2,451,072 2,293,238 (157,834) Other liabilities – amortised cost Other liabilities – amortised cost Other liabilities – amortised cost Other financial liabilities – amortised cost Other financial liabilities – amortised cost Other financial liabilities – amortised cost 1,337,984 1,337,984 928,236 928,236 177,740 177,740 - - - 60 4. Adoption of new and revised standards effective during 2018 (continued) Revenue recognition The Group has adopted IFRS 15 from 1 January 2018, using the modified retrospective approach and has not restated comparatives for 2017. The Group used the five-step model to develop an impact assessment framework to assess the impact of IFRS 15 on the Group’s revenue transactions. The results of our IFRS 15 assessment framework and contract reviews indicated that the impact of applying IFRS 15 on our consolidated financial statements was not material for the Group and there was no adjustment to retained earnings or material impact on the timing of revenue recognition on application of the new rules at 1 January 2018. A number of other new pronouncements are also effective from 1 January 2018 but they do not have a material impact on the consolidated financial statements. Additional disclosure has been given where relevant. New standards and interpretations not applied. New accounting standards and interpretations have been published that are not mandatory for the year ended 31 December 2018. The Group has elected not to early-adopt these new standards and interpretations. The Group’s assessment of the impact of these new standards is set out below. The Group will apply IFRS 16 on 1 January 2019 using the modified retrospective approach. Under this approach, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings on 1 January 2019, with no restatement of comparative information. The Group has assessed the impact of adopting IFRS 16 with reference to its existing lease portfolio. The most significant part of the portfolio are property and vehicle leases, together with a number of low value equipment leases. The lease liability has been measured at the present value of the remaining lease payments, discounted using the incremental borrowing rate at transition. The right-of-use asset is measured at an amount equal to the lease liability plus any lease payments made at or before the commencement date and any initial direct costs incurred by the lessee. Transition recognition exemptions relating to short-term and low value leases have been applied as well as practical expedients taken, where available, to simplify the transition process. It is estimated that on transition the Group will recognise a right-of-use asset and corresponding lease liability of approximately £0.5m. The impact on the income statement in 2019 is expected to be negligible with the operating lease expense recognised under the existing standard (IAS 17) being replaced by depreciation and finance costs. There will be no impact on the Group’s cash and cash equivalents. 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 grease management market. The Group also has three geographic segments: UK, North America and Europe. Revenue and non-current assets by origin of geographical segment for all entities in the Group is as follows: Revenue North America U.K. Europe Total continuing operations Discontinued operations Total 2018 £ 9,204,340 4,752,287 256,577 14,213,204 2017 £ 8,349,325 3,197,973 – 11,547,298 13,915 14,227,119 1,937,440 13,484,739 61 Financial StatementsGovernance OverviewStrategy and OperationsNotes to the Financial Statements continued year ended 31 December 2018 5. Segment analysis (continued) Non-current assets North America U.K. Europe Total Product and services revenue analysis Revenue Franchise Development Fryer Management FiltaSeal FiltaGMG Total continuing operations Discontinued operations Total 2018 £ 2,005,116 9,277,362 461,298 11,743,776 2017 £ 1,673,329 1,544,785 – 3,218,114 2018 £ 1,487,927 9,337,232 1,646,062 1,741,983 14,213,204 2017 £ 1,348,193 8,434,262 1,327,835 437,008 11,547,299 13,915 14,227,119 1,937,440 13,484,739 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. Operating segment performance for the year ended 31 December 2018: Sales to external customers Adjusted EBITDA Acquisition and legal 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 1.5 0.4 (0.0) (0.0) (0.1) 0.3 (0.0) 0.3 Fryer Management £m 9.4 1.7 (0.0) (0.3) (0.3) 1.1 (0.0) 1.1 FiltaSeal £m 1.6 0.2 (0.0) (0.0) (0.0) 0.2 (0.0) 0.2 FiltaGMG £m 1.7 0.4 (0.1) (0.0) (0.0) 0.2 (0.0) 0.2 Total £m 14.2 2.7 (0.2) (0.3) (0.4) 1.8 (0.0) 1.8 (0.4) 0.0 (0.0) 1.3 62 5. Segment analysis (continued) Operating segment performance for the year ended 31 December 2017: Sales to external customers Adjusted EBITDA Acquisition and legal 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 FiltaSeal £m 1.3 0.2 (0.0) (0.0) (0.0) 0.2 (0.0) 0.2 FiltaGMG £m 0.4 0.1 (0.0) (0.0) (0.0) 0.1 (0.0) 0.1 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 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 18) Amortisation of intangible assets (note 17) Loss on disposal of plant and equipment Staff costs, including directors (Note 7) Share based payment Cost of acquisition Foreign exchange 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 annual accounts Fees payable to the Company’s Auditor and their associates for other services: The audit of the Company’s subsidiaries pursuant to legislation Tax and other services Total auditors remuneration Inventory expensed Operating lease rental expense Exceptional items consist of the following: Acquisition related Legal and professional 2018 £ 186,582 212,474 (4,920) 3,525,043 302,506 149,260 (757) 2017 £ 109,911 100,001 9,992 2,993,670 87,082 34,000 (22,238) 49,700 40,000 42,232 30,148 122,080 7,130,656 19,570 21,920 8,643 70,563 5,870,449 24,399 2018 £ 149,260 9,338 158,598 2017 £ 65,402 54,878 120,280 Acquisition related costs are attributable to the FiltaFry Deutschland GmbH and Watbio Holdings Limited acquisitions while the legal and professional costs relate primarily to the disposal of Filta Refrigeration assets. 63 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2018 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 2018 £ 2,819,674 237,994 15,635 302,506 149,234 3,525,043 2017 £ 2,602,507 195,084 9,062 87,082 99,935 2,993,670 2018 No. 7 13 14 6 6 22 68 2017 No. 7 10 11 6 7 26 67 2018 £ 712,604 712,604 2017 £ 723,667 723,667 2018 £ 33,606 8,378 41,984 2017 £ 78,452 12,500 90,952 64 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 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 temporary differences Total tax expense 2018 £ 2017 £ 464,025 775,151 (42,358) – 421,667 (215,878) 264,995 824,268 2018 £ 1,741,838 334,287 6,695 (13,415) 136,458 464,025 2017 £ 1,607,727 310,934 19,690 (42,959) 487,486 775,151 (42,358) 421,667 49,117 824,268 The Filta Group’s effective tax rate for the year ended 31 December 2018 was 24.2% (2017: 51.3%). The effective rate is an amalgamation of mainly UK, US and Canadian rates for the periods reported. The change from prior year has been particularly affected by the 2017 non-recurring/non-cash tax charge related to the revaluation of U.S. deferred tax assets due to the U.S. rate reduction. For the prior year the effective tax rate excluding the tax charge on the U.S. rate reduction was 35.1%. The Filta Group has tax losses of approximately £667,480 (2017: £667,480) to carry forward against future profits. The UK tax losses have no expiry date and a deferred tax asset of £128,460 (2017: £124,249) 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 Adjustment on initial application of IFRS 9 Acquired with subsidiaries Addition for the year Charge related to reduction in U.S. tax rate Foreign exchange differences At end of year 2018 £ 652,131 39,360 5,468 25,226 – 32,543 754,728 2017 £ 755,965 – – 210,735 (264,995) (49,574) 652,131 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 Other At end of year 2018 £ 128,460 546,777 79,491 754,728 2017 £ 124,249 524,658 3,224 652,131 65 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2018 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 for the year At end of year 12. Discontinued operations 2018 £ 95,185 – 1,203,206 (7,073) 1,291,318 2017 £ – 29,215 71,113 (5,143) 95,185 In December 2017, the Group agreed terms to sell certain assets of 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 2018 £ 13,915 (17,918) (4,003) 22,559 18,556 2017 £ 1,937,101 (1,868,489) 68,612 (35,754) 32,858 Following the sale on 4 January 2018, there were no assets or liabilities of the operation classified as a disposal group held for sale and presented separately on the balance sheet during the period. 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 2018 £ – – – – – 2017 £ 25,114 49,258 74,372 66,425 7,947 66 13. Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity shareholders of the company by the weighted average number of shares in issue during the year, excluding ordinary shares purchased by the company and held as treasury shares. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to take account of all dilutive potential ordinary shares and adjusting the profit attributable, if applicable, to account for any tax consequences that might arise from conversion of those shares. Earnings attributable to equity holders of the company Weighted average number of shares Effect of dilutive share options and awards Weighted average number of shares for dilutive earnings Earnings per share from continuing operations Basic Diluted Earnings per share from continuing and discontinued operations Basic Diluted 14. Investment in subsidiaries Cost at the beginning of the year Additions Cost at end of year 2018 1,338,727 27,204,089 224,199 27,428,288 2017 816,317 26,971,892 288,081 27,259,973 4.86 4.82 4.93 4.89 2.90 2.87 3.03 2.99 2018 £ 2,293,426 6,657,998 8,951,424 2017 £ 2,176,216 117,210 2,293,426 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 Filta Europe B.V. FiltaFry Deutschland GmbH Watbio Holdings Limited Watbio Limited Watling Hope Installations Limited Environmental Biotech Limited M&M Asset Maintenance Class Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 2018 ownership interest 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2017 ownership interest Nature of business 100% Environmental Services 100% Environmental Services 100% Discontinued 100% Dormant 100% Dormant 100% Dormant 100% Environmental Services – Environmental Services – Environmental Services – Environmental Services – Environmental Services – Environmental Services – Environmental Services – 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 Filta Europe B.V. FiltaFry Deutschland GmbH 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 Debbeshoek 14B, 7071XK Ulft, Netherlands Pliniusstraße 8, 48488 Emsbüren, Germany 67 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2018 15. Business combinations A key strategy of the Group is to create and sustain market leading positions through acquisitions in markets it currently operates in, together with extending the Group’s footprint in new geographic markets. In line with this strategy, the acquisitions completed during the year were as follows: FiltaFry Deutschland GmbH On 30 January 2018, the Group acquired 100 per cent of the voting equity interests of FiltaFry Deutschland GmbH, the company which held the master franchise license for Germany. The acquisition aligns Germany with the same franchise business model as is used in North America and the UK as well as providing a platform for further expansion in Europe. Details of the fair values of the identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows: Reacquired license rights (intangible asset) Property, plant and equipment Inventory Trade and other receivables Cash Trade and other payables Loans and borrowings Deferred tax liability Total fair value Consideration consists of: Cash Shares Contingent Total Consideration Goodwill Book value £ 114,591 7,289 2,909 10,880 3,265 (16,656) (48,201) – 74,077 Adjustment £ 126,356 – – – – – – (72,284) 54,072 Fair value £ 240,947 7,289 2,909 10,880 3,265 (16,656) (48,201) (72,284) 128,149 £ 153,367 21,910 43,818 219,095 90,946 The fair values include recognition of an intangible asset related to the reacquired rights to the international master licence agreement in Germany that will be amortised on a straight line basis over a 6.75-year period. Regarding the acquired Trade and other receivables in the transaction of £10,880, the amount estimated to be potentially uncollectible at the acquisition date was £Nil. At 31 December 2018, £10,880 of this balance had been collected. Deferred tax has been calculated on the value of the intangible assets acquired at a corporation tax rate of 30% 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 £49,080 and are disclosed within the statement of comprehensive income. Since the acquisition date, FiltaFry Deutschland GmbH has contributed £235,981 to Group revenues and a loss of £4,112 to Group income. If the acquisition had occurred on 1 January 2018, Group revenue would have increased by £257,435 and Group income for the period would have decreased by £4,486. 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 2018 £ 153,367 (3,265) 150,102 68 15. Business combinations (continued) Watbio Holdings Limited On 21 December 2018, the Group acquired 100 per cent of the voting equity interests of Watbio Holdings Limited, a provider of grease and drain management solutions to commercial kitchens across the UK. The acquisition supports the Group’s strategy of growing its share of the fats, oils and grease market following on the acquisition of Grease Management Limited in 2017. Details of the provisional fair values of the identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows: Customer contracts (intangible asset) Customer relationships (intangible asset) Supply contract (intangible asset) Property, plant and equipment Inventory Trade and other receivables Cash Trade and other payables Loans and borrowings Deferred tax liability Total provisional fair value Consideration consists of: Cash Shares Contingent Total Consideration Goodwill Book value £ – – – 86,686 437,367 2,255,031 261,744 (2,114,579) (907,518) – 18,731 Adjustment £ 2,217,194 3,617,527 724,481 – – – – – – (1,140,871) 5,418,331 Fair value £ 2,217,194 3,617,527 724,481 86,686 437,367 2,255,031 261,744 (2,114,579) (907,518) (1,140,871) 5,437,062 £ 3,850,000 550,000 1,954,611 6,354,611 917,549 The provisional fair values include recognition of intangible assets related to customer contracts and customer relationships that will be amortised over a 10-year period, and a supply contract, amortised over a 15-year period, all on a straight-line basis. The fair values are provisional as the year end has fallen within the measurement period. Any new information about facts or circumstances that existed at the acquisition date will be retrospectively adjusted. Regarding the acquired trade receivables in the transaction of £1,738,685 the amount estimated to be potentially uncollectible at the acquisition date was £118,336. At 31 December 2018, £Nil of this balance has been collected. Deferred tax has been calculated on the value of the intangible assets acquired at a corporation tax rate of 17.4%, which is the effective tax rate over the amortisation period, 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 £100,179 and are disclosed within the statement of comprehensive income. Since the acquisition date, Watbio Holdings Limited has contributed £192,641 to Group revenues and a profit of £16,846 to Group income. If the acquisition had occurred on 1 January 2018, Group revenue would have increased by £9,800,000 and Group income for the period would have increased by £600,000. 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 2018 £ 3,850,000 (261,744) 3,588,256 69 Financial StatementsGovernance OverviewStrategy and OperationsNotes to the Financial Statements continued year ended 31 December 2018 16. Dividends Distributions to equity holders in the year: Final dividend for the year ended 31 December 2017 of 0.65p per share Interim dividend for the year ended 31 December 2018 of 0.72p per share 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 2018 of 0.92p per share 2018 £ 2017 £ 176,434 195,434 – – 371,868 267,286 – – 51,210 175,192 226,402 – 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 2018 Additions Business combinations Foreign exchange Balance at 31 December 2018 Amortisation and impairment Balance at 1 January 2018 Amortisation Foreign exchange Balance at 31 December 2018 Net book value at 31 December 2018 Cost Balance at 1 January 2017 Additions Business combinations 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 Computer Software £ Goodwill £ Customer Relationships £ Customer Contracts £ Supply Contract £ Total £ 412,117 104,913 – 25,752 542,782 274,506 104,451 20,006 398,963 143,819 Computer Software £ 391,350 55,480 (34,713) 412,117 224,726 72,930 (23,150) 274,506 137,611 631,380 – 1,008,495 (352) 1,639,523 346,210 – 3,617,527 – 3,963,737 – – – – 1,639,523 Goodwill £ – – 631,380 – 631,380 – – – – 631,380 25,110 69,243 – 94,353 3,869,384 Customer Relationships £ – – 346,210 – 346,210 – 25,110 – 25,110 321,100 28,071 – 2,458,142 3,276 2,489,489 1,961 38,780 – 40,741 2,448,748 – – 724,481 – 724,481 – – – 724,481 Customer Contracts £ Supply Contract £ – – 28,071 – 28,071 – 1,961 – 1,961 26,110 – – – – – – – – – 1,417,778 104,913 7,808,645 28,676 9,360,012 301,577 212,474 20,006 534,057 8,825,955 Total £ 391,350 55,480 1,005,661 (34,713) 1,417,778 224,726 100,001 (23,150) 301,577 1,116,201 Intangible assets are valued separately for each acquisition and the primary method of valuation used is the discounted cash flow method. The majority of acquired intangibles are amortised using an amortisation profile based on the projected cash flows underlying the acquisition date valuation of the intangible asset. The Group keeps the expected pattern of consumption under review. Impairment tests for goodwill and intangibles The Group is obliged to test goodwill and other intangibles with finite lives for impairment, at least annually, or at any time if there are indications that these assets might be impaired. 70 17. Intangible assets (continued) 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’s to which the goodwill has been attributed and its carrying value are summarised below. Franchise development FiltaGMG Total 2018 £ 90,946 1,548,577 1,639,523 2017 £ – 631,380 631,380 The recoverable amount of a CGU is primarily determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on annual financial budgets which are approved by the Board. Income and costs within the budget are derived on a detailed, ‘bottom up’ basis – all income streams and cost lines are considered and appropriate growth, or decline, rates are assumed for each, all of which are then reviewed, challenged and stress tested, firstly by senior management and ultimately by the Board. Income and cost growth forecasts are risk adjusted to reflect specific risks facing each CGU and take into account the markets in which they operate. Cash flows beyond the budgeted period are extrapolated using the estimated growth rate stated below in to perpetuity. The growth rate does not exceed the long-term average growth rate for the markets in which the CGU’s operate. Further, other than as included in the financial budgets, it is assumed that there are no material adverse changes in legislation that would affect the forecast cash flows. The pre-tax discount rate used within the recoverable amount calculations was 9.38% (2017: 9.70%) and is based upon the weighted average cost of capital reflecting specific principal risks and uncertainties. The discount rate takes into account, amongst other things, the risk free rate of return, the market risk premium and beta factor reflecting the average Beta for the Group. The same discount rate has been used for each CGU as the principal risks and uncertainties associated with the Group, as highlighted on pages 21 to 22, would also impact each CGU in a similar manner. The Board acknowledge that there are additional factors that could impact the risk profile of each CGU. These additional factors were considered by way of sensitivity analysis performed as part of the annual impairment tests. The level of impairment recognised is predominantly dependent upon judgments used in arriving at future growth rates and the discount rate applied to cash flow projections. Key drivers to future growth rates are dependent on the Group’s ability to maintain and grow income streams whilst effectively managing operating costs. The level of headroom may change if different growth rate assumptions or a different pre-tax discount rate were used in the cash flow projections. Where the value-in-use calculations suggest an impairment, the Board would consider alternative use values prior to realising any impairment, being the fair value less costs to dispose. A sensitivity analysis has been performed and the Board 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. 71 Financial StatementsGovernance OverviewStrategy and OperationsNotes to the Financial Statements continued year ended 31 December 2018 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 2018 Additions Business combinations Foreign exchange At 31 December 2018 Depreciation At 1 January 2018 Depreciation charge Foreign exchange At 31 December 2018 Net Book Values At 31 December 2018 Cost At 1 January 2017 Additions Business combination Reclass to assets held for sale Disposals Foreign exchange At 31 December 2017 Depreciation At 1 January 2017 Depreciation charge Reclass to assets held for sale Disposals Foreign exchange At 31 December 2017 Net Book Values At 31 December 2017 Freehold Property £ Fixture and Fittings & Equipment £ 1,519,590 11,675 2,511 84,676 1,618,452 623,664 49,303 31,993 704,960 111,450 37,300 28,477 2,759 179,986 97,208 15,206 2,656 115,070 Plant and Machinery £ 198,056 36,103 63,196 2,368 299,723 104,958 33,810 2,103 140,871 Motor Vehicles £ Total £ 246,549 231,007 – 391 477,947 33,427 88,262 338 122,027 2,075,645 316,085 94,184 90,194 2,576,108 859,257 186,581 37,090 1,082,928 913,492 64,916 158,852 355,920 1,493,180 1,640,785 4,496 2,815 – – (128,506) 1,519,590 641,013 39,202 – – (56,551) 623,664 93,095 16,394 5,349 – – (3,388) 111,450 88,529 12,096 – – (3,417) 97,208 183,632 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) 859,257 895,926 14,242 93,098 213,122 1,216,388 Certain of the property, plant and equipment listed above are held as security against bank facilities referred to in note 24. The net book value of vehicles held under finance lease was £0.2m. 72 19. Trade and other receivables Trade and other receivables consist of the following: Total Trade receivables, gross Impairment allowance Trade receivables, net Prepayments and other receivables Franchise payment plans Current Trade receivables Prepayments and other receivables Franchise payment plans Non-current Trade receivables Franchise payment plans 2018 £ 2017 £ 4,238,420 (184,022) 4,054,398 572,491 519,170 5,146,059 2,084,362 (56,255) 2,028,107 200,809 384,439 2,613,355 2018 £ 2017 £ 4,054,398 572,491 194,305 4,821,194 1,984,569 200,809 125,814 2,311,192 2018 £ 2017 £ – 324,865 324,865 43,538 258,625 302,163 Trade and other receivables 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 £2.0m consist of £1.5m of loans to subsidiaries to fund debt repayment and acquisitions and is repayable after more than twelve months while the balance of £0.5m is comprised of £0.1m of management service charges and £0.4m 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. The Group applies a simplified approach to measure the loss allowance for trade receivables classified at amortised cost, using the lifetime expected loss provision. The expected credit loss on trade receivables is estimated using a provision matrix by reference to past default experience and credit rating, adjusted as appropriate for current observable data. The following table details the risk profile of trade receivables based on the Group’s provision matrix. 31 December 2018 Gross carrying amount Weighted average expected credit loss rate Loss allowance Trade receivables – days past due Not past due 1,563,235 < 30 1,937,492 31 – 60 229,229 60 – 90 362,412 > 90 146,052 Total 4,238,420 1.0% 15,882 1.7% 33,049 8.8% 20,090 10.7% 38,691 52.2% 76,310 4.3% 184,022 Movement in the allowance for doubtful debt: At beginning of year Adjustment on initial application of IFRS 9 (note 4) Acquired with subsidiaries Impairment loss recognised Utilised At end of year 2018 £ 56,255 157,834 118,336 7,620 (156,023) 184,022 2017 £ 10,302 – – 53,224 (7,271) 56,255 73 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2018 20. Contract acquisition costs The Group capitalises incremental costs to obtain contracts with customers where it is expected these costs will be recoverable. Incremental costs to obtain contracts with customers are considered those which would not have been incurred if the contract had not been obtained. For the Group, these costs relate primarily to third party broker fees. The Group has elected to use the practical expedient as allowable by IFRS 15 whereby such costs will be expensed as incurred where the expected amortisation period is one year or less. Where the amortisation period is greater than one year, these costs are amortised over the contract term on a systematic basis consistent with the transfer of the underlying goods and services within the contract to which these costs relate, which will generally be on a ratable basis. Impairment of capitalised contract costs was £nil in 2018. The amount of capitalised contract cost expected to be recovered after more than one year is £0.3m (2017: £0.2m). 21. Inventories Finished goods Inventory included in assets held for sale Total 2018 £ 1,386,383 – 1,386,383 2017 £ 486,974 (49,258) 437,716 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. 22. Cash and cash equivalents Group Cash at bank and in hand Company Cash at bank and in hand 23. Trade and other payables Group Trade payables Taxes and social security Accruals and other payables Company Trade payables Taxes and social security Accruals and other payables 2018 £ 2017 £ 6,789,968 4,031,174 3,616,685 1,162,035 2018 £ 2017 £ 2,877,737 413,782 3,218,783 6,510,302 37,674 – 2,227,454 2,265,128 846,564 804,922 491,420 2,142,906 44,908 – 44,908 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. The Company Accruals and other payables balance of £1.7m represents the balance due on completion of the Watbio Holdings acquisition. 74 24. Loans and other borrowings Group Total Bank loans, net of £209,263 of debt issuance costs Hire purchase and finance leases Related party loans Current Bank loans, net of £41,852 of debt issuance costs Hire purchase and finance leases Non-current Bank loans, net of £167,410 of debt issuance costs Hire purchase and finance leases Related party loans Company Total Bank loans, net of £209,263 of debt issuance costs Current Bank loans, net of £41,852 of debt issuance costs Non-current Bank loans, net of £167,410 of debt issuance costs 2018 £ 2017 £ 4,531,925 168,448 49,579 4,749,952 928,236 111,315 – 1,039,551 2018 £ 2017 £ 791,467 49,174 840,641 2018 £ 3,740,458 119,274 49,579 3,909,311 2018 £ 3,790,737 3,790,737 758,147 758,147 3,032,590 3,032,590 64,102 43,684 107,786 2017 £ 864,134 67,631 – 931,765 2017 £ – – – – – – The bank loans are comprised of a £4,000,000 term loan (£3,790,737 net of debt issuance costs), which carries a variable interest rate of Libor plus 3% and is repayable in equal instalments of £200,000 per quarter; and a $940,523 US Dollar denominated mortgage loan (£741,188), which carries an interest rate of 4.6% and matures in 2024. 25. Deferred income Deferred income relates to certain performance obligations of franchise sales that are deferred over the life of the franchise agreement. The deferral period is 10 years in North America and 5 years in the UK and mainland Europe. Movements in Deferred income are as follows: Deferred income Current Non-current Total 1 Jan 2018 £ 2,937,327 Acquisition £ 1,364,388 Utilisation £ (815,992) Foreign Exchange £ 174,196 31 Dec 2018 £ 3,659,919 868,788 2,791,131 3,659,919 75 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2018 26. 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 The increase over prior year is due primarily to leases acquired in the Watbio Holdings acquisition. 27. Reconciliation of movements in net debt 2018 £ 274,467 296,145 570,612 2017 £ 10,687 2,360 13,047 1 January 2018 £ 928,236 – 111,315 1,039,551 1 January 2017 £ 1,037,022 – 84,296 1,121,318 Cash flows £ (204,791) – 57,133 (147,658) Acquisition £ 3,840,316 – – 3,840,316 Non-cash changes Foreign exchange movements £ 17,744 – 17,744 Non-cash changes Cash flows £ (36,585) – (10,473) (47,058) Acquisition £ – 37,492 37,492 Foreign exchange movements £ (72,200) – (72,200) Fair value changes £ – – Fair value changes £ – – 31 December 2018 £ 4,581,505 – 168,448 4,749,953 31 December 2017 £ 928,236 – 111,315 1,039,551 Long term borrowings Short term borrowings Lease liabilities Total Long term borrowings Short term borrowings Lease liabilities Total 28. 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 Issue of ordinary shares Share buyback Issued under share option scheme Total shares in issue at 31 December 2018 Number 2017 £ Number £ 27,132,660 1,785,970 – – 28,918,630 2,713,266 178,597 – – 2,891,863 26,952,660 180,000 – – 27,132,660 2,695,266 18,000 – – 2,713,266 The Company 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. On 31 January 2018, pursuant to a share purchase agreement between the Company and FiltaFry Deutschland GmbH, 10,970 shares of 10 pence each were issued to Chesskin Beheer B.V. at a price of 200 pence each, giving rise to a share premium of £20,843. On 19 December 2018, the Company announced that it had raised gross proceeds of £3m from the issue of 1,500,000 Placing Shares at a placing price of 200 pence each, giving rise to a share premium of £2.85m. On 24 December 2018, pursuant to a share purchase agreement between the Company and Watbio Holdings Limited, 275,000 shares of 10 pence each were issued to the sellers at a price of 200 pence, giving rise to a share premium of £522,500, to partially satisfy share consideration due as part of the total consideration paid for the business. 76 29. Other reserves Group Merger reserve Purchase consideration reserve Share based payment reserve Company Purchase consideration reserve Share based payment reserve 2018 £ 2017 £ (339,687) 250,000 79,634 (10,053) (339,687) – 43,786 (295,901) 250,000 79,634 329,634 – 43,786 43,786 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). Purchase consideration reserve On 21 December 2018, the Company completed the acquisition of 100% of share capital of Watbio Holdings Limited. At 31 December 2018, consideration shares of £250,000 were due to the sellers and are expected to be issued and allotted in the first quarter of 2019. Share based payment reserve 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 2018 was £79,634 (2017: £43,785). 30. 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. 77 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2018 30. 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 £ (176,751) 216,029 (4,514) 5,517 Effect on equity £ 120,672 (147,488) 17,100 (20,900) 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. The following table analyses interest bearing loans and borrowings by fixed and floating mix. Floating GBP LIBOR Floating Base Fixed Total 2018 £ 3,790,737 – 959,215 4,749,952 2017 £ – 201,375 838,176 1,039,551 As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from its borrowings, chiefly its floating GBP LIBOR term debt. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. An increase or decrease of 100 basis points in each of the applicable rates would impact reported after-tax profit by £0.04m (2017: £0.002m) and equity by £0.04m (2017: £0.002m). 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. 78 30. Financial instruments (continued) Categories of financial instruments: The table below sets out the Group’s classification of each of its financial assets and liabilities at 31 December 2018 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 (excluding taxes) Borrowings 2018 £ 2017 £ 6,789,968 4,585,002 2,491 11,377,461 4,031,174 2,451,072 2,343 6,484,589 6,096,520 4,749,952 10,846,472 1,337,984 1,105,976 2,443,960 The table below summarises the maturity profile (representing undiscounted contractual cash flows) of the Group’s financial liabilities: At 31 December 2018 Trade and other payables Expected future interest payments Borrowings Total At 31 December 2017 Trade and other payables Expected future interest payments Borrowings Total 31. Retirement benefit schemes Less than 3 months £ 3 to 12 months £ 1 to 5 years £ Over 5 years £ Total £ 6,026,750 49,362 13,749 6,089,861 17,308 140,825 826,892 985,025 52,462 401,551 3,909,311 4,363,324 Less than 3 months £ 3 to 12 months £ 1 to 5 years £ 1,290,679 8,762 21,828 1,321,269 16,038 43,229 109,140 168,407 31,267 162,694 809,815 1,003,776 – – – – 6,096,520 591,738 4,749,952 11,438,210 Over 5 years £ – 42,356 165,193 207,549 Total £ 1,337,984 257,041 1,105,976 2,701,001 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 was required to contribute 1% of payroll costs, increased to 2% in April 2018, 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 £15,635 (2017: £9,062) 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. 79 Financial StatementsGovernance OverviewStrategy and Operations Notes to the Financial Statements continued year ended 31 December 2018 32. Share option scheme The Company maintains an EMI 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 1.5% 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 vesting and within 10 years from the grant date. the vesting conditions between 2019 and 2021 and are exercisable at any time after Additionally, all qualifying U.S. employees have been awarded share acquisition rights (SARs). The SARs 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 SARs the same reward value as if the SARs were share options. The qualifying conditions and timing of vesting are identical to those within the share option scheme for UK employees. All SARs are settled in cash when exercised. A total of 360,000 SARs 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. As at 31 December 2018, a total of 540,000 (2017: 562,500) were outstanding, having a range of (2017: 0.97p to 1.74p) and a weighted average exercise price of 1.01p (2017:1.03p). average contractual life of 8.33 years (2017: 9.13 years). exercise prices from 0.97p to 1.74p These outstanding awards have a weighted Movement in the number of share options outstanding during the year, including grant dates and grant price were as follows: Outstanding at 1 January 2018 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 2018 (0.97p) Outstanding at 31 December 2018 (1.74p) Total Outstanding 31 December 2018 Exercisable at 31 December 2018 Share options 232,500 – (7,500) (15,000) (22,500) 180,000 30,000 210,000 – Share acquisition rights 330,000 – – – – 330,000 330,000 – Total 562,500 – (7,500) (15,000) (22,500) 510,000 30,000 540,000 – During the year the Company recognised total expense of £302,506 (2017: £87,082) related to the fair value of the share-based payment arrangements. This included £35,849 (2014: £43,785) related to equity-settled share options and £266,657 (2017: £43,297) from cash- settled SARs. The SARs liability at 31 December 2018 was £309,954 (2017: £43,297). These amounts were determined using the Black Scholes model, with the following assumptions for each type of award granted: Stock Options Weighted average share price Exercise price Risk free rate Dividend yield Volatility Share Appreciation Rights Weighted average share price Exercise price Risk free rate Dividend yield Volatility 80 108.0p 97.0p 0.59% 0.9% 54.99% 156.9p 97.0p 1.83% 0.0% 53.41% 33. 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. 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 2018, the related franchise operator purchased £Nil of equipment and supplies from the company (2017: £Nil). On 16 January 2017 the franchise rights were sold by the related party entity to a non-related third party. Notes payable to related party On 31 January 2018, Filtafry Deutschland GmbH entered into notes totaling £48,201, bearing interest at 2.5%, with related parties. The notes mature on 31 January 2023 and include the right to repay early without penalty. These amounts are classified within borrowings. Interest accrued on the notes amounted to £1,378 at 31 December 2018. 34. Events after the reporting date There have been no material events subsequent to 31 December 2018, up to the reporting date, which would require adjustment to or disclosure in this report. 81 Financial StatementsGovernance OverviewStrategy and OperationsNotes 82 Corporate Information Directors: Timothy (Tim) John Worlledge Non-Executive Chairman Jason Charles Sayers Chief Executive Officer Brian Joseph Hogan Chief Financial Officer Victor Clewes Executive Director Jlubomir (Roscoe) Urosevic Executive Director Roy Charles Sayers Non-Executive Director Graham Jeffrey Woolfman Non-Executive Director Lloyd Martin Non-Executive Director Secretary: ONE Advisory Limited Registered Office: The Locks Hillmorton, Rugby Warwickshire CV21 4PP 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 Nominated Advisor and Broker: Cenkos Securities plc 6.7.8. Tokenhouse Yard London, EC2R 7AS Auditors: Crowe U.K. LLP St Bride’s House 10 Salisbury Square London EC4Y 8EH Designed and produced by london@blackandcallow.com www.blackandcallow.com 020 3794 1720 83 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 F i l t a G r o u p H o l d i n g s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 8 

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