Public Service Enterprise Group Annual Report 2018

Plain-text annual report

253591 Petards cover spread 5mm spine.qxp 12/04/2019 10:31 Page 1 8 1 0 2 t r o p e R l i a c n a n F i l a u n n A c l p p u o r G s d r a t e P Petards Group plc Parallel House, 32 London Road, Guildford, GU1 2AB, United Kingdom Tel: +44 (0) 1483 230345 www.petards.com Annual Financial Report 2018 Petards Group plc Registered number 02990100 Petards Group plc 253591 Petards cover spread 5mm spine.qxp 12/04/2019 10:31 Page 2 Introduction Petards’ operations continue to be focused upon the development, supply and maintenance of technologies used in advanced security, surveillance and ruggedized electronic applications, the main markets for which are: Rail – software driven video and other sensing systems for on-train applications sold under the eyeTrain brand to global train builders, integrators and rail operators, and web-based real-time safety critical integrated software applications supporting the UK rail network infrastructure sold under the RTS brand; Traﬃc –Automatic Number Plate Recognition (“ANPR”) systems for lane and speed enforcement and other applications, and UK Home Oﬃce approved mobile speed enforcement systems, sold under the QRO and ProVida brands to UK and overseas law enforcement agencies and commercial customers; and Defence – electronic countermeasure protection systems, mobile radio systems and related engineering services sold predominantly to the UK Ministry of Defence (“MOD”). Overview Financial statements Financial and operational highlights 1 2 Chairman’s statement Strategic report Business review 4 8 Our business, business model and strategy 9 Key performance indicators 10 Principal risks and uncertainties Corporate governance 11 Directors’ report 20 Remuneration report 22 Statement of directors’ responsibilities 23 Independent auditor’s report 31 Consolidated income statement 31 Consolidated statement of comprehensive income 32 Statements of changes in equity 33 Balance sheets 34 Statements of cash flows 35 Notes 72 Alternative performance measures glossary AGM and information 73 Directors, officers and advisors 74 Notice of Annual General Meeting 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 1 Petards Group plc Annual Report & Accounts 2018 | 1 Overview Financial and operational highlights Revenue Adjusted EBITDA* Net funds £20.0m +28% 13.5 13.1 15.3 15.6 20.0 £2.1m +27% 2.1 1.6 1.6 1.3 1.0 £1.0m –25% 0.9 0.8 1.3 1.0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Revenue Adjusted EBITDA* Operating profit Profit before taxation Cash from operating activities Net funds (cash less debt) Net assets (0.1) 2014 2015 2016 2017 2018 2018 £000 2017 £000 19,973 15,581 2,057 1,156 1,126 2,515 969 8,091 1,619 1,245 1,205 539 1,286 7,231 *Adjusted EBITDA comprises operating proﬁt adjusted to remove the impact of depreciation, amortisation, exceptional items, acquisition costs and share based payments. See Alternative Performance Measures Glossary on page 72. The Group has adopted IFRS 15 Revenue from contracts with customers using the cumulative eﬀect method, under which the comparative information is not restated. The cumulative eﬀect of adopting IFRS 15 is recognised in equity at the date of ﬁrst adoption on 1 January 2018. The impact of this on the above results is set out at note 3 to the ﬁnancial statements. – Total revenues increased to £20.0m (2017: £15.6m) – Gross margins 34.5% (2017: 38.6%) – Adjusted EBITDA £2.1m (2017: £1.6m) – Operating profit £1.2m (2017: £1.2m including £0.4m exceptional income) – Cash generated from operating activities of £2.5m (2017: £0.5m) – Significant investment of £1.4m (2017: £1.3m) in our eyeTrain automated software applications has created new orders and opened up new business opportunities – Order book at 31 December 2018 over £19m (2017: £18m) – 2019 revenue coverage of over £13m from 2018 closing order book – Acquired RTS Solutions software business focused on UK rail infrastructure – QRO generated over £1 million of revenues from two new UK police framework agreements 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 2 2 | Petards Group plc Annual Report & Accounts 2018 Chairman’s statement I am pleased to report on the Group’s annual results for 2018 together with the progress made in meeting our strategic growth objectives. While the development of our new eyeTrain software solutions presented some technical challenges, it is gratifying that Petards’ market position has been strengthened and that the Group is well positioned to continue to win signiﬁcant new projects. Group revenues increased to £20.0 million (2017: £15.6 million) with Adjusted EBITDA* of £2,057,000 (2017: £1,619,000) and proﬁts before tax of £1,126,000 (2017: £1,205,000 that included £491,000 of net exceptional proﬁt). The Group closed 2018 with net funds of £969,000 (2017: £1,286,000). As I reported at the half year stage, the 2018 results reﬂect the adoption of IFRS 15, the new revenue recognition standard, details of which are set out in note 3 to the ﬁnancial statements. Rail products continued to provide the majority of the Group’s revenues with around 60% relating to eyeTrain in 2018. The majority of the Group’s overseas sales also derive from the rail sector with overall Group exports accounting for 23% of revenues. Over the past few years the Group has placed considerable emphasis on establishing a strong position in its home rail market, which is expected to provide good growth prospects over the coming years for train new build and retroﬁt applications as the train operators continue to increase network capacity. Signiﬁcant investment was made in 2018 in developing Driver Controlled Operation (“DCO”) and Automatic Selective Door Opening (“ASDO”) safety critical software systems. ASDO forms a key part of the overall solution to help train operators increase passenger carrying capacity particularly on rail lines with shorter platforms. QRO’s traﬃc products had an excellent 2018 in its second full year as part of the Group. Following its success in winning two long-term framework agreements with UK police forces, QRO is well positioned to achieve continued growth for its ANPR products and new service agreements. In April 2019 it is moving to larger nearby facilities in Northamptonshire to manage this new business, with plans to expand the product range. Defence products had a mixed year. Following a strong ﬁrst half year with a number of good contract wins and related revenues, the second half year proved to be more diﬃcult. The MOD has not presently sought to re-tender the radio catalogue framework agreement previously held by the Group for the past 5 years, which expired in September 2018. While we understand that the MOD will re-tender in due course, this delay means that the large orders received in 2018 are not expected to be repeated in 2019. RTS Solutions made a maiden contribution to Petards’ results following its acquisition in May 2018. I would like to welcome the team at RTS to the Group and look forward to supporting them in the future development of the business. The acquisition aﬃrmed the Board’s strategy to pursue ownership of a broader portfolio of products and RTS provides the Group with its ﬁrst exposure to rail infrastructure. Leeds based RTS supplies real-time software solutions and services that support the operational, maintenance and safety functions of the UK’s rail infrastructure. Since its acquisition we have created a business development function to market the software products on a wider basis while at the same time pursuing business with existing customers where we believe there is potential for the provision of additional services. The importance and contribution that the staﬀ within the Group make cannot be underestimated and 2018 was certainly a challenging year. On behalf of the Board and shareholders I would like to express thanks to all of our management and staﬀ at all levels for their hard work and professionalism and their contribution to the success of the Group. We look forward to their continued support in 2019. In line with its strategy the Board is reviewing opportunities to increase the Group’s market presence which will either be in the form of strategic alliances or the acquisition of complementary organisations, which is its preferred route. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 3 Petards Group plc Annual Report & Accounts 2018 | 3 Overview The Group continues to enjoy a strong order book that provides the Board with good visibility to plan for the future. The order book at 31 December 2018 was over £19 million, of which over £13 million is scheduled for revenue during 2019, with customer delivery schedules weighted towards the second half of the year. The Group has a strong pipeline of new contracts under negotiation which it is anticipated will add to the orders for delivery in the second half of 2019 and for 2020. These together with the Group’s strong market position provides the Board with conﬁdence in its prospects for the year ahead. Raschid Abdullah Chairman 9 April 2019 *Adjusted EBITDA comprises operating proﬁt adjusted to remove the impact of depreciation, amortisation, exceptional items, acquisition costs and share based payments. A reconciliation of Adjusted EBITDA to operating proﬁt is included on the face of the consolidated income statement. This is considered useful by the Board since by removing exceptional items, acquisition costs and share based payments, the year on year operational performance comparison is more comparable (see Alternative Performance Measures Glossary on page 72). 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 4 4 | Petards Group plc Annual Report & Accounts 2018 Strategic report The directors present their strategic report for the year ended 31 December 2018. Business review Petards’ operations continue to be focused upon the development, supply and maintenance of technologies used in advanced security, surveillance and ruggedized electronic applications, the main markets for which are: ● Rail – software driven video and other sensing systems for on-train applications sold under the eyeTrain brand to global train builders, integrators and rail operators, and web-based real-time safety critical integrated software applications supporting the UK rail network infrastructure sold under the RTS brand; ● Traﬃc –Automatic Number Plate Recognition (“ANPR”) systems for lane and speed enforcement and other applications, and UK Home Oﬃce approved mobile speed enforcement systems, sold under the QRO and ProVida brands to UK and overseas law enforcement agencies and commercial customers; and ● Defence – electronic countermeasure protection systems, mobile radio systems and related engineering services sold predominantly to the UK Ministry of Defence (“MOD”). Operating review 2018 saw the Group continue to secure the majority of orders available for its products placed by new train builders for the UK market. Order intake for eyeTrain products was similar to the prior year with recurring revenues for spares and repairs continuing to grow. The acquisition of RTS during the year added to the Group’s rail-related software solutions. The Group also secured year-on-year increases in both order intake and revenues for its Traﬃc and Defence products. At an operational level the year presented a number of challenges, particularly in respect of the delivery of some complex eyeTrain projects. The Group addressed these head-on and it is pleasing that these have been overcome to the satisfaction of our customers, albeit at some higher than anticipated cost. Order intake for eyeTrain products was weighted towards the second half of the year with signiﬁcant orders being received for delivery in 2019 and 2020 from Bombardier Transportation and Siemens Mobility worth in the region of £6.5 million. The Group’s industry experience, the growing number of train types on which eyeTrain is installed, our willingness to innovate, and the strong customer relationships built over time, all play a signiﬁcant role in continuing to secure such projects. The Group has invested heavily in developing software that provides Automatic Selective Door Operation (ASDO), Driver Controlled Operation (DCO) and Automatic Passenger Counting (APC) systems that integrate with its other eyeTrain video systems. The programme required a signiﬁcant scaling up of our software team with both permanent and contract staﬀ. It has taken longer than originally envisaged, however, the core system is now operational and provides a further diﬀerentiator for Petards. It is well suited to retroﬁt applications and we have been presented with new sales opportunities, some of which we expect to be converted in the coming 12 months. As more eyeTrain projects go into service, revenues from spares and service support are expected to continue to grow. This is a key long- term objective to enhance our customer and product support and we are seeking to reach agreement on service contracts as warranty periods expire. The UK’s demand for new and upgraded rolling stock remains strong and there are a number of major projects for which orders are scheduled to be placed by customers over the course of the next year. If Petards is selected then the majority of these are expected to utilise our existing proven eyeTrain software systems developed over the past two years. While the development of new on-board product applications for eyeTrain remains core to the Group’s strategy, the quantum of spend is presently expected to be much lower in 2019. Defence products had a strong ﬁrst half year with the receipt and delivery of £1.5 million in radio equipment orders and the delivery of the £1 million emulator tool for the MOD’s transport aircraft. The MOD also extended Petards post design services contract for another two years to the end of 2021, worth an additional £1.1 million. However, regretfully that level of performance was not carried through to the second 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 5 Strategic report Petards Group plc Annual Report & Accounts 2018 | 5 half of the year. While Petards continues to win some radio business, at the present time the MOD has not as yet re-tendered its radio catalogue framework agreement, previously held by the Group, which expired in September 2018. While we understand that the MOD will re-tender in due course, this delay means that the large orders received in 2018 are not expected to be repeated in 2019. Other than the provision of specialist engineering services, the Group’s current defence activities are mainly as a value-added re-seller of radio communications and electronic countermeasures equipment. The strong order and revenue performance of Traﬃc products continued into the second half buoyed by QRO’s success in securing two framework agreements with UK police forces; one with the Cheshire force and a joint one with Thames Valley and Hampshire. While Cheshire has been a longstanding customer, the growth in revenues over the prior year can be attributed to the second agreement. This has been utilised by other forces in England with deliveries worth over £1 million being made during 2018. Commercial sales also increased and customer service support contracts continued to be an important aspect of the business. In April 2019 QRO will be relocating to new premises in Northamptonshire to support its anticipated future growth. The Board is very satisﬁed with the return on its investment in QRO over the past two years and looks forward to further growth. The RTS acquisition in May 2018 was the ﬁrst since QRO joined the Group back in April 2016. The initial and contingent consideration of £1.85 million was paid during the year, including £0.6 million paid on a pound for pound basis for surplus cash in RTS’s acquired balance sheet. The consideration was satisﬁed in cash from the Group’s existing cash reserves and a new £1.25 million ﬁve year bank term loan. No further consideration is expected to be payable. RTS adds to Petards’ existing capabilities in the rail sector providing the Group with an entry into the UK rail infrastructure market. It brings with it a portfolio of software solutions and recurring revenues. In June 2018 it added signiﬁcantly to its recurring revenues order book with the renewal of a contract that related to software licences, maintenance and third line support in respect of Network Rail’s real time failure and incident management system. The contract will generate annual revenues in excess of £250,000 and runs until June 2023. The ﬁnal two years are at Network Rail’s option which would add to the order book when exercised. Since its acquisition RTS has made steady progress and contributed £0.2 million to Group proﬁts in the period to 31 December 2018 on revenues of £0.5 million. Investment of £0.1 million was also made in developing a new core module for its software portfolio, the ﬁrst revenues on which were realised in the period. While customer related project delays had an impact on its ﬁnancial performance in 2018, those projects remain live and the revenues are expected to be realised during the course of 2019. The Board remains conﬁdent that RTS will prove to be a good contributor to Group proﬁts going forward. Following 2018’s positive order intake performance, the Group closed the year with an order book of over £19 million (2017: over £18 million). This provides good coverage of the Group’s forward revenues with over £13 million scheduled for recognition during 2019 and a further £5 million for 2020. Financial review Operating performance The year ended 31 December 2018 is the ﬁrst year that the Group has reported under IFRS 15 “Revenue from contracts with customers” and its implementation has not altered the revenue recognition policy for the majority of the Group’s revenue streams. The one area of the Group’s business in which the adoption of IFRS 15 has resulted in a change, is that of the work performed relating to the delivery of customer speciﬁc development projects. Prior to the adoption of IFRS 15, the Group recognised such revenue upon achievement of speciﬁc pre-agreed, customer-set milestones (other than advance payments) and for which the Group could invoice the customer for payment. Under IFRS 15, work of this nature results in later recognition of the related revenue and predominantly aﬀects eyeTrain revenues. The Group has adopted IFRS 15 using the “cumulative eﬀect” method under which comparative information is not restated. The cumulative eﬀect of revising the revenue and proﬁt previously recognised up to 31 December 2017 is shown as an adjustment to brought forward retained earnings, details of which are set out in note 3 to the ﬁnancial statements, as is the eﬀect of the deferral of revenues that would have been recognised in 2018 IFRS 15 not been adopted. Revenues for the year were £20.0 million (2017: £15.6 million) including exports of £4.7 million (2017: £5.3 million). The majority of exports related to shipments of eyeTrain system to customers in Germany, Switzerland and Poland, most of which are destined for rail vehicles that will be operated in the UK. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 6 6 | Petards Group plc Annual Report & Accounts 2018 Strategic report (continued) Business review (continued) Gross margins for the year remained in line with those reported in the ﬁrst half year at 34.5%, with the reduction over those achieved in 2017 (38.6%) reﬂecting both product mix and higher than anticipated project costs. With regards to mix, Defence products comprised almost a third of 2018 total revenues. The increase over the prior year related to additional bought-in lower margin product and this had a dilutive eﬀect on the overall margin. In addition, higher non-recurring project costs were incurred in the implementation of eyeTrain projects on two new train platforms, and this work has been completed in the ﬁrst quarter of 2019. While the beneﬁts will be seen on future new orders, these costs had an eﬀect on the gross margin in 2018. While those higher speciﬁc project costs are one-oﬀ in nature, the Group has embarked on a programme of margin improvement across its supply chain, which it is expected will drive better returns. Overall administrative expenses were up to £5,728,000 (2017: £4,770,000). The main increases related to higher amortisation and depreciation charges, the eﬀect of the RTS acquisition and exceptional income of £362,000 netted oﬀ against 2017 administrative expenses. Other administrative expenses increased by 4% over the prior year primarily due to higher indirect staﬀ costs and one-oﬀ Defence product tendering costs. Earnings before interest, tax, depreciation, amortisation, exceptional items, acquisition costs and share based payment charges (“Adjusted EBITDA”) totalled £2,057,000 up from £1,619,000 in 2017. Operating proﬁts were £1,156,000 against £1,245,000 in 2017 (2017 included £362,000 exceptional income). Net ﬁnancial expenses totalled £30,000 (2017: £40,000) albeit that its composition was very diﬀerent than the prior year which included interest relating to loan notes converted in 2017 of £131,000, and net exceptional ﬁnancial income of £129,000. A tax credit of £17,000 for the year (2017: £32,000 credit) included the beneﬁt of research and development tax credits relating to prior years. Proﬁt after tax was £1,143,000 (2017: £1,237,000) and basic earnings per share 2.01p (2017: 3.31p). The equity issued as a result of the conversion of loan notes in December 2017 had little eﬀect on 2017’s basic earnings per share as they were only in issue for two weeks but impacted that of 2018 as they were in issue for the whole year. Fully diluted earnings per share were not aﬀected to the same extent and were 1.95p (2017: 2.32p). Research and development The Group continues to invest in its product oﬀering and during 2018 made a signiﬁcant investment in its rail products. This investment totalled £1,608,000 (2017: £1,290,000) of which £1,444,000 was capitalised (2017: £1,043,000). The capitalised costs relate predominantly to the Group’s next generation of eyeTrain software products which will sit alongside its existing software portfolio. These new products will support future sales to the Group’s most recent new customers as well as those for all ASDO systems, retroﬁtted DCO systems and integrated APC systems. In addition to eyeTrain, the Group invested to support RTS’s software development roadmap. Cash and cash ﬂow Net cash ﬂows from operating activities for the year were £2,515,000 (2017: £539,000). Net cash outﬂows from investing activities were £3 million comprising the acquisition of RTS, investment in new product development and equipment. Net ﬁnancing inﬂows were £1.3 million of which a net £1.1 million concerned the term loan ﬁnancing of the RTS acquisition. At 31 December 2018 the Group’s net cash and cash equivalents were £2,117,000 up by £793,000 over the year (2017: £1,324,000). The Group also has available to it a £0.75 million 2-year revolving credit facility secured in June 2018. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 7 Strategic report Petards Group plc Annual Report & Accounts 2018 | 7 Brexit In common with most UK companies, Petards would not be immune to any potential adverse impact that a disorderly Brexit might have on the wider economy. However, the Board’s current assessment is that the speciﬁc sectors in which the Group operates are not signiﬁcantly exposed to particular Brexit risk, although some impact may be felt in the days immediately following any disorderly Brexit. Rail products are the main contributor to Group revenues and while almost a quarter of the Group’s revenues for 2018 were exported to the EU, the majority related to UK rail projects. The market sectors to which Petards supplies tend to be highly regulated and the Group does not anticipate Brexit will change existing regulations signiﬁcantly. Like most businesses it can be aﬀected by any inﬂationary pressures in the supply chain but again these are not considered to be speciﬁc to the sectors in which the Group operates. Neither the Group’s current order book nor the orders it expects to receive during 2019 contain signiﬁcant foreign currency exposures. The Group has also been monitoring its major suppliers within its supply chain and they have indicated that they have taken additional measures, such as stocking, to ensure continuity of supply. The UK Long Term Passenger Rolling Stock Strategy for the Rail Industry published in 2018 continued to express the view that while Brexit impacts remain unknown, the scenarios covered by the “worst case” industry modelling already cater for impacts much worse than the Oﬃce of Budgetary Responsibility predictions for Brexit. The overall long term rolling stock outlook remained unchanged from the prior year’s report and forecasts a national rail ﬂeet increase of between 40% (5,500 vehicles) and 85% (12,000 vehicles) over the next 30 years. The investment decisions for new rolling stock require long term planning and those relating to orders which Petards expects to receive in the coming year were completed some time ago. The Group’s other sector exposure, defence and traﬃc, is also largely dependent upon UK government expenditure but those for Petards’ products and services are generally subject to shorter planning cycles. The current indications are that the Group’s forecast revenues take into account any likely adverse impact that Brexit might have, although Petards may possibly be a beneﬁciary of any boost in government spending that may follow Brexit. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 8 8 | Petards Group plc Annual Report & Accounts 2018 Strategic report (continued) Our business, business model and strategy Petards Group plc was listed on AIM in 1997 and the Group supplies advanced security and surveillance systems to three markets: Rail – Software driven on-board digital video and sensor systems for ﬁtment to new build or retroﬁtted to existing rolling stock. Applications include Driver Controlled Operation (DCO), condition monitoring, saloon car CCTV, drivers view cameras and automatic passenger counting systems, as well as software solutions and services that support the UK rail network including incident and fault management, work site and resource management, resource management, machine plant and asset/inventory management. Traﬃc – ANPR systems for lane and speed enforcement and other applications, and UK Home Oﬃce approved mobile speed enforcement systems, sold under the QRO and ProVida brands to UK and overseas law enforcement agencies and commercial customers. Defence – Electronic defensive countermeasure systems for ﬁtment to rotary and ﬁxed wing aircraft, threat simulation systems and mobile radios predominantly for the UK Ministry of Defence. The Group’s customer base mainly comprises international ‘blue chip’ and government agencies and their strength, often global, gives rise to the opportunity to develop Petards business through the provision of good quality professional service in support of its existing and future product ranges. The Group develops its own products and services for sale to the Rail and Traﬃc markets whereas within the Defence market, in which it has a heritage of nearly 70 years, it is a specialist “value added” re-seller and supplier of related engineering services. The Board believes that the Group operates in growth areas and that it has the products and services plus available technical and technological skills to develop new products as well as the sales and marketing abilities to become a larger and more successful operator in each of the sectors in which it operates. The Group’s overriding objective is to achieve attractive and sustainable rates of growth and returns for shareholders and its strategy to achieve this objective is: ● to focus upon the Group’s core products which are used in the rail, defence and traﬃc industries; ● to continue to invest in developing technologies to enhance its product portfolio; ● to increase revenues both organically by exploiting the synergies within the Group and by acquisition; ● to expand revenues globally into the Group’s target markets; and ● to improve operating margins through cost management. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 9 Strategic report Petards Group plc Annual Report & Accounts 2018 | 9 Key performance indicators The Group uses a number of key performance indicators (KPI’s) to monitor its progress against its objectives. In addition to on time delivery and quality standards, the main KPI’s are: Revenue Adjusted EBITDA1 Net cash from operating activities Net funds2 Current net funds3 2018 £000 2017 £000 19,973 15,581 2,057 2,515 969 1,852 1,619 539 1,286 1,309 1 Adjusted EBITDA comprises operating proﬁt adjusted to remove the impact of depreciation, amortisation, exceptional items, acquisition costs and share based payments. A reconciliation of Adjusted EBITDA to operating proﬁt is included on the face of the consolidated income statement. An Adjusted EBITDA KPI is considered useful to the Board since by removing exceptional items, acquisition costs and share based payments, the year on year operational performance comparison is more transparent. 2 Net funds comprises cash and cash equivalents (note 20) less interest bearing loans and borrowings (note 21). 3 Current net funds comprises cash and cash equivalents (note 20) less current liabilities in respect of interest bearing loans and borrowings (note 21). See Alternative Performance Measures Glossary on page 72. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 10 10 | Petards Group plc Annual Report & Accounts 2018 Strategic report (continued) Principal risks and uncertainties The management of the business and the execution of the Group’s strategy is subject to a number of risks. The main business risks aﬀecting the Group are outlined below. Potential risks relating to Brexit and the assessment of the impact of Brexit have been addressed separately above. The Group may face increased competition – the Group may face greater competition including that from competitors with greater capital resources than those of the Group. The Group may need future access to capital – the Group’s capital requirements depend on numerous factors. In order to make future acquisitions and to fund growth, the Group may require further ﬁnancing. This may not be able to take place if ﬁnancing is not available. The ﬁnancial results of the Group can be materially aﬀected by the timing of large contracts – the Group’s revenue is generated from a mix of longer and shorter lead time orders. The timing of order placement and delivery of the larger orders is inherently diﬃcult to predict potentially causing material ﬂuctuations in actual results compared with expectations or plans. Government expenditure – many of the industries that utilise the Group’s products receive funding from central and local governments. The levels of funding for those industries may impact on demand for the Group’s products. The Group has sought to mitigate this potential exposure by increasing its geographic customer base and by supplying a range of products and services. Dependence on key personnel – the Group’s performance depends to a signiﬁcant extent upon a limited number of key employees. The loss of one or more of these key employees and the inability to recruit people with the appropriate experience and skills could have a material adverse eﬀect on the Group. The Group has endeavoured to ensure that these key employees are incentivised but their retention cannot be guaranteed. Technological changes – the Group’s product oﬀerings may be under threat should technologies be developed by competitors that render those products either redundant or uncompetitive. This could potentially result in a reduction in revenues generated by the products aﬀected. The Group also incurs expenditure in developing new products and services. Should such development projects not be successfully completed or result in oﬀerings that are not attractive to customers, the costs incurred may not be fully recoverable. Currency risk – the Group buys from suppliers and sells to customers based outside of the UK and consequently these dealings may be in foreign currencies that are subject to exchange rate ﬂuctuations. The Group actively manages these exposures with foreign currency instruments, unless there is a natural hedge between purchases and sales. The principal currencies involved are US dollars and Euros. Further details regarding the key accounting estimates and judgements are included in note 1. Signed on behalf of the Board Osman Abdullah Group Chief Executive Parallel House 32 London Road Guildford Surrey GU1 2AB 9 April 2019 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 11 Directors’ report Corporate governance Petards Group plc Annual Report & Accounts 2018 | 11 The directors present their report and ﬁnancial statements for the year ended 31 December 2018. Board of Directors and Directors’ interests The Board currently comprises an executive Chairman, two executive directors and one non-executive director as follows: Raschid Abdullah – Executive Chairman Raschid was appointed executive Chairman in January 2013 and until its purchase by Petards was also executive Chairman of Water Hall Group plc, which was listed on AIM. He was previously executive Chairman of Evered Holding plc, a fully listed public company specialising in industrial and quarry related products, from 1982 to 1989. Raschid started his commercial life within the construction industry in the areas of building product supplies and the provision of specialist subcontracting services starting his ﬁrst business in 1971 which he sold to a competitor in 1976. He then joined the family business providing a range of services to clients in the Middle East. These included owning and operating family and procurement oﬃces for prominent families and their businesses, and co-investing in the UK stock market with a number of Middle Eastern families. He is a Life Fellow of the Royal Society of Arts. Osman Abdullah – Group Chief Executive Osman Abdullah was appointed to the Board in September 2010 as a non-executive director, becoming executive Chairman of the Group’s principal trading subsidiary in 2013 to lead its restructure. He was appointed as Group Chief Executive from January 2016. He was formerly Group Chief Executive of Evered Holdings plc, a fully listed public company specialising in industrial manufacturing, distribution and quarry mining related products from 1981 to 1989. He subsequently served from 1993 to 2005 as a non-executive director of Umeco plc, a fully listed company specialising in component distribution and the manufacture of composite material based products principally to the aerospace industry. Paul Negus – Director Paul Negus joined the Board in September 2014 and is responsible for business development for Petards’ rail products. He has considerable commercial experience having spent eight years as Managing Director of PIPS Technology Limited, a developer of automatic number plate recognition and CCTV systems ﬁrst under private ownership and latterly under the ownership of Federal Signal Inc. Terry Connolly FCA – Non-Executive Director Terry Connolly was appointed in August 2007. He is a chartered accountant and had a career in advertising and the entertainment sector where as Group Managing Director of Chrysalis he was responsible for taking that company to a public listing. Since 1989 he has been a self- employed consultant specialising in strategic and corporate aﬀairs. He is Chairman of the Audit and Remuneration Committees. Directors’ interests in the share capital of the Company are set out in the Remuneration Report. Research and development The Group is committed to research and development activities in order to secure competitive advantage in the markets in which it operates. An amount of £1,444,000 (2017: £1,043,000) has been capitalised during the year which relates to the ongoing development of the Group’s rail products. In addition, the Group expensed other development expenditure totalling £127,000 (2017: £247,000) directly to the income statement. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 12 12 | Petards Group plc Annual Report & Accounts 2018 Directors’ report (continued) Corporate Governance Statement The Board is collectively responsible for Corporate Governance and I, as Chairman of the Board, am ultimately responsible for ensuring that a high level of Corporate Governance is embedded in the Company’s culture. As a company whose shares are traded on the Alternative Investment Market (‘AIM’) of the London Stock Exchange, Petards Group plc recognises its responsibility for the proper management of the Company and the importance of sound corporate governance, commensurate with the size and nature of the Company and the interests of its shareholders. In accordance with AIM Rule 26, which requires AIM companies to comply with a recognised code of Corporate Governance, the Board believes that the Quoted Companies Alliance Corporate Governance Code 2018 (the “QCA Code”) provides a suitable framework by which it is able to continue to commit to maintaining high standards of corporate governance. Accordingly, the Company complies with the 10 principles of the QCA Code where considered relevant and appropriate, having regard to the size, current stage of development and resources of the Company. The QCA Code is applied by the Company primarily through its Board process, which includes regular meetings covering ﬁnancial as well as non-ﬁnancial matters which aﬀect not only the Company’s shareholders but other signiﬁcant stakeholders, including employees. The Board process and corporate governance is enhanced by the establishment of Audit, Remuneration and Nominations Committees. The Board believes that, having regard to the size of the Group, its stage of development and the resources it has available, its governance structures and practices are in compliance with the expectations of the QCA Code. Set out below are the 10 principles of the QCA Code, together with a summary under each heading explaining how the Company has applied these. In fulﬁlling their responsibilities, the directors believe that they govern the Company in the best interests of its shareholders, whilst having due regard to the interests of other stakeholders in the Group including, in particular, customers, employees and creditors. 1 Establish a strategy and business model which promotes long-term value for shareholders Application The Board must be able to express a shared view of the Company’s purpose, business model and strategy. It should go beyond the simple description of products and corporate structures and set out how the Company intends to deliver shareholder value in the medium to long- term. It should demonstrate that the delivery of long-term growth is underpinned by a clear set of values aimed at protecting the Company from unnecessary risk and securing its long-term future. Compliance The Company’s vision is to invest in and develop its business to deliver long term, sustainable growth in shareholder value. This may come from organic growth, acquisitions or divestments. The strategy for achieving this focuses on maintaining acceptable gross proﬁt margins, underpinned with sensible cost and cash management, having regard to perceived risks within the industry market and sector parameters, as well as the macro economic environment. The Chairman’s Statement and Strategic Report include detailed analysis of the Group’s strategy, ﬁnancial performance, principal risks and uncertainties and future expectations. 2 Seek to understand and meet shareholder needs and expectations Application Directors must develop a good understanding of the needs and expectations of all elements of the Company’s shareholder base. The Board must manage shareholders’ expectations and should seek to understand the motivations behind shareholder voting decisions. Compliance The Board recognises and understands that it has a ﬁduciary responsibility to the shareholders. The Board is aware of the need to protect the interests of minority shareholders and balancing these interests with those of any more substantial shareholders. The Chairman is responsible for ongoing dialogue and relationships with shareholders supported by the other executive directors. As such, members of the Board meet with the Company’s larger shareholders during the course of the year. The Annual General Meeting is always an opportunity for the Board to communicate with shareholders and the Board welcomes the attendance and participation of all shareholders. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 13 Corporate governance Petards Group plc Annual Report & Accounts 2018 | 13 This communication allows the Board to understand the shareholders’ views, and to ensure that the strategies and objectives of the Group are aligned with shareholders. In its decision-making, the Board will have regard to the ascertained expectations and needs of its shareholders (as appropriate in accordance with its statutory and ﬁduciary duties). The Group’s website (www.petards.com) allows shareholders access to information including; contact details, major shareholders and the current share price. In addition, all announcements issued since 2014 via RNS are available, together with an archive of recent ﬁnancial reports and accounts and interim statements. The resolutions to be put to a vote at each AGM can be found at the back of the relevant Annual Financial Report and the Financial Reports and Circulars section of the Company’s website for any forthcoming AGM. Past AGM resolutions can be found at the back of each Annual Financial Report with the results now published in the RNS section. 3 Take into account wider stakeholder and social responsibilities and their implications for long-term success Application Long-term success relies upon good relations with a range of diﬀerent stakeholder groups both internal (workforce) and external (suppliers, customers, regulators and others). The Board needs to identify the Company’s stakeholders and understand their needs, interests and expectations. Where matters that relate to the Company’s impact on society, the communities within which it operates or the environment have the potential to aﬀect the Company’s ability to deliver shareholder value over the medium to long-term, then those matters must be integrated into the Company’s strategy and business model. Feedback is an essential part of all control mechanisms. Systems need to be in place to solicit, consider and act on feedback from all stakeholder groups. Compliance The Group’s responsibilities to stakeholders including staﬀ, suppliers and customers and the wider society are also recognised as important to the delivery of the Company’s business objectives. The Company is committed to a series of Corporate Social Responsibility principles that provide a reference point for all stakeholders on the elements that deﬁne the conduct of the Company’s business and relationships in the geographical markets in which it operates. These principles are subject to periodic review and cover the following areas; ethics and business conduct, employees (including our supply chain), health and safety, environment and community. The environmental impact of the Group’s activities is carefully considered, and the maintenance of high environmental standards is a priority. The Group is committed to reducing that impact as far as reasonably possible through full regulatory compliance, recycling programmes and other initiatives. The Board has regard to the feedback of relevant stakeholders in its decision-making and the formulation of strategy. 4 Embed effective risk management, considering both opportunities and threats, throughout the organisation Application The Board needs to ensure that the Company’s risk management framework identiﬁes and addresses all relevant risks in order to execute and deliver strategy; companies need to consider their extended business, including the Company’s supply chain, from key suppliers to end- customer. Setting strategy includes determining the extent of exposure to the identiﬁed risks that the Company is able to bear and willing to take (risk tolerance and risk appetite). 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 14 14 | Petards Group plc Annual Report & Accounts 2018 Directors’ report (continued) Compliance The Board has established Audit and Remuneration Committees full details of which are contained in principle 9, below. The Company also receives feedback from its external auditors on the eﬀectiveness of its internal control structure. The Audit Committee believes that there should be no internal audit function for the Group at this time considering the size of the Group and the close involvement of senior management over the Group’s accounting systems. However, the Committee will keep this matter under review in the event that circumstances warrant an internal function in the future. In addition to the activities of the Board’s sub-committees, the Board approves the annual budget each year. This process allows the Board to identify key performance targets and risks expected during the upcoming year. The Board also considers the agreed budget when reviewing trading updates and considering expenditures throughout the year. Progress is monitored via monthly reporting of actual ﬁnancial performance against budget. Where appropriate, forecasts are prepared to further appraise any risks arising during the year. The Group has clear authority limits deriving from the list of matters reserved for decision by the Board, including capital expenditure approval procedures. The Board regularly reviews and monitors Key Performance Indicators, including those related to banking covenants. The Board plans to develop a risk register to assist in addressing and monitoring the risks critical to executing and delivering its strategy. 5 Maintain the Board as a well-functioning, balanced team led by the Chair Application The Board members have a collective responsibility and legal obligation to promote the interests of the Company, and are collectively responsible for deﬁning corporate governance arrangements. Ultimate responsibility for the quality of, and approach to, corporate governance lies with the Chair of the Board. The Board (and any committees) should be provided with high quality information in a timely manner to facilitate proper assessment of the matters requiring a decision or insight. The Board should have an appropriate balance between executive and non-executive directors and should have at least two independent non-executive directors. Independence is a Board judgement. The Board should be supported by committees (e.g. audit, remuneration, nomination) that have the necessary skills and knowledge to discharge their duties and responsibilities eﬀectively. Directors must commit the time necessary to fulﬁl their roles. Compliance The principal risks faced by the Group are addressed by the appointment of an experienced executive Board supported by an experienced independent non-executive director and a team of appropriately qualiﬁed professional advisers. The executive directors are closely involved in the day to day operations of the Group and report to the Board in detail, typically on a monthly basis. Their reports include the status and trends of agreed Key Performance Indicators that are noted in the Group’s Annual Financial Report in the Strategic Report and Financial and Operational Highlights. Nine main Board meetings were held during 2018. The Company Secretary records attendance at all Board meetings and the table below shows attendance by each director. Raschid Abdullah Osman Abdullah Paul Negus Terry Connolly 9/9 9/9 9/9 9/9 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 15 Corporate governance Petards Group plc Annual Report & Accounts 2018 | 15 The Board currently comprises three executive directors and one independent non-executive director. Biographical details of the directors are provided at the beginning of this report. The role of the independent non-executive director is to bring independent judgement to Board deliberations and decisions. The independent non-executive director has no personal ﬁnancial interest, other than as a shareholder, in the matters to be decided and although he has served for more than 9 years the Board is satisﬁed that the he is independent in terms of character and judgement. The Board believes that based on the size of the Company, its current stage of development and its internal resources, having only one independent non-executive director represents a suﬃcient balance and level of independence. The Board reviews these factors regularly and considers whether, or at what stage of the Company’s development, a second independent non-executive director will be required to further enhance this balance. The Board has sub-committees appointed to review the speciﬁc matters of Audit, Remuneration and Nominations. The Audit and Remuneration Committees are chaired by the independent non-executive director and the whole Board undertakes the responsibilities of the Nominations Committee. Further details are provided under principle 9, below. The Board is conﬁdent that each current member has the necessary skills, experience and knowledge to discharge his duties and responsibilities eﬀectively and that each commits the time necessary to fulﬁl his role. 6 Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities Application The Board must have an appropriate balance of sector, ﬁnancial and public markets skills and experience, as well as an appropriate balance of personal qualities and capabilities. The Board should understand and challenge its own diversity, including gender balance, as part of its composition. The Board should not be dominated by one person or a group of people. Strong personal bonds can be important but can also divide a Board. As companies evolve, the mix of skills and experience required on the Board will change, and Board composition will need to evolve to reﬂect this change. Compliance Each Board director has a wealth of knowledge and experience of the Group’s business operations and ﬁnancial management, and of the market the sector in which it operates. The Board is collectively aware of its need to consider and review its composition, in terms of individual personalities, diversity and gender. Having regard to the size and stage of development of the Group and of its internal resources and management support structure beneath it, the Board believe that it currently has an appropriate mix of personal qualities, experience and capability. 7 Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement Application The Board should regularly review the eﬀectiveness of its performance as a unit, as well as that of its committees and the individual directors. The Board performance review may be carried out internally or, ideally, externally facilitated from time to time. The review should identify development or mentoring needs of individual directors or the wider senior management team. It is healthy for membership of the Board to be periodically refreshed. Succession planning is a vital task for Boards. No member of the Board should become indispensable. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 16 16 | Petards Group plc Annual Report & Accounts 2018 Directors’ report (continued) Compliance The Board undertakes regular monitoring of personal and corporate performance using agreed key performance indicators and detailed ﬁnancial reports. Key performance indicators include; revenues, Adjusted EBITDA, pre-tax proﬁt, cash generation, net cash, net assets and earnings per share. The Board considers the need for refreshing its membership and is also responsible for succession planning. Having regard to the size and stage of development of the Group and of its internal resources and management support structure beneath it, the Board believes that it currently has an appropriate mix of personal qualities, experience and capability and that it undertakes suﬃcient procedures to review its own eﬀectiveness and performance as a unit, as well as that of its committees and individual members. 8 Promote a corporate culture that is based on ethical values and behaviours Application The Board should embody and promote a corporate culture that is based on sound ethical values and behaviours and use it as an asset and a source of competitive advantage. The policy set by the Board should be visible in the actions and decisions of the Chief Executive and the rest of the management team. Corporate values should guide the objectives and strategy of the Company. The culture should be visible in every aspect of the business, including recruitment, nominations, training and engagement. The performance and reward system should endorse the desired ethical behaviours across all levels of the Company. The corporate culture should be recognisable throughout the disclosures in the Annual Report, website and any other statements issued by the Company. Compliance The Board is committed to embodying and promoting a sound corporate culture and has endorsed various policies which require ethical behaviour of staﬀ and relevant counterparties (such as those mandating anti-corruption, anti-counterfeiting, fair treatment and equality of opportunity). The Board and management conduct themselves ethically at all times. The Group values its reputation for ethical behaviour and has a set of values that are at the core of its business philosophy. 9 Maintain governance structures and processes that are fit for purpose and support good decision- making by the Board Application The Company should maintain governance structures and processes in line with its corporate culture and appropriate to its: – size and complexity; and – capacity, appetite and tolerance for risk. The governance structures should evolve over time in parallel with its objectives, strategy and business model to reﬂect the development of the Company. Compliance Whilst the Company recognises the importance of high standards of Corporate Governance, the Board has sought to address the matter in a proportionate way having regard to the size and resources of the Group. The principal risks faced by the Group are addressed by the appointment of an experienced executive Board, supported by an experienced independent non-executive director, an experienced, capable and diverse operational management support structure and a team of appropriately qualiﬁed external professional advisers. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 17 Corporate governance Petards Group plc Annual Report & Accounts 2018 | 17 The Board aims to hold twelve formally constituted meetings per annum at which it typically reviews the Group’s ﬁnancial performance and risk proﬁle and considers strategies for future growth. The Board is supported by the Company Secretary who records and distributes minutes of the meetings on a timely basis. In support of its aim of maintaining governance structures and processes, the Board has sub-committees appointed to review the speciﬁc matters of Audit, Remuneration and Nominations. Audit Committee The Audit Committee is responsible for ensuring that the ﬁnancial performance of the Group is properly reported on and monitored and for meeting the auditors and reviewing their reports in relation to the accounts and the audit. It holds a formal meeting with the external auditors at least twice a year. The Audit Committee evaluates the independence and objectivity of the external auditor and takes into consideration all United Kingdom professional and regulatory requirements. Consideration is given to all relationships between the Group and the audit ﬁrm including in respect of the provision of non-audit services. The Audit Committee considers whether those relationships appear to impair the auditor’s judgement or independence. The Audit Committee believes they do not. The Audit Committee believes that there should be no internal audit function for the Group at this time considering the size of the Group and the close involvement of senior management over the Group’s accounting systems. However, the Committee will keep this matter under review in the event that circumstances warrant an internal function for the Group in the future. Remuneration Committee The Remuneration Committee is responsible for setting the scale and structure of the executive directors’ remuneration. It also recommends the allocation of share options to directors and other employees. The responsibilities of both the Audit and Remuneration Committees are undertaken by the Company’s independent non-executive director, who seeks independent advice from external advisors as he feels is appropriate and necessary. Nomination Committee The whole Board undertakes the Nomination Committee responsibilities. The remit comprises all new appointments of directors and senior management throughout the Group; nominations, interviewing, taking up references and considering related matters. 10 Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders Application A healthy dialogue should exist between the Board and all of its stakeholders, including shareholders, to enable all interested parties to come to informed decisions about the Company. In particular, appropriate communication and reporting structures should exist between the Board and all constituent parts of its shareholder base. This will assist: – the communication of shareholders’ views to the Board; and – the shareholders’ understanding of the unique circumstances and constraints faced by the Company. It should be clear where these communication practices are described. Compliance The Board is conscious of the need to engage with shareholders and other stakeholders so that interested parties have suﬃcient information on which to make informed decisions about the Company. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 18 18 | Petards Group plc Annual Report & Accounts 2018 Directors’ report (continued) The Company’s Annual Financial Report provides information on a number of key areas, including the following: – Corporate Governance, including reference to the QCA Code; – Operational and Financial review – A summary of the business, the business model and strategy; – Signiﬁcant risks and uncertainties; – Signiﬁcant accounting policies and particularly areas which are subject to judgements, estimates and assumptions; and – A Remuneration Committee Report. The Company’s website provides further information on a number of key areas, including the following: – Material on the Company’s Corporate Governance Framework; – The AGM Statement and results of voting at the AGM; – Regulatory News; and – Historical Annual Financial Reports. Both this Annual Financial Report and the Company’s Website provide information on forthcoming AGMs and a list of external advisers. Further details regarding the communication between the Company and its shareholders is explained in the disclosure above against principle 2. Financial instruments and financial risk management The Group presently ﬁnances its operations through a mixture of cash resources, bank borrowings, retained earnings and share capital. Its principal ﬁnancial instruments comprise cash and bank borrowings together with trade receivables and trade payables. The Group’s other ﬁnancial instruments arise from its day to day operations and comprise primarily of short term debtors and creditors and, where deemed appropriate, forward currency contracts. Further details of the Group’s ﬁnancial instruments are given in note 26 to the ﬁnancial statements and the directors consider the principal risks associated with the Group’s ﬁnancial instruments to be liquidity risk and currency risk. Employment policies The Group has established policies to comply with the relevant legislation and codes of practice regarding employment and equal opportunities. It keeps its employees informed of matters aﬀecting them as employees through regular team brieﬁngs throughout the year and has a policy that training, career development and promotion opportunities should be available to all employees. It is the Group’s policy to give full and fair consideration to applications for employment by people who are disabled, to continue wherever possible the employment of staﬀ who become disabled and to provide equal opportunities for the career development of disabled employees. Disclosure of information to auditor The directors who held oﬃce at the date of approval of this directors’ report conﬁrm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware; and each director has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 19 Corporate governance Petards Group plc Annual Report & Accounts 2018 | 19 Substantial shareholdings At 5 April 2019 the Company was aware of the following interests in three percent or more of its issued share capital. Name of holder El-Khereiji Financial Company WLL Charwell Investments Limited PFS Downing Active Management Limited R M Abdullah Miton UK Microcap Trust PLC A Perloﬀ O Abdullah Chelverton Growth Trust plc MT Zahid YT Zahid T W G Charlton Number of shares Percentage held 8,615,268 5,083,767 3,605,000 3,476,909 2,639,375 2,500,000 2,139,948 2,000,000 1,875,000 1,875,000 1,725,000 14.9% 8.8% 6.3% 6.1% 4.6% 4.4% 3.7% 3.5% 3.3% 3.3% 3.0% Going concern After making detailed enquiries, the Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and accordingly continues to prepare the ﬁnancial statements on a going concern basis. Further details relating to going concern are provided at note 1 on page 35 to the ﬁnancial statements. Auditor In accordance with section 489 of the Companies Act 2006, a resolution for the appointment of KPMG LLP as auditor of the Company is to be proposed at the forthcoming Annual General Meeting. By order of the Board Raschid Abdullah Director Parallel House 32 London Road Guildford Surrey GU1 2AB 9 April 2019 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 20 20 | Petards Group plc Annual Report & Accounts 2018 Remuneration report Remuneration Committee The Remuneration Committee is presently comprised of Mr T Connolly. Remuneration Policy The Remuneration Committee reviews the performance of executive directors and sets the scale and structure of their remuneration and other beneﬁts. Individual rewards and incentives are aligned with the performance of the Group and the interests of the shareholders and are set at an appropriate level in order to attract, retain and motivate executives who are expected to meet challenging performance criteria. The committee also recommends the allocation of share options to directors and other employees. Service contracts No directors have contracts of service with notice periods that exceed 12 months. Directors’ emoluments Details of individual director’s emoluments are set out in note 6 to the ﬁnancial statements. Directors’ share interests The directors’ beneﬁcial interests in the shares of the Company at the year-end were as follows: Ordinary Shares of 1p each at Ordinary Shares of 1p each at 31 December 31 December 2017 2018 R Abdullah O Abdullah T Connolly P Negus 3,476,909 2,139,948 30,000 575,000 3,476,909 2,724,585 30,000 – 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 21 Corporate governance Petards Group plc Annual Report & Accounts 2018 | 21 Directors’ interests in share options At 31 December 2018 the number of options to subscribe for ordinary shares of 1p held by directors were as follows: Number of options at Exercised 1 January during 2018 the year Granted Number of options at during 31 December 2018 the year Exercise price (pence) Date first exercisable Expiry date R Abdullah1 1,000,000 (1,000,000) 850,000 – – – – – 575,000 O Abdullah 1,312,500 – 850,000 – – – – – 575,000 – 8.00p 25.11.13 24.11.23 850,000 575,000 12.25p 21.50p 06.01.19 05.01.26 31.10.21 31.10.28 1,312,500 8.00p 25.11.13 24.11.23 850,000 575,000 12.25p 21.50p 06.01.19 05.01.26 31.10.21 31.10.28 P Negus2 700,000 (700,000) – – 11.625p 23.04.18 24.04.25 – – 300,000 300,000 21.50p 31.10.21 31.10.28 1 There was a gain on the exercise of these options of £136,000. R Abdullah also exercised share options in 2017 on which there was a gain of £81,250. 2 The options were held by Adcel Ltd, a company solely controlled by P Negus. There was a gain on the exercise of these options of £97,125. The share price at 31 December 2018 was 26.50p and the share price has ranged during the year from 19.00p to 27.50p. There have been no changes to directors’ interests since the year end. Non-executive director Fees for the non-executive director are determined by the Board as a whole having regard to the time devoted to the Company’s aﬀairs. The non-executive director is not part of any pension, share option or bonus schemes of the Group. Terry Connolly Director 9 April 2019 253591 Petards pp01-pp22.qxp 12/04/2019 10:18 Page 22 22 | Petards Group plc Annual Report & Accounts 2018 Statement of directors’ responsibilities in respect of the Annual Report and the ﬁnancial statements The directors are responsible for preparing the Annual Report and the Group and parent Company ﬁnancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and parent Company ﬁnancial statements for each ﬁnancial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group ﬁnancial statements in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs as adopted by the EU) and applicable law and have elected to prepare the parent Company ﬁnancial statements on the same basis. 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 parent Company and of their proﬁt or loss for that period. In preparing each of the Group and parent Company ﬁnancial statements, the directors are required to: ● select suitable accounting policies and then apply them consistently; ● make judgements and estimates that are reasonable, relevant and reliable; ● state whether they have been prepared in accordance with IFRSs as adopted by the EU; ● assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and ● use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. The directors are responsible for keeping adequate accounting records that are suﬃcient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the parent Company and enable them to ensure that its ﬁnancial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of ﬁnancial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of ﬁnancial statements may diﬀer from legislation in other jurisdictions. 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 23 Financial statements Petards Group plc Annual Report & Accounts 2018 | 23 Independent auditor’s report to the members of Petards Group plc Overview Materiality: Group financial £195k (2017: £156k) 1% statements as a whole (2017: 1%) of revenue Coverage 100% (2017: 100%) of Group revenue Key audit matters vs 2017 Event driven – New: The impact of uncertainties due to the UK exiting the European Union on our audit Event driven – New: Completeness and valuation of intangibles arising on acquisition New: Going concern ▲ ▲ ▲ Recurring risk – Revenue from contracts ongoing at year end ▲ ▲ Recurring risk, Parent Company – Recoverability of Parent Company’s investments in subsidiaries ▲ ▲ 1. Our opinion is unmodified We have audited the financial statements of Petards Group plc (“the Company”) for the year ended 31 December 2018 which comprise the consolidated income statement, consolidated statement of comprehensive income, Group and parent Company statements of changes in equity, Group and parent Company balance sheets, Group and parent Company statements of cash flows, and the related notes, including the accounting policies in note 1. 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 International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU); – the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and 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 are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 24 24 | Petards Group plc Annual Report & Accounts 2018 Independent auditor’s report to the members of Petards Group plc (continued) 2. Key audit matters: including our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including 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. We summarise below the key audit matters in arriving at our audit opinion above. 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. The risk Our response The impact of uncertainties due to the UK exiting the European Union on our audit Refer to page 7 (ﬁnancial review). Unprecedented levels of uncertainty All audits assess and challenge the reasonableness of estimates, in particular as described in the recoverability of the parent company’s investments in subsidiaries and the completeness and valuation of intangibles arising on acquisition (see below), and related disclosures and the appropriateness of the going concern basis of preparation of the financial statements (see below). All of these depend on assessments of the future economic environment and the Group’s future prospects and performance. Brexit is one of the most significant economic events for the UK and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. We developed a standardised firm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our audits. Our procedures included: • Our Brexit knowledge – We considered the directors’ assessment of Brexit-related sources of risk for the group’s business and financial resources compared with our own understanding of the risks. We considered the directors’ plans to take action to mitigate the risks. • Sensitivity analysis – When addressing estimates, in particular the recoverability of the parent company’s investments in subsidiaries, the completeness and valuation of intangibles arising on acquisition and the appropriateness of the going concern basis of preparation of the financial statements key audit matters and other areas that depend on forecasts, we compared the directors’ analysis to our assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty. • Assessing transparency – As well as assessing individual disclosures as part of our procedures on estimates, in particular as described in the recoverability of the parent company’s investments in subsidiaries, the completeness and valuation of intangibles arising on acquisition and the appropriateness of the going concern basis of preparation of the financial statements key audit matters, we considered all of the Brexit related disclosures together, including those in the strategic report, comparing the overall picture against our understanding of the risks. However, no audit should be expected to predict the unknowable factors or all possible future implications for a Group and this is particularly the case in relation to Brexit. 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 25 Financial statements Petards Group plc Annual Report & Accounts 2018 | 25 The risk Our response Completeness and valuation of intangibles arising on acquisition of RTS Solutions (Holdings) Limited and its subsidiary Intangible assets of £553k: Refer to note 1 on page 38 (accounting policy) and note 15 on page 58. Forecast based valuation Our procedures included: • Use of an expert – With the assistance of our own valuation specialists, we assessed the appropriateness of the valuation methodologies applied and challenged the completeness of the intangible assets identified and the discount rates applied. • Assessing transparency – We considered the adequacy of the disclosures in respect of the acquisition. • Historical comparison – We challenged the reasonableness of the assumptions, particularly the projected sales volumes, by assessing the historical accuracy of the Group’s forecasting. There is significant judgement with regard to the assumptions and estimates involved in the forecasting of future cash flows that form the basis of the assessment of the value of the intangible assets recognised on acquisition. The key assumptions are the expected future revenue and discount rates applied to the cash flows. Given the level of goodwill recognised on this acquisition, there is a risk that not all intangible assets have been recognised on acquisition. The effect of these matters is that, as part of our risk assessment, we determined that the recognition and valuation of intangible assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. In conducting our final audit work, we reassessed the degree of estimation uncertainty to be less than materiality. 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 26 26 | Petards Group plc Annual Report & Accounts 2018 Independent auditor’s report to the members of Petards Group plc (continued) The risk Our response Going concern Disclosure quality Our procedures included: Refer to page 10 (principal risks), note 1 on page 35 (accounting policy) and note 21 on page 64 (ﬁnancial disclosures). The financial statements explain how the Board has formed a judgement that it is appropriate to adopt the going concern basis of preparation for the Group and parent Company. • Funding assessment – We inspected the bank facility documents and correspondence with the lender to ascertain the committed level of financing and the related covenant requirements. That judgement is based on an evaluation of the inherent risks to the Group’s and parent Company’s business model and how those risks might affect the Group’s and parent Company’s financial resources or ability to continue operations over a period of at least a year from the date of approval of the financial statements. The risk most likely to adversely affect the Group’s and parent Company’s available financial resources and compliance with the terms of the bank facilities over this period is the timing and delivery of larger orders which are difficult to predict, and can cause material fluctuations in actual cash flows compared to those forecast. There are also less predictable but realistic second order impacts, such as the impact of Brexit and the erosion of customer confidence, which could result in a rapid reduction of available financial resources. The risk for our audit was whether or not those risks were such that they amounted to a material uncertainty that may have cast significant doubt about the ability to continue as a going concern. Had they been such, then that fact would have been required to have been disclosed. • Historical comparisons – We compared the Group’s forecasts to actual cash flows achieved in the year and in earlier years. • Sensitivity analysis – We considered sensitivities over the level of available financial resources (and related covenant requirements) indicated by the Group’s financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively. • Benchmarking assumptions – We tested the integrity of the cash flow projections and challenged the appropriateness of the key assumptions used therein by reference to our knowledge of the business. We also assessed the projections and assumptions by reference to general market conditions and post year end trading and cash flows, and assessed the potential risk of management bias. • Assessing transparency – We assessed the completeness and accuracy of the going concern disclosures, and disclosures on the maturity and classification of debt. 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 27 Financial statements Petards Group plc Annual Report & Accounts 2018 | 27 The risk Our response Revenue from contracts with customers ongoing at year end Refer to note 1 on page 36 and note 2 on page 46 (accounting policy notes). Accounting application Our procedures included: The Group’s contracts comprise the construction and delivery of a combination of electronic services and/or electronic assets. A typical contract identifies the consideration applicable to each deliverable and milestones are usually specified for the provision of electronic services. This is the first year that the Group is required to account for revenue under the revised revenue accounting standard. Each contract is reviewed to identify and assess distinct performance obligations, and the consideration applicable to each. For contracts ongoing at year end, inaccurate identification of the performance obligations and/or incorrectly concluding whether performance obligations have been satisfied could lead to material variances in the amounts recognised in revenue. Inaccurate assessment of whether revenue from ongoing contracts at year end should be recognised ‘over time’ rather than ‘point in time’, under the relevant accounting standards, could lead to material variances in the amounts recognised in revenue. • Accounting analysis – For selected contracts ongoing at year end we inspected the signed contracts to identify relevant performance obligations and other key information in order to assess whether the Group’s determination that contract revenue should be recognised over time or at a point in time was appropriate. • Test of detail – For selected contracts ongoing at year end, we inspected the signed contracts to identify relevant performance obligations and corroborated with reference to customer correspondence, other documentation, or client project personnel interviews whether these obligations had been satisfied and revenue appropriately allocated to the performance obligations and reflected in the financial statements. • Assessing transparency – We assessed the adequacy of the disclosures about the judgement involved in the identification of performance obligations and the classification of ongoing contracts at year end as over time or point in time under the relevant accounting standards. 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 28 28 | Petards Group plc Annual Report & Accounts 2018 Independent auditor’s report to the members of Petards Group plc (continued) The risk Our response Parent Company: Recoverability of investments in subsidiaries £12.9m million; 2017: £11.0 million Refer to note 1 on page 37 (accounting policy) and note 16 on page 60 (ﬁnancial disclosures). Low risk, high value Our procedures included: The carrying amount of the parent company’s investments in subsidiaries represents 96% (2017: 92%) of the Company’s total assets of £13.3 million (2017: £11.9 million). Their recoverability is not at a high risk of significant misstatement or subject to significant judgement, and the market capitalisation is in excess of the carrying value. However, due to their materiality in the context of the parent Company’s financial statements, this is considered to be the area that had the greatest effect on our overall parent Company audit. • Tests of detail – We compared the carrying value of all investments to with the relevant subsidiaries’ draft balance sheets to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount and assessed whether those subsidiaries had historically been profit making. For investments where the carrying amount exceeded the net asset value of the subsidiary, we compared the carrying amount of the investment with an estimate of the recoverable amount of the investment determined by reference to discounted cash flow forecasts. • Assessing the subsidiary audits – We considered the results of the audit work performed on all of those subsidiaries’ profits and net assets. • Comparing valuations – We compared the carrying amounts of investments to the Group’s market capitalisation to assess whether there were any indicators of impairment. 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 29 Financial statements Petards Group plc Annual Report & Accounts 2018 | 29 3. Our application of materiality and an overview of the 4. We have nothing to report on going concern scope of our audit Materiality for the group financial statements as a whole was set at £195k (2017: £156k), determined with reference to a benchmark of total revenue of £20.0 million (2017: £15.6 million of which it represents 1% (2017: 1%). We consider total revenue to be the most appropriate benchmark as it provides a more stable measure year on year than Group profit before tax. Materiality for the Parent Company financial statements as a whole was set at £131k (2017: £119k) determined with reference to a benchmark of Company total assets of £13.3 million (2017: £11.9 million) which it represented 1% (2017: 1%). We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £9k (2017: £8k), in addition to other identified misstatements that warranted reporting on qualitative grounds. The Group audit team performed full scope audits for Group purposes on all 9 (2017: 7) of the Group’s reporting components, as well as the audit of the Parent Company. These components accounted for 100% (2017: 100%) of total Group revenue, Group profit before tax and total Group assets. The component materialities ranged from £14k to £157k (2017: £35k to £141k), having regard to the mix of size and risk profile of the Group across the components. The group team conducted all audits at the Group’s offices in Gateshead. The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the parent Company or the Group or to cease their operations, and as they have concluded that the parent Company’s and the Group’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”). Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor’s report is not a guarantee that the group or the company will continue in operation. We identified going concern as a key audit matter (see section 2 of this report). Based on the work described in our response to that key audit matter, we are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least a year from the date of approval of the financial statements. We have nothing to report in this respect. Revenue £20.0m (2017: £15.6m) Group materiality £195k (2017: £156k) £195k Whole financial statements materiality (2017: £156k) £146k Range of materiality at components (£14k to £157k) (2017: £35k to £141k) (cid:81)(cid:3)Revenue (cid:81)(cid:3)Group materiality £9k Misstatements reported to the audit committee (2017: £8k) 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 30 30 | Petards Group plc Annual Report & Accounts 2018 Independent auditor’s report to the members of Petards Group plc (continued) 5. We have nothing to report on the other information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic report and directors’ report Based solely on our work on the other information: • we have not identified material misstatements in the strategic report and the directors’ report; • in our opinion the information given in those reports for the financial year is consistent with the financial statements; and • in our opinion those reports have been prepared in accordance with the Companies Act 2006. 6. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required 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. We have nothing to report in these respects. 7. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 22, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group 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 they 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 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 our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not 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 aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. 8. The purpose of our audit work and to whom we owe our responsibilities 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. Paul Moran (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants Quayside House 110 Quayside Newcastle upon Tyne NE1 3DX 9 April 2019 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 31 Financial statements Petards Group plc Annual Report & Accounts 2018 | 31 Consolidated income statement For year ended 31 December 2018 Revenue Cost of sales Gross profit Administrative expenses Adjusted EBITDA* Amortisation of intangibles Depreciation Exceptional income Acquisition costs Share based payment charges Operating profit Financial income (2017 included £340,000 exceptional income) Financial expenses (2017 included £211,000 exceptional expense) Profit before tax Income tax Profit for the year attributable to equity shareholders of the parent Earnings per ordinary share (pence) Basic Diluted Note 4 14 12 7 15 23 8 8 9 11 11 2018 £000 19,973 (13,089) 6,884 (5,728) 2,057 (590) (209) – (77) (25) 1,156 3 (33) 1,126 17 1,143 2.01 1.95 2017 £000 15,581 (9,566) 6,015 (4,770) 1,619 (547) (162) 362 – (27) 1,245 340 (380) 1,205 32 1,237 3.31 2.32 * Earnings before financial income and expenses, tax, depreciation, amortisation, exceptional items, acquisition costs and share based payment charges. See Alternative Performance Measures Glossary on page 72. Consolidated statement of comprehensive income For year ended 31 December 2018 Profit for the year Other comprehensive income Items that may be reclassiﬁed to proﬁt: Release of foreign currency reserve on abandonment of US subsidiary (included in financial expenses) Total comprehensive income for the year Note 7,8 2018 £000 1,143 – 1,143 2017 £000 1,237 211 1,448 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 32 32 | Petards Group plc Annual Report & Accounts 2018 Statements of changes in equity For year ended 31 December 2018 Group At 1 January 2017 Profit for the year Other comprehensive income Total comprehensive income for the year Equity-settled share based payments Conversion of convertible loan notes Exercise of share options At 31 December 2017 At 1 January 2018 Adjustment on initial application of IFRS 15 (net of tax) * Adjusted balance at 1 January 2018 Profit for the year Total comprehensive income for the year Equity-settled share based payments Exercise of share options Share capital £000 Share premium £000 Equity reserve £000 Currency Retained translation reserve earnings £000 £000 357 – – – – 198 3 558 558 – 558 – – – 17 68 – – – – 1,383 22 1,473 1,473 – 1,473 – – – 144 200 – – – – (169) (6) 25 25 – 25 – – – (11) 14 3,768 1,237 – 1,237 27 142 – 5,174 5,174 (468) 4,706 1,143 1,143 25 11 5,885 (211) – 211 211 – – – – – – – – – – – – Total equity £000 4,182 1,237 211 1,448 27 1,554 19 7,230 7,230 (468) 6,762 1,143 1,143 25 161 8,091 At 31 December 2018 575 1,617 * The Group has adopted IFRS 15 using the cumulative effect method, under which the comparative information is not restated (note 3). The cumulative effect of adopting IFRS 15 is recognised in equity at the date of first adoption on 1 January 2018. Company At 1 January 2017 Profit for the year Total comprehensive income for the year Equity-settled share based payments Conversion of convertible loan notes Exercise of share options At 31 December 2017 At 1 January 2018 Profit for the year Total comprehensive income for the year Equity-settled share based payments Exercise of share options Share capital £000 Share premium £000 Equity reserve £000 Retained earnings £000 Total equity £000 357 – – – 198 3 558 558 – – – 17 68 – – – 1,383 22 1,473 1,473 – – – 144 200 – – – (169) (6) 25 25 – – – (11) 14 5,897 1,038 1,038 27 142 – 7,104 7,104 514 514 25 11 6,522 1,038 1,038 27 1,554 19 9,160 9,160 514 514 25 161 7,654 9,860 At 31 December 2018 575 1,617 The accompanying notes form an integral part of the financial statements. 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 33 Financial statements Petards Group plc Annual Report & Accounts 2018 | 33 Balance sheets At 31 December 2018 ASSETS Non-current assets Property, plant and equipment Intangible assets Investments in subsidiary undertakings Deferred tax assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital Share premium Equity reserve Currency translation reserve Retained earnings Total equity Non-current liabilities Interest-bearing loans and borrowings Trade and other payables Current liabilities Interest-bearing loans and borrowings Trade and other payables Total liabilities Total equity and liabilities Note 12,13 14 16 17 18 19 20 24 25 21 22 21 22 Group 2018 £000 943 4,676 – 284 5,903 4,104 2,553 2,117 8,774 2017 £000 825 2,488 – 344 3,657 3,403 3,743 1,324 8,470 Company 2018 £000 2 – 12,851 130 12,983 – 258 85 343 2017 £000 2 – 10,999 130 11,131 – 743 30 773 14,677 12,127 13,326 11,904 575 1,617 14 – 5,885 8,091 883 – 883 265 5,438 5,703 6,586 558 1,473 25 – 5,174 7,230 23 – 23 15 4,859 4,874 4,897 575 1,617 14 – 7,654 9,860 875 901 1,776 250 1,440 1,690 3,466 558 1,473 25 – 7,104 9,160 – 870 870 – 1,874 1,874 2,744 14,677 12,127 13,326 11,904 These financial statements were approved by the Board of Directors on 9 April 2019 and were signed on its behalf by: Raschid Abdullah Director Registered number: 02990100 The accompanying notes form an integral part of the ﬁnancial statements. 253591 Petards pp23-pp034.qxp 12/04/2019 10:25 Page 34 34 | Petards Group plc Annual Report & Accounts 2018 Statements of cash flows For year ended 31 December 2018 Cash flows from operating activities Profit for the year Adjustments for: Depreciation Amortisation of intangible assets Financial income Financial expenses Equity settled share-based payment expenses Income tax (credit)/charge Operating cash flows before movement in working capital Change in inventories Change in trade and other receivables Change in trade and other payables Cash generated from operations Interest received Interest paid Tax received Net cash from operating activities Cash flows from investing activities Acquisition of property, plant and equipment Capitalised development expenditure Acquisition of subsidiary Net cash outflow from investing activities Cash flows from financing activities Bank loan received Bank loan repaid Finance lease repayments Proceeds from exercise of share options Net cash inflow from financing activities Net increase/(decrease) in cash and cash equivalents Total movement in cash and cash equivalents in the year Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Note 12,13 14 8 8 23 9 12,13 14 15,16 21 21 24 20 Group 2018 £000 2017 £000 Company 2018 £000 2017 £000 1,143 1,237 514 1,038 209 590 (3) 33 25 (17) 1,980 1,024 1,344 (1,834) 2,514 3 (58) 56 2,515 (325) (1,444) (1,224) (2,993) 1,250 (125) (15) 161 1,271 793 793 1,324 2,117 162 547 (340) 380 27 (32) 1,981 (1,450) (1,003) 1,057 585 – (107) 61 539 (509) (1,043) – (1,552) – (10) 25 15 (998) (998) 2,322 1,324 1 – – 31 25 – 571 – 685 (603) 653 – (31) – 622 (1) – (1,852) (1,853) 1,250 (125) – 161 1,286 55 55 30 85 1 – (340) 157 27 – 883 – (373) (1,165) (655) – (133) – (788) (1) – – (1) – – – 25 25 (764) (764) 794 30 The accompanying notes form an integral part of the ﬁnancial statements. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 35 Financial statements Petards Group plc Annual Report & Accounts 2018 | 35 Notes (forming part of the financial statements) Accounting policies 1 Petards Group plc (the “Company”) is a company incorporated in the UK. The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the “Group”). The parent company financial statements present information about the Company as a separate entity and not about its Group. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements. In these financial statements the Group has changed its accounting policies in the following areas: ● ● Revenue recognition Financial instruments These are further described in note 2. Statement of compliance Both the parent company financial statements and the Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”). On publishing the parent company financial statements here together with the Group financial statements, the Company is taking advantage of the exemption in section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements. Basis of preparation The financial information is presented in pounds sterling, rounded to the nearest thousand, and is prepared on the historic cost basis. Going concern Information on the Group’s business activities, cashflows and liquidity position, together with the factors likely to affect its future development, performance and position are described in the Strategic Report. In addition note 26 to the financial statements includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; and its exposures to credit risk and liquidity risk. The Group currently meets its day to day working capital requirements through its own cash resources, and also has available a revolving credit facility of £0.75m which was undrawn at the year end and which is available until 21 June 2020. Interest bearing loans and borrowings total £1.15m at the year end, of which only £0.26m is payable within one year. The Group has prepared forecasts which have been flexed to take into account reasonably possible changes in future trading performance, in particular to take into account uncertainty as to the timing of contract awards. This reflects the fact that the Group contracts with a number of customers across different industries and that the Group’s revenue is generated from a mix of longer and shorter lead time orders. The order book at the year end was in excess of £19m with over £13m scheduled for revenue in 2019 with an ongoing pipeline of new contracts under negotiation. The timing and delivery of the larger orders are difficult to predict, and can cause material fluctuations in actual results compared with forecast results and cash flows. These flexed forecasts show that the Group should be able to operate within the level of its cash resources and available bank facilities and accordingly the financial statements have been prepared on a going concern basis. Judgements and estimates The preparation of financial statements requires the directors to make judgements, estimates and assumptions that may affect the application of accounting policies and the reported amounts of assets and liabilities, and income and expenses. The key areas requiring the use of estimates and judgements which may significantly affect the financial statements are considered to be: 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 36 36 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) 1 a) Accounting policies continued Revenue recognition (notes 2 and 3) The Group has adopted IFRS 15 retrospectively from 1 January 2018 and has chosen to apply the cumulative effect approach. The Group recognises revenue when it transfers control over a product or service to its customer. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. Where a modification to an existing contract occurs, the Group assesses the nature of the modification and whether it represents a separate performance obligation required to be satisfied by the Group, or whether it is a modification to the existing performance obligation. A proportion of the Group’s contracts were previously treated as construction contracts under IAS 11 on the basis that they comprised contracts specifically negotiated for the construction and delivery of a combination of electronic assets and/or electronic services in a single package which were so closely related as to be in essence part of a single project, with an overall profit margin, being performed concurrently or in a continuous sequence. In applying IFRS 15 the Group has had to apply judgements and estimates to its portfolio of contracts in order to identify specific performance obligations and the timing of transfer of control of a product or service to a customer. The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group has not needed to apply estimates and judgements in respect of the time value of money as applied to transaction prices. Recognition of deferred tax assets (notes 9 and 17) The Group has substantial deferred tax assets. In determining how much of these assets can be recognised this requires an assessment of the extent to which it is probable that future taxable profits will be available. This assessment is based on management’s future assessment of the Group’s financial performance and forecast financial information. Capitalised development expenditure (note 14) This involves the identification of development expenditure which is recoverable through future product revenue together with an assessment of the estimated useful economic life of any asset recognised. Assets recognised in this way are also subject to impairment reviews. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Valuation of intangible assets arising on acquisition (note 15) The determination of the fair value of intangible assets including goodwill arising on acquisition includes significant judgement. The fair value of these intangible assets is determined by discounting the estimated future net cash flows to be generated by those assets where no active market exists. b) c) d) The use of different assumptions for the cash flows, the discount rate and the useful life of these assets would all change the valuation. Allocation of the purchase price impacts the results of the Group as finite life intangible assets are amortised whereas goodwill is not amortised but is tested annually for impairment. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 37 Financial statements Petards Group plc Annual Report & Accounts 2018 | 37 Accounting policies continued 1 Basis of consolidation Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Inter-company balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated when preparing the consolidated financial information. Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Non- monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign exchange differences arising on translation are recognised in the income statement. The Group has taken advantage of the relief available in IFRS 1 to deem the cumulative translation differences for all foreign operations to be zero at the date of transition to Adopted IFRSs (1 January 2006). Classification of financial instruments issued by the Group Following the adoption of IAS 32, financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions: (a) they include no contractual obligations upon the Company (or Group as the case may be) to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company (or Group); and (b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments. To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares. Finance payments associated with financial liabilities are dealt with as part of financial expenses. Finance payments associated with financial instruments that are classified in equity are treated as distributions and are recorded directly in equity. Investments in subsidiaries Investments in subsidiaries are carried at cost less impairment in the Company balance sheet. Derivative financial instruments Derivative financial instruments are recognised initially at fair value and subsequently re-measured. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. Intra-group financial guarantee contracts Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its Group, the Company considers these to be insurance arrangements and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 38 38 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) Accounting policies continued 1 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Leased assets acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Depreciation is charged to the income statement on a straight line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The estimated useful lives are as follows: Leasehold improvements life of lease straight line Plant and equipment: Plant and equipment 3-10 years Computer equipment 3-5 years Furniture and fittings 3-5 years Motor vehicles 4-5 years The residual values and useful economic lives are reassessed annually. Business combinations Subject to the transitional relief in IFRS 1, all business combinations are accounted for by applying the acquisition method. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Acquisitions on or after 1 January 2010 For acquisitions on or after 1 January 2010, the Group measures goodwill at the acquisition date as: ● ● ● ● the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus the fair value of the existing equity interest in the acquiree; less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. On a transaction-by-transaction basis, the Group elects to measure non-controlling interests, which have both present ownership interests and are entitled to a proportionate share of net assets of the acquiree in the event of liquidation, either at its fair value or at its proportionate interest in the recognised amount of the identifiable net assets of the acquiree at the acquisition date. All other non-controlling interests are measured at their fair value at the acquisition date. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 39 Financial statements Petards Group plc Annual Report & Accounts 2018 | 39 Accounting policies continued 1 Acquisitions between 1 January 2006 and 1 January 2010 For acquisitions between 1 January 2006 and 1 January 2010, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess was negative, a bargain purchase gain was recognised immediately in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the cost of the acquisition. Acquisitions prior to 1 January 2006 IFRS 1 grants certain exemptions from the full requirements of Adopted IFRSs in the transition period. The Group elected not to restate business combinations that took place prior to transition date. In respect of acquisitions prior to 1 January 2006, goodwill is included at transition date on the basis of its deemed cost, which represents the amount recorded under UK GAAP. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units and is not amortised but is tested annually for impairment. Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged on a straight line basis over the estimated useful lives of intangible assets. Other intangible assets are amortised from the date they are available for use. Research and development Expenditure on research activities is recognised as an expense in the period in which it is incurred. Expenditure on activities for the development of new or substantially improved products is capitalised if the product is technically and commercially feasible, and the Group has the technical ability and has sufficient resources to complete development and if the Group can measure reliably the expenditure attributable to the intangible asset during its development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Development expenditure not meeting the above criteria is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. Internally generated development expenditure is amortised on a straight-line basis over the period which the directors expect to obtain economic benefits (typically 3 to 8 years from asset being available for use). Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and accumulated impairment losses. Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: Technology related assets 4-10 years Customer related assets 3-5 years Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank borrowings that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose only of the statement of cash flows. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 40 40 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) Accounting policies continued 1 Impairment The carrying amounts of the Group’s assets, other than inventories and deferred tax assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. Goodwill is allocated to cash generating units and is tested annually for impairment and more frequently if there are indications of impairment. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Reversals of impairment An impairment loss in respect of goodwill is not reversed. An impairment loss in respect of other assets is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest- bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. Employee benefits Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as service is provided. Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Share-based payment transactions Options granted under the Group’s employee share schemes are equity settled. The grant date fair value of options granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is due only to share prices not achieving the threshold for vesting. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected, risk adjusted, future cash flows at a pre-tax risk-free rate. Contracts with customers – accounting policies applied since 1 January 2018 The Group has adopted IFRS 15 retrospectively from 1 January 2018 in accordance with paragraph C3(a) and has chosen to apply the cumulative effect approach. As a result, the Group has restated its opening equity position as at 1 January 2018 to reflect the impact of transitioning to IFRS 15. Comparatives for the year ended 31 December 2017 have not been restated. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 41 Financial statements Petards Group plc Annual Report & Accounts 2018 | 41 Accounting policies continued 1 The following expedients have been used in accordance with paragraph C5: – – – revenue in respect of completed contracts that begin and end in the same accounting period has not been restated; revenue in respect of completed contracts with variable consideration reflects the transaction price at the date the contracts were completed; and in the financial statements for the year ending 31 December 2018, the comparative information for the year ending 31 December 2017 will not disclose the amount of the transaction price allocated to the remaining performance obligations or an explanation of when the Group expects to recognise that amount as revenue. Following the adoption of IFRS 15, the Group’s accounting policy in respect of revenue is as follows: Revenue represents income derived from contracts for the provision of goods and services by the Group to customers in exchange for consideration in the ordinary course of the Group’s activities. Performance obligations Upon approval by the parties to a contract, the contract is assessed to identify each promise to transfer either a distinct good or service or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Goods and services are distinct and accounted for as separate performance obligations in the contract if the customer can benefit from them either on their own or together with other resources that are readily available to the customer and they are separately identifiable in the contract. Transaction price At the start of the contract, the total transaction price is estimated as the amount of consideration to which the Group expects to be entitled in exchange for transferring the promised goods and services to the customer, excluding sales taxes. Variable consideration, such as price escalation, is included based on the expected value or most likely amount only to the extent that it is highly probable that there will not be a reversal in the amount of cumulative revenue recognised. The transaction price does not include estimates of consideration resulting from contract modifications, such as change orders, until they have been approved by the parties to the contract. The total transaction price is allocated to the performance obligations identified in the contract in proportion to their relative stand-alone selling prices. Given the bespoke nature of many of the Group’s products and services, which are designed and/or manufactured under contract to the customer’s individual specifications, there are sometimes no observable stand-alone selling prices. Instead, stand-alone selling prices are typically estimated based on expected costs plus contract margin consistent with the Group’s pricing principles. Revenue and profit recognition Revenue is recognised as performance obligations are satisfied as control of the goods and services is transferred to the customer. For each performance obligation within a contract, the Group determines whether it is satisfied over time or at a point in time. The Group has determined that the performance obligations of the majority of its contracts are satisfied at a point in time. Performance obligations are satisfied over time if one of the following criteria is satisfied: – – – the customer simultaneously receives and consumes the benefits provided by the Group’s performance as it performs; the Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or the Group’s performance does not create an asset with an alternative use to the Group and it has an enforceable right to payment for performance completed to date. For each performance obligation to be recognised over time, the Group recognises revenue using an input method, based on costs incurred in the period. Revenue and attributable margin are calculated by reference to reliable estimates of transaction price and total expected costs, after making suitable allowances for technical and other risks. Revenue and associated margin are therefore recognised progressively as costs are incurred, and as risks have been mitigated or retired. The Group has determined that this method faithfully depicts the Group’s performance in transferring control of the goods and services to the customer. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 42 42 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) Accounting policies continued 1 If the over-time criteria for revenue recognition are not met, revenue is recognised at the point in time that control is transferred to the customer, which is usually when legal title passes to the customer and the business has the right to payment, for example, on delivery. The Group’s contracts that satisfy the over time criteria are typically services and maintenance support contracts where the customer simultaneously receives and consumed the benefit provided by the Groups performance. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately as an expense. The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust its transaction price for the time value of money. Software licences The Group sells software licences either separately or together with other goods and services. Revenue recognition in respect of software licences sold as part of a bundle of goods and services is considered separately when the licence is determined to be a separate performance obligation. Software licences either represent a right to access the Group’s intellectual property as it exists throughout the licence period or a right to use the Group’s intellectual property as it exists at the point in time at which the licence is granted. Revenue in respect of right to access licences is recognised over the licence term and revenue in respect of right to use licences is recognised upfront on delivery to the customer. Contract modifications The Group’s contracts are sometimes amended for changes in customers’ requirements and specifications. A contract modification exists when the parties to the contract approve a modification that either changes existing or creates new enforceable rights and obligations. The effect of a contract modification on the transaction price and the Group’s measure of progress towards the satisfaction of the performance obligation to which it relates is recognised in one of the following ways: (a) prospectively as an additional, separate contract; (b) prospectively as a termination of the existing contract and creation of a new contract; or (c) as part of the original contract using a cumulative catch up. The majority of the Group’s contract modifications are treated under either (a) (for example, the requirement for additional distinct goods or services) or (c) (for example, a change in the specification of the distinct goods or services for a partially completed contract), although the facts and circumstances of any contract modification are considered individually as the types of modifications will vary contract-by-contract and may result in different accounting outcomes. Costs to obtain a contract The Group expenses pre-contract bidding costs which are incurred regardless of whether a contract is awarded. The Group does not typically incur costs to obtain contracts that it would not have incurred had the contracts not been awarded. Costs to fulfil a contract Contract fulfilment costs in respect of over time contracts are expensed as incurred. Contract fulfilment costs in respect of point in time contracts are accounted for under IAS 2 Inventories. Inventories Inventories include raw materials, work-in-progress and finished goods recognised in accordance with IAS 2 in respect of contracts with customers which have been determined to fulfil the criteria for point in time revenue recognition under IFRS 15. It also includes inventories for which the Group does not have a contract. This is often because fulfilment costs have been incurred in expectation of a contract award. The Group does not typically build inventory to stock. Inventories are stated at the lower of cost, including all relevant overhead expenditure, and net realisable value. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 43 Financial statements Petards Group plc Annual Report & Accounts 2018 | 43 Accounting policies continued 1 Contract receivables Contract receivables represent amounts for which the Group has an unconditional right to consideration in respect of unbilled revenue recognised at the balance sheet date and comprises costs incurred plus attributable margin. Contract liabilities Contract liabilities represent the obligation to transfer goods or services to a customer for which consideration has been received, or consideration is due, from the customer. Revenue – accounting policies applied prior to 1 January 2018 Revenue is measured at the fair value of consideration received or receivable in the normal course of business, net of discounts, VAT and other sales related taxes provided that it can be measured reliably. Revenue from sales of goods and equipment is recognised on despatch unless the customer specifically requests deferred delivery instructions. For deliveries deferred at the customer’s request, revenues are recognised when the customer takes title to the goods provided that it is probable that delivery will be made, the goods are identified and ready for delivery and usual payment terms apply. Revenue from service contracts, where services are performed by an indeterminate number of acts over a specified period of time, is recognised on a straight line basis over the period of the contract. Revenue from certain of the Group’s contracts is recognised in accordance with IAS 11 Construction Contracts by reference to the stage of completion of the contract, as set out in the accounting policy for construction contracts. Construction contracts comprise contracts specifically negotiated for the construction and delivery of a combination of goods and/or services in a single package which are so closely related as to be in essence part of a single project and are performed concurrently or in a continuous sequence. Construction contracts – accounting policies applied prior to 1 January 2018 Construction contracts comprise contracts specifically negotiated for the construction and delivery of a combination of electronic assets and/or electronic services in a single package which are so closely related as to be in essence part of a single project with an overall profit margin and are performed concurrently or in a continuous sequence. Contract revenue includes the initial amount agreed in the contract plus any variations in contract work, to the extent that it is probable that they will result in revenue and can be measured reliably. As soon as the outcome of a contract can be estimated reliably, contract revenue and expenses are recognised in profit or loss in proportion to the stage of completion of the contract. The stage of completion is assessed by reference to completion of a physical proportion of the contract work. When the outcome of a contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable. An expected loss on a contract is recognised immediately in the income statement. Contract work in progress represents the gross unbilled amount expected to be collected from customers for contract work performed to date. It is measured at cost plus any appropriate profit recognised to date less progress billing and recognised losses. Cost includes all expenditure related directly to specific projects and an allocation of fixed and variable overheads incurred in the Group’s contract activities based on normal operating capacity. Payments from customers, to the extent that they exceed income recognised, are included as payments on account within trade and other payables. Inventories – accounting policies applied prior to 1 January 2018 Raw materials and consumables Inventories are stated at the lower of cost and net realisable value. Cost is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 44 44 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) Accounting policies continued 1 Expenses Operating lease payments Payments under operating leases are recognised in the income statement on a straight line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. Financial income Financial income comprises interest receivable on funds invested, and foreign exchange gains. Interest income is recognised in the income statement as it accrues using the effective interest method. Financial expenses Financial expenses comprise interest payable on borrowings, and foreign exchange losses. Taxation Income tax on the profit or loss for the period comprises both current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amounts of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Exceptional items Exceptional items are items of income and expenditure that are individually material due to size or incidence that the directors consider require separate disclosure in order for the reader to obtain a full understanding of the performance of the Group in the year. Standards issued but not yet effective The following Adopted IFRSs have been issued but have not been applied by the Group in these financial statements. Their adoption is not expected to have a material effect on the financial statements unless otherwise indicated: ● ● ● ● ● ● ● ● ● ● IFRS 17: Insurance Contracts (effective date 1 January 2021); Amendments to References to the Conceptual Framework in IFRS Standards (effective date 1 January 2020); Amendment to IFRS 3: Business Combinations (effective date 1 January 2020); Amendments to IAS 1 and IAS 8: Definition of material (effective 1 January 2020); Annual Improvements to IFRS Standards 2015-2017 Cycle (effective 1 January 2019); Amendments to IAS 19: Plan Amendment, Curtailment or Settlement (effective date 1 January 2019); Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures (effective 1 January 2019); IFRIC 23: Uncertainty over Income Tax Treatments (effective 1 January 2019); Amendments to IFRS 9: Prepayment Features with Negative Compensation (effective 1 January 2019); and IFRS 16: Leases (effective date 1 January 2019). 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 45 Financial statements Petards Group plc Annual Report & Accounts 2018 | 45 Accounting policies continued 1 IFRS 16 Leases IFRS 16 introduces a single, on-balance sheet accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short- term leases and leases of low value items. IFRS 16 replaces existing leases guidance including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases—Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The Group will adopt the requirements of IFRS 16 for the first time in 2019. As a result, it will recognise a balance sheet asset and corresponding obligation relating to its use of properties under multi-year agreements. The Group will not apply IFRS 16 to its commitments under operating leases on certain low value non-property assets. Rental payments made under leases will be accounted for as repayments of the balance sheet liability, which will include an implied interest element, and the asset recognised will be depreciated over the remaining lease term. The Group will adopt the modified approach to transition where the initial asset values will be equal to the present value of the future lease payments as at the date of transition. This will result in all existing leases being capitalised over their remaining lives, as if they had just been entered into, and the Group’s accounts will reflect a higher interest charge following adoption. Although the final determination has not been concluded, it is estimated that on transition the opening balance sheet position for 2019 will be adjusted to include approximately £0.4m of right-of-use assets and a corresponding lease liability. The effect on the Group’s net profit before tax for 2019 is not expected to be material with the pre-IFRS 16 rental charge being replaced by depreciation and interest. The depreciation will be charged on a straight-line basis; however interest is charged on the outstanding lease liabilities and will therefore be higher in the earlier years and will decrease over time. The transition to IFRS16 will have no effect on cash flows. Changes in significant accounting policies 2 IFRS 9 Financial instruments (effective 1 January 2018) IFRS 9 addresses the classification and measurement of financial assets and liabilities and replaces IAS 39. Among other things, the standard introduces a forward looking credit loss impairment model whereby entities need to consider and recognise impairment triggers that might occur in the future (an ‘expected loss’ model). The Board has considered the impact of the introduction of IFRS 9 and determined that it does not have a significant impact on the numbers reported in these financial statements or as previously presented. IFRS 9 replaces the provisions of IAS 39 that relate to recognition, classification and measurement of financial assets and financial liabilities, de-recognition of financial instruments, impairment of financial assets and hedge accounting. The adoption of IFRS 9 Financial Instruments from 1 January 2018 resulted in changes in accounting policies however no adjustments were required to the amounts recognised in the financial statements in previous periods. The new accounting policies are set out below. Classiﬁcation and measurement On 1 January 2018, the Group has classified its financial instruments in the appropriate IFRS 9 categories. The Group has no derivative financial instruments either designated as cash flow hedges or not qualifying for hedge accounting. Financial assets previously classified in the “loans and receivables” category and measured at amortised cost under IAS 39 (being trade and other receivables and amounts owed by equity accounted investments) continue to be classified in the “amortised cost” category under IFRS 9. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 46 46 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) Changes in significant accounting policies continued 2 Impairment of ﬁnancial assets The Group has two types of financial assets that are subject to IFRS 9’s new expected credit loss model: – – trade and other receivables; and contract receivables. Trade and other receivables, and contract receivables, do not contain a significant financing element and therefore expected credit losses are measured using the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from the initial recognition of the receivables. The Group has assessed credit risk in relation to defence-related sales to government customers or sub-contractors to governments and believes it to be extremely low, therefore no expected credit loss provision is required for these trade and other receivables, or contract receivables. The Group also considers expected credit losses for non-government commercial customers, however this risk is not expected to be material to the financial statements. While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, no impairment loss was identified. There was no IFRS 9 impact on retained earnings at 1 January 2018. Classiﬁcation From 1 January 2018, the Group classifies its financial assets in the following measurement categories: – – those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss); and those to be measured at amortised cost. Measurement At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not measured at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. The Group subsequently measures trade and other receivables and contract receivables at amortised cost. Impairment For trade and other receivables, contract receivables and amounts due from equity accounted investments, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. Financial liabilities There are no changes to the accounting policies in respect of loans, overdrafts, and trade and other payables, which continue to be measured at amortised cost. IFRS 15 Revenue from contracts with customers (effective 1 January 2018) IFRS 15 sets out a single and comprehensive framework for revenue recognition. The guidance in IFRS 15 is considerably more detailed than previous IFRSs for revenue recognition (IAS 11 Construction Contracts and IAS 18 Revenue and associated interpretations). The Group has adopted IFRS 15 retrospectively from 1 January 2018 and has chosen to apply the cumulative effect approach. As a result, the Group has restated its opening equity position as at 1 January 2018 to reflect the impact of transitioning to IFRS 15. A summary of the effect of the impact of the adoption of IFRS 15 is set out at note 3 below. In line with the requirements of the standard in regard to the transition option adopted, the Group has not restated its comparative information which continues to be reported under previous revenue standards, IAS 11 and IAS 18. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 47 Financial statements Petards Group plc Annual Report & Accounts 2018 | 47 Impact of the adoption of IFRS 15 3 Impact in respect of the position on adoption at 1 January 2018 IFRS 15 As reported 31 December as adopted 2017 Reclassification Remeasurement 1 January 2018 £000 Balance sheet headings £000 £000 £000 Work in progress within inventories 2,211 – 1,707 Payments on account within current trade and other payables (382) 382 – Deferred revenue within current trade and other payables – (382) (2,271) Deferred tax assets 344 – 96 3,918 – (2,653) 440 As reported 1 January 2018 £000 Retained earnings as previously reported 5,174 Adjustment to earnings from adoption of IFRS 15 – profit before tax (564) Adjustment to earnings from adoption of IFRS 15 – deferred tax 96 Retained earnings on adoption of IFRS 15 – at 1 January 2018 4,706 Impact on the result for the year ended 31 December 2018 Consolidated income statement Revenue Cost of sales Gross profit Administrative expenses Operating profit Financial income Financial expense Profit before tax Income tax Profit for the year Revenue before the adoption of IFRS 15 was accounted for under IAS 11 and IAS 18. Result before adoption of IFRS 15 £000 Impact of change in GAAP £000 Result after adoption of IFRS 15 £000 18,198 (11,719) 6,479 (5,728) 751 3 (33) 721 103 824 1,775 (1,370) 19,973 (13,089) 405 – 405 – – 405 (86) 319 6,884 (5,728) 1,156 3 (33) 1,126 17 1,143 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 48 48 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) Impact of the adoption of IFRS 15 continued 3 An assessment of the impact of IFRS 15 was completed during the year across the Group’s revenue streams, including a comprehensive review of contracts that were not completed contracts at the date of initial application. This review ascertained that under IFRS 15, £2,271,000 of revenue and £564,000 of profit recognised in previous accounting periods up to and including 31 December 2017 would be deferred to future periods. The effect of this assessment based on the progress of these contracts during the current year, has been to recognise revenue of £1,961,000 and profit of £451,000 in 2018, leaving revenue of £310,000 and profit of £113,000 to be recognised in accounting periods after 31 December 2018. The impact of IFRS 15 on contracts commencing during the year and which are incomplete at 31 December 2018 has been to defer revenue of £186,000 and estimated profit of £46,000 to future accounting periods. A summary of the new accounting policies and the nature of the changes to previous accounting policies in relation to the Group’s various goods and services are set out below. Nature, timing and satisfaction of performance Type of product or service obligations and significant payment terms Nature, timing and satisfaction of performance Revenue from the sale of goods and equipment Revenue from service contracts Revenue from construction contracts Revenue from sales of goods and equipment is recognised on despatch unless the customer specifically requests deferred delivery. For deliveries deferred at the customer’s request, revenues are recognised when the customer takes title to the goods provided that it is probable that delivery will be made, the goods are identified and ready for delivery and usual payment terms apply. Revenue from service contracts, where services are performed by an indeterminate number of acts over a specified period of time, is recognised on a straight line basis over the period of the contract. Construction contracts comprise contracts specifically negotiated for the construction and delivery of a combination of electronic services and/or electronic assets. A typical contract identifies the consideration applicable to each and milestones are usually specified for the provision of electronic services. Each contract is reviewed to identify and assess distinct performance obligations, and the consideration applying to each. An expected loss on a contract is recognised immediately in the income statement. No material impact on adoption of IFRS 15. No material impact on adoption of IFRS 15. The impact of IFRS 15 has been to identify and segregate the elements of the contracts relating to the construction and delivery of electronic services as these have distinct performance obligations. This is outlined below. Revenue from sale of electronic assets Revenue deriving from the provision of electronic assets is recognised at the point in time that the assets are provided. There is no material impact on the adoption of IFRS 15. 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 49 Financial statements Petards Group plc Annual Report & Accounts 2018 | 49 Impact of the adoption of IFRS 15 continued 3 Nature, timing and satisfaction of performance Type of product or service obligations and significant payment terms Nature, timing and satisfaction of performance Revenue from provision of electronic services Revenue deriving from the provision of electronic services, which is normally classified as non-recurring development expenditure, is recognised at the point that each development service obligation has been completed. If at the end of a reporting period the provision of this service is incomplete, costs incurred are included in the balance sheet as work in progress within inventories. Costs include all expenditure related directly to specific projects and an allocation of fixed and variable overheads incurred in the Group’s contract activities based on normal operating capacity. If at the end of a reporting period the provision of this service is incomplete, payments received from customers on the achievement of milestones are included in the balance sheet as deferred income until the provision of the service is complete. The impact of IFRS 15 on this element of contract revenue is to defer revenue and profit until the completion of each development service obligation. Under IAS 11 revenue was recognised in proportion to the stage of completion of the contract, which was assessed by reference to the completion of each customer agreed milestone. Contract work in progress represented the gross unbilled amount expected to be collected from customers for contract work performed to date. It was measured at cost plus any appropriate profit recognised to date less progress billings and recognised losses. Payments from customers, to the extent that they exceeded income recognised, were included as payments on account within trade and other payables. Segmental information 4 The analysis by geographic segment below is presented in accordance with IFRS 8 on the basis of those segments whose operating results are regularly reviewed by the Board of Directors (the Chief Operating Decision Maker as defined by IFRS 8) to make strategic decisions, to monitor performance and allocate resources. The Board regularly reviews the Group’s performance and balance sheet position for its entire operations as a whole. The Board receives financial information, assesses performance and makes resource allocation decisions for its UK based business as a whole, therefore the directors consider the Group to have only one segment in terms of products and services, being the development, supply and maintenance of technologies used in advanced security, surveillance and ruggedized electronic applications. As the Board of Directors receives revenue, Adjusted EBITDA and operating profit on the same basis as set out in the consolidated income statement no further reconciliation or disclosure is considered necessary. Revenue by geographical destination can be analysed as follows: United Kingdom Continental Europe Rest of World The timing of revenue recognition can be analysed as follows: Products and services transferred at a point in time – IFRS 15 Products and services transferred over time – IFRS 15 Products and services – IAS 11 and IAS 18 Construction contract revenue – IAS 11 Details of the revenues relating to the Group’s main customers in the year are given in note 19. 2018 2017 £000 £000 15,285 10,227 4,250 4,930 424 438 19,973 15,581 2018 2017 £000 £000 19,058 – 915 – – 5,921 9,660 – 19,973 15,581 253591 Petards pp35-end.qxp 12/04/2019 10:28 Page 50 50 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) Expenses and auditor’s remuneration 5 Profit before tax is stated after charging/(crediting): Amortisation of intangibles Development costs expensed directly to income Depreciation of property, plant and equipment – owned Depreciation of property, plant and equipment – leased Net write down/(up) of inventories Auditor’s remuneration: Audit of these financial statements Amounts receivable by the Company’s auditor and its associates in respect of: Audit of financial statements of subsidiaries pursuant to legislation Other services relating to taxation 2018 2017 £000 £000 590 547 164 247 196 147 13 15 (64) 7 2018 2017 £000 £000 15 13 57 44 13 17 Amounts receivable by the Company’s auditor and its associates in respect of services to the Company, other than the audit of the Company’s financial statements, have not been disclosed as the information is required instead to be disclosed on a consolidated basis. Staff numbers and costs 6 The aggregate payroll costs, including directors, were as follows: Wages and salaries Share based payments (note 23) Social security costs Other pension costs (note 23) The average number of employees during the year (including directors) was as follows: Direct labour Development Sales Administration Group 2018 2017 £000 £000 4,816 4,606 25 27 489 458 202 206 5,536 5,293 Group 2018 2017 Number Number 70 69 26 20 10 12 19 20 126 120 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 51 Financial statements Petards Group plc Annual Report & Accounts 2018 | 51 6 Staff numbers and costs continued Directors’ remuneration Directors’ emoluments Company contributions to defined contribution pension schemes 2018 2017 £000 £000 669 497 – – 669 497 The aggregate of emoluments of the highest paid director was £282,000 (2017: £186,000). Share options Salaries and fees Other benefits exercised Total 2018 2017 2018 2017 2018 2017 2018 Name of director £000 £000 £000 £000 £000 £000 £000 R Abdullah 111 105 – – 136 81 247 O Abdullah 111 105 – – – – 111 P Negus ¹ 185 182 – – 97 – 282 T Connolly ² 29 24 – – – – 29 436 416 – – 233 81 669 Total 2017 £000 186 105 182 24 497 ¹ Includes fees for the services of P Negus payable to Adcel Limited of £171,000 (2017: £182,000). ² Includes ex-gratia fee of £5,000 (2017: £nil) No performance bonus is payable in respect of the year ended 31 December 2018 (2017: £nil). No directors are accruing rights to shares under long term incentive schemes. Number of directors exercising share options Number of directors accruing benefits under a defined contribution pension scheme Directors’ rights to subscribe for shares in the Company are as follows: 2018 2017 Number Number 2 1 1 – At start of year At end of year Director Number of shares Number of shares Exercise price (pence) R Abdullah 1,850,000 1,425,000 O Abdullah 2,162,500 2,737,500 P Negus 700,000 300,000 8p – 21.5p 8p – 21.5p 11.6p – 21.5p Further details of movement in rights to subscribe for shares are included in the Remuneration Report, under the heading ‘Directors’ Interests in Share Options’, which forms part of these audited financial statements. 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 52 52 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) 7 Exceptional items Exceptional income included in administrative expenses Exceptional interest received included in financial income Exceptional loss on currency translation reserve 2018 2017 £000 £000 – 362 – 340 (211) – The 2017 results included two exceptional items. First, the Group accepted an offer to settle a historic matter, unrelated to the current trading activities of the Group, which arose over ten years ago. Under the settlement, on 9 January 2018, the Group received a total of £702,000 in cash comprising an amount of £362,000 plus compensatory interest of £340,000. The second exceptional item was also unrelated to the current trading activities of the Group. During 2017 the Board decided that the US subsidiary that had been dormant for several years should be abandoned, and any future activities that the Group may undertake in the US would not be conducted through the subsidiary. The £211,000 deficit on the Group’s currency translation reserve was reclassified from equity to income and shown as an expense. 8 Financial income and expenses Recognised in profit or loss Exceptional item – interest receivable on settlement (note 7) Interest on bank deposits Other exchange gain Financial income Interest expense on financial liabilities at amortised cost Exceptional item – foreign exchange loss (note 7) Other exchange loss Financial expenses 2018 2017 £000 £000 – 340 1 – – 2 3 340 2018 2017 £000 £000 33 133 – 211 36 – 33 380 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 53 9 Taxation Recognised in the income statement Current tax (credit)/expense Current tax charge Adjustments in respect of prior years Total current tax Deferred tax (credit)/expense Origination and reversal of temporary differences Derecognition of previously recognised tax losses Recognition of previously unrecognised tax losses Utilisation of recognised tax losses Adjustment in respect of prior years Effect of differential tax rate for deferred tax Total deferred tax Total tax credit in income statement Financial statements Petards Group plc Annual Report & Accounts 2018 | 53 2018 £000 34 (113) 105 73 (56) 75 (145) 10 2018 £000 2017 £000 2017 £000 5 (57) (79) (52) 5 – (148) 303 (162) 22 62 (17) 20 (32) The majority of the adjustments to tax in respect of prior years (2017: same) relates to research and development claims. These claims are recognised when receipt is determined to be probable. Factors that may affect future current and total tax charges The main rate of UK corporation tax changed from 20% to 19% with effect from 1 April 2017. The main rate of UK corporation tax will reduce to 17% from 1 April 2020. These tax changes were substantively enacted on 26 October 2016 and therefore the effect of this rate reduction has been applied to the deferred tax balances as at 31 December 2018 and 31 December 2017. Reconciliation of effective tax rate Profit before tax Tax using the UK corporation tax rate of 19% (2017: 19.25%) Non-deductible expenses Non taxable income Derecognition of previously recognised tax losses Recognition of previously unrecognised tax losses Adjustments in respect of prior years Effect of differential tax rate for deferred tax Other reconciling items Total tax credit 2018 2017 £000 £000 1,126 1,205 214 232 42 81 (21) – 73 – (56) (148) (258) (219) 10 22 – (21) (17) (32) 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 54 54 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) 10 Profit for the financial year – parent company As permitted by section 408 of the Companies Act 2006, the parent company’s income statement has not been included in these financial statements. The parent company’s profit for the financial year was £514,000 (2017: £1,038,000). 11 Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit for the year attributable to the shareholders by the weighted average number of shares in issue. Earnings Profit for the year (£000) Number of shares Weighted average number of ordinary shares (‘000) Basic earnings per share (pence) 2018 2017 1,143 1,237 56,752 37,418 2.01 3.31 Diluted earnings per share Diluted earnings per share assumes conversion of all potentially dilutive ordinary shares, which arise from share options, and is calculated by dividing the adjusted profit for the year attributable to the shareholders by the assumed weighted average number of shares in issue. The adjusted profit for 2017 comprised the profit for the year attributable to the shareholders after adding back the interest on convertible loan notes amounting to £131,000. Adjusted earnings Profit for the year (£000) Number of shares Weighted average number of ordinary shares (‘000) Diluted earnings per share (pence) 2018 2017 1,143 1,368 58,627 58,844 1.95 2.32 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 55 Financial statements Petards Group plc Annual Report & Accounts 2018 | 55 12 Property, plant and equipment – Group Leasehold improvements £000 Plant and equipment £000 Motor vehicles £000 Cost Balance at 1 January 2017 Acquisitions Disposals Balance at 31 December 2017 Balance at 1 January 2018 Acquisitions Arising on acquisition (note 15) Balance at 31 December 2018 Depreciation and impairment Balance at 1 January 2017 Depreciation charge for the year Disposals Balance at 31 December 2017 Balance at 1 January 2018 Depreciation charge for the year Balance at 31 December 2018 Net book value At 1 January 2017 At 31 December 2017 and 1 January 2018 At 31 December 2018 255 30 – 285 285 – – 285 193 17 – 210 210 18 228 62 75 57 1,324 477 (274) 1,527 1,527 325 2 1,854 965 134 (274) 825 825 175 1,000 359 702 854 51 24 (3) 72 72 – – 72 16 11 (3) 24 24 16 40 35 48 32 The net book value of assets held under finance lease obligations is £29,000 (2017: £43,000). Total £000 1,630 531 (277) 1,884 1,884 325 2 2,211 1,174 162 (277) 1,059 1,059 209 1,268 456 825 943 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 56 56 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) 13 Property, plant and equipment – Company Plant and equipment £000 Cost Balance at 1 January 2017 3 Acquisitions 1 Balance at 31 December 2017 4 Balance at 1 January 2018 4 Acquisitions 1 Balance at 31 December 2018 5 Depreciation and impairment Balance at 1 January 2017 1 Depreciation charge for the year 1 Balance at 31 December 2017 2 Balance at 1 January 2018 2 Depreciation charge for the year 1 Balance at 31 December 2018 3 Net book value At 1 January 2017 2 At 31 December 2017 and 1 January 2018 2 At 31 December 2018 2 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 57 Financial statements Petards Group plc Annual Report & Accounts 2018 | 57 14 Intangible assets – Group Cost Balance at 1 January 2017 Additions – internally developed Disposals Balance at 31 December 2017 Balance at 1 January 2018 Additions – internally developed Arising on acquisition (note 15) Balance at 31 December 2018 Amortisation and impairment Balance at 1 January 2017 Amortisation for the year Disposals Balance at 31 December 2017 Balance at 1 January 2018 Amortisation for the year Balance at 31 December 2018 Net book value At 1 January 2017 At 31 December 2017 and 1 January 2018 At 31 December 2018 Customer related intangibles £000 Technology related intangibles £000 Goodwill £000 Development costs £000 32 – – 32 32 – 146 178 9 6 – 15 15 67 82 23 17 96 41 – – 41 41 – 407 448 13 18 – 31 31 34 65 28 10 707 – – 707 707 – 781 1,488 – – – – – – – 707 707 383 1,488 3,466 1,043 (973) 3,536 3,536 1,444 – 4,980 2,232 523 (973) 1,782 1,782 489 2,271 1,234 1,754 2,709 Total £000 4,246 1,043 (973) 4,316 4,316 1,444 1,334 7,094 2,254 547 (973) 1,828 1,828 590 2,418 1,992 2,488 4,676 Development costs relate to the ongoing development of the Group’s rail products. This includes an amount of £1,249,000 (2017: £156,000) for which amortisation has not yet commenced. Amortisation The amortisation charge is recognised within administrative expenses in the income statement. Impairment testing The Group considers that for the purpose of goodwill impairment testing it has three cash generating units (CGUs) involved in the development, supply and maintenance of technologies used in advanced security, surveillance, web-based real-time safety critical integrated software applications and ruggedised electronic applications. 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 58 58 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) 14 Intangible assets – Group continued Goodwill has been allocated to cash generating units as follows: Petards Joyce-Loebl QRO Solutions RTS Solutions 2018 2017 £000 £000 401 401 306 306 – 781 1,488 707 Impairment is tested by calculating its value in use by reference to discounted cash flow forecasts over a five year period. The key assumptions for the value in use calculation are those regarding the growth rates, discount rates and expected changes in profit margins during the period. These are based on approved forecasts for the next year and an assumption of no growth thereafter has been applied in perpetuity (2017: approved forecasts for the next year and an assumption of no growth thereafter) and are based on forecast proﬁt margin being maintained (2017: proﬁt margin maintained). The discount rate applied is 10% (2017: 10%). For Petards Joyce-Loebl the discount rate would have to increase to 260% before there is an impairment. The profit margin would have to fall by 96% before there is an impairment. For QRO Solutions the discount rate would have to increase to 33% before there is an impairment. The profit margin would have to fall by 70% before there is an impairment. For RTS Solutions (UK) the discount rate would have to increase to 43% before there is an impairment. The profit margin would have to fall by 77% before there is an impairment. The Company had no intangible assets in 2017 or 2018. 15 Acquisitions On 11 May 2018, the Group acquired the entire issued share capital of RTS Solutions (Holdings) Limited which was the sole shareholder of RTS Solutions (UK) Limited (RTS) for £1.8 million, comprising £1.2 million for the business and £0.6 million for surplus cash. This consideration was settled by an initial cash consideration of £1 million, funded by a 5 year bank loan and £547,000 paid from internal cash reserves. Further deferred consideration of £250,000 was paid in June 2018, funded by an additional drawdown on the 5 year bank loan and a further £55,000 was paid in July, funded from cash reserves. The terms of the acquisition provided for a further amount of up to £250,000 to be payable in the event that the financial performance of RTS for the year ended 31 March 2019 met certain targets. The fair value of this element of consideration has been determined to be £nil on the basis that the forecast results were expected to be below the target amounts. During the period from acquisition to 31 December 2018, RTS contributed £511,000 of revenue and £183,000 of profit to the Group. Had the results been consolidated from 1 January 2018, Group revenue would have been £20,165,000 and net profit would have been £1,167,000. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 January 2018. 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 59 Financial statements Petards Group plc Annual Report & Accounts 2018 | 59 15 Acquisition continued The acquisition had the following effect on the Group’s assets and liabilities on the acquisition date: Provisional fair values recognised on acquisition £000 Net assets acquired Intangible assets Technology related assets 407 Customer related assets 146 Property, plant and equipment 2 Inventories 18 Trade and other receivables 131 Cash and cash equivalents 628 Trade and other payables (167) Deferred tax (94) Net identified assets and liabilities 1,071 Goodwill on acquisition 781 Total consideration 1,852 Cash flow Consideration paid in cash 1,852 Cash and cash equivalents acquired (628) Net cash flow 1,224 Pre-acquisition carrying amounts were determined based on applicable IFRSs, immediately prior to the acquisition. The values of assets and liabilities recognised on acquisition are the estimated fair values. The goodwill arising on acquisition can be attributed to a multitude of assets that cannot be readily separately identified for the purposes of fair value accounting. None of the goodwill is expected to be deductible for tax purposes. The fair value adjustments arise in accordance with the requirements of IFRSs to recognise intangible assets acquired. In determining the fair value of intangible assets, the Group has used discounted cash flow forecasts and these are being amortised over their estimated useful life. The Group incurred acquisition related costs of £77,000 that are included within administrative expenses. 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 60 60 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) 16 Investments in subsidiary undertakings The Group and Company have the following investments in subsidiary undertakings: Name of company Country of operation and registration Petards Joyce-Loebl Limited QRO Solutions Limited RTS Solutions (UK) Limited RTS Solutions (Holdings) Limited Water Hall Group plc Petards Limited Joyce-Loebl Group Limited Petards International Limited England (2) England (1) England (1) England (1) England (1) England (2) England (2) England (2) Nature of business Holding Specialist electronic systems Specialist electronic systems Specialist electronic systems Ordinary shares Ordinary shares Ordinary shares Non-trading Non-trading Dormant Dormant Dormant Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Proportion held Group Company 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Registered offices: (1) Parallel House, 32 London Road, Guildford, GU1 2AB (2) 390 Princesway, Team Valley, Gateshead, Tyne and Wear, NE11 0TU Shares in subsidiary undertakings Company £000 Cost At 1 January 2017 16,515 Investment in Petards Inc written off (2) At 31 December 2017 16,513 At 1 January 2018 16,513 Acquisition – RTS Solutions (Holdings) Limited 1,852 At 31 December 2018 18,365 Provisions for impairment in value At 1 January 2017, 31 December 2017 and 31 December 2018 5,514 Net book value At 1 January 2017 11,001 At 31 December 2017 10,999 At 31 December 2018 12,851 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 61 Financial statements Petards Group plc Annual Report & Accounts 2018 | 61 17 Deferred tax assets and liabilities Group Recognised deferred tax assets and liabilities are attributable to the following: Property, plant and equipment Provisions Tax value of loss carry-forwards Intangible fixed assets Initial application of IFRS 15 Tax assets/(liabilities) Offset of tax Net tax assets Assets Liabilities Net 2018 £000 – 5 418 – 10 433 (149) 284 2017 £000 – 5 401 – – 406 (62) 344 2018 £000 (46) – – (103) – (149) 149 – 2017 £000 (45) – – (17) – (62) 62 – 2018 £000 (46) 5 418 (103) 10 284 – 284 2017 £000 (45) 5 401 (17) – 344 – 344 Unrecognised deferred tax assets are attributable to the following: Property, plant and equipment Provisions Tax value of loss carry-forwards Tax assets There is no expiry date on the above unrecognised deferred tax assets. Movement in deferred tax during the year Assets Assets 2018 2017 £000 £000 209 248 3 4 1,359 1,424 1,636 1,611 Property, plant and equipment Provisions Tax value of loss carry-forwards Intangible fixed assets Initial application of IFRS 15 31 December 2017 £000 Initial application of IFRS 15 £000 1 January 2018 £000 Arising on acquisitions £000 Recognised 31 December 2018 £000 in income £000 (45) 5 401 (17) – 344 – – – – 96 96 (45) 5 401 (17) 96 440 – – – (94) – (94) (1) – 17 8 (86) (62) (46) 5 418 (103) 10 284 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 62 62 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) 17 Deferred tax assets and liabilities continued Movement in deferred tax during the prior year Property, plant and equipment Provisions Tax value of loss carry-forwards Intangible fixed assets Company Recognised deferred tax assets are attributable to the following: Tax value of loss carry-forwards Tax assets Unrecognised deferred tax assets are attributable to the following: Property, plant and equipment Provisions Tax value of loss carry-forwards Tax assets There is no expiry date on the above unrecognised deferred tax assets. 18 Inventories Raw materials and consumables Work in progress 1 January 2017 £000 Recognised 31 December 2017 £000 in income £000 (24) 6 423 (41) 364 (21) (1) (22) 24 (20) (45) 5 401 (17) 344 Assets Assets 2018 2017 £000 £000 130 130 130 130 Assets Assets 2018 2017 £000 £000 23 22 3 3 168 132 158 193 Group Company 2018 £000 1,855 2,249 4,104 2017 £000 1,192 2,211 3,403 2018 £000 – – – 2017 £000 – – – The Group has adopted IFRS 15 using the cumulative effect method, under which the comparative information is not restated (note 3). The cumulative effect of adopting IFRS 15 is recognised in equity at the date of first adoption on 1 January 2018. The work in progress balance at 31 December 2018 includes £337,000 representing the impact of the adoption of IFRS 15. The directors consider all inventories to be essentially current in nature although the duration of certain contracts is such that a proportion of inventories will not be realised within 12 months. It is not possible to determine this amount with precision as this is dependent on a number of issues including future order volumes, the timing of project milestones and customer call off schedules. 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 63 Financial statements Petards Group plc Annual Report & Accounts 2018 | 63 18 Inventories continued Inventories recognised as cost of sales in the year amounted to £12,530,000 (2017: £8,730,000). At 31 December 2018 inventories are shown net of provisions of £191,000 (2017: £184,000). Construction contract work in progress The Group’s 2017 net balance on construction contracts work in progress of £1,224,000 was analysed into the following assets and liabilities under IAS 11; work in progress £1,458,000 and payments on account of £234,000. Work in progress at 31 December 2017 related to construction contracts in progress at that date comprising cumulative costs incurred plus recognised profits less losses of £13,975,000 less cumulative progress billings received and receivable of £12,517,000. These disclosures are not relevant to IFRS 15 that was adopted in 2018. 19 Trade and other receivables Trade receivables Amounts owed by group undertakings Corporation tax recoverable Other receivables Prepayments and accrued income Group Company 2018 £000 2,236 – 75 29 213 2,553 2017 £000 2,771 – – 791 181 3,743 2018 £000 – 213 – 16 29 258 2017 £000 – – – 722 21 743 At 31 December 2018 trade receivables include retentions of £197,000 (2017: £2,000). The Group has a variety of credit terms depending on the customer. The majority of the Group’s sales are made to government agencies and blue chip companies and consequently have very low historical default rates. At 31 December 2018 trade receivables are shown net of an allowance for credit notes of £nil (2017: £nil) arising from the ordinary course of business. The ageing of trade receivables at the balance sheet date was: Group Not past due date Past due date (0-90 days) Past due date (over 90 days) 2018 Gross and net trade receivables £000 2017 Gross and net trade receivables £000 1,452 1,850 603 758 163 181 2,236 2,771 Management has no indication that any unimpaired amounts will be irrecoverable. No other receivables are past due in either the current or prior year. In 2018 revenues for three customers each exceeded 10% of the Group’s revenues. Revenues from these customers were £5,063,000, £3,362,000 and £2,569,000 (2017: Three customers: £4,376,000, £2,690,000 and £2,381,000) of which £1,048,000 was included in the carrying amount of trade receivables at 31 December 2018 (2017: £1,589,000). 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 64 64 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) 19 Trade and other receivables continued The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: UK Europe Other regions Group 2018 2017 £000 £000 1,364 1,962 815 808 1 57 2,236 2,771 The Group’s exposure to credit and currency risks and impairment losses related to trade receivables are disclosed in note 26. The Company has no trade receivables. 20 Cash and cash equivalents Group Company 2018 £000 2017 £000 2018 £000 2017 £000 Cash and cash equivalents Cash and cash equivalents per balance sheet and per cash flow statement 2,117 1,324 85 30 The Group’s exposure to credit and currency risk related to cash and cash equivalents are disclosed in note 26. 21 Interest-bearing loans and borrowings This note provides information about the contractual terms of the Group’s and Company’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Group’s and Company’s exposure to interest rate and foreign currency risk, see note 26. Non-current liabilities Bank loan Finance lease liabilities Current liabilities Bank loan Current portion of finance lease liabilities Group Company 2018 £000 2017 £000 2018 £000 2017 £000 875 8 883 250 15 265 – 23 23 – 15 15 875 – 875 250 – 250 – – – – – – During the year the Company entered into a term loan facility of £1.25 million repayable by equal quarterly instalments over 60 months. The interest rate is set at LIBOR plus 3.19% and the loan is secured by a fixed and floating charge over the assets of the Group. 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 65 Financial statements Petards Group plc Annual Report & Accounts 2018 | 65 21 Interest-bearing loans and borrowings continued During the year the Company was also provided a revolving credit facility of up to £750,000 which was undrawn at 31 December 2018. The interest rate on amounts drawn is set at LIBOR plus 3.19%. Changes in liabilities from financing activities Balance at 1 January 2018 New bank loan Repayment of bank loan Payment of finance lease liabilities Total changes from financing cash flows Balance at 31 December 2018 22 Trade and other payables Non-current liabilities Amounts owed to group undertakings Current liabilities Trade payables Amounts owed to group undertakings Deferred income* Payments on account* Non-trade payables and accrued expenses Interest payable Loans and Finance lease liabilities £000 borrowings £000 – 38 1,250 – (125) – (15) – 1,125 1,125 (15) 23 Group Company 2018 £000 2017 £000 2018 £000 2017 £000 – – 901 870 3,268 – 1,167 – 995 8 5,438 2,869 – 148 234 1,575 33 4,859 62 1,239 – – 131 8 1,440 82 1,616 – – 143 33 1,874 * The Group has adopted IFRS 15 using the cumulative effect method, under which the comparative information is not restated (note 3). The cumulative effect of adopting IFRS 15 is recognised in equity at the date of first adoption on 1 January 2018. The deferred income balance at 31 December 2018 includes £496,000 representing the impact of the adoption of IFRS 15. No amounts included in current liabilities are expected to be settled in more than 12 months (2017: £nil). In both 2018 and 2017 amounts payable to group undertakings in current liabilities are due on demand but have no fixed repayment dates. The non-current amount payable to a group undertaking is formally agreed, attracts interest at 3.25% and is not repayable before 31 March 2020. 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 66 66 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) 23 Employee benefits Defined contribution plans The Group operates defined contribution pension plans. The total expense relating to defined contribution plans in the current year was £206,000 (2017: £202,000). Share-based payments The Company has granted share options under its Enterprise Management Incentive Scheme (‘EMI Scheme’), and an Unapproved Share Option Scheme (‘Unapproved Scheme’). Options granted have a contractual life of ten years and are exercisable on the third anniversary from the date of grant. All options are to be settled by physical delivery of shares. The unexercised options at 31 December 2018 are stated below. Date of grant Scheme Nov 2013 Jan 2016 Jan 2016 Jul 2017 Oct 2018 Oct 2018 (1) Fully vested (2) 3 years from date of grant EMI Scheme EMI Scheme Unapproved Scheme EMI Scheme EMI Scheme Unapproved Scheme Exercise price (pence) 8.00p 12.25p 12.25p 29.00p 21.50p 21.50p Number of shares granted Vesting conditions 1,312,500 1,810,204 189,796 80,000 575,000 875,000 (1) (2) (2) (2) (2) (2) Exercise period Nov 2013 – Nov 2023 Jan 2019 – Jan 2026 Jan 2019 – Jan 2026 Jul 2020 – Jul 2027 Oct 2021 – Oct 2028 Oct 2021 – Oct 2028 Outstanding at beginning of the year Granted during the year Forfeited/lapsed during the year Exercised Outstanding at the end of the year Exercisable at the end of the year 2018 2017 Weighted average exercise price £ 0.105 0.22 0.18 0.09 0.141 Number of shares 5,515,000 80,000 (70,000) (312,500) 5,212,500 0.08 2,312,500 Weighted average exercise price £ 0.10 0.29 0.25 0.08 0.105 0.08 Number of shares 5,212,500 1,570,000 (240,000) (1,700,000) 4,842,500 1,312,500 The estimated fair value of the options ranges between 2.5p and 9.8p. These were calculated by applying the Black-Scholes option pricing model. The model inputs were the share price at the date of grant, the appropriate exercise price, expected volatility of 40% (2017: 50%) and a risk free interest rate of 0.8% (2017: 0.13%). It was assumed that option holders would exercise their options during the first year after the option vesting date. The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of daily share prices over the period of one year to the date of grant. During the year options were exercised in respect of 1,700,000 shares which were satisfied by the issue of new shares and for which the related weighted average share price at the time of exercise was 23p. The options outstanding at 31 December 2018 had exercise prices ranging from 8p to 29p and the weighted average remaining contractual life of the options was 7.3 years. The Group and Company recognised a total expense of £25,000 (2017: £27,000) in respect of equity settled share options. 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 67 Financial statements Petards Group plc Annual Report & Accounts 2018 | 67 24 Share capital Number of shares in issue – allotted, called up and fully paid Ordinary shares of 1p each Value of shares in issue – allotted, called up and fully paid Ordinary shares of 1p each At At 31 December 31 December 2017 Number 2018 Number 57,468,229 55,768,229 £000 £000 575 558 The Company’s issued share capital comprises 57,468,229 ordinary shares of 1p each, all of which have equal voting rights. On 22 May 2018 the Company issued 700,000 ordinary 1p shares at a price of 11.625p each and on 11 June 2018 the Company issued a further 1,000,000 ordinary 1p shares at a price of 8p each, on the exercise of options. 25 Equity reserve The equity reserve relates to the fair value of the share options issued but not yet exercised in respect of the acquisition of Water Hall Group plc in 2013. During the year 1,000,000 of these share options were exercised, resulting in a transfer of £11,000 from this equity reserve to retained earnings. 26 Financial risk management The Group’s and Company’s policy is to maintain a strong capital base with a view to ensuring that entities within the Group will be able to continue as going concerns. The Group’s and Company’s principal financial instruments comprise short term debtors and creditors, short term bank deposits, cash, bank borrowings and, when required, forward currency contracts and options. Neither the Group nor the Company trades in financial instruments but, where appropriate, uses derivative financial instruments in the form of forward foreign currency contracts and options to help manage foreign currency exposures. The prime objective of the Group’s and Company’s policy towards financial instruments is to manage their working capital requirements and finance their ongoing operations. Capital management The Group’s and Company’s policy is to maintain a strong capital base with a view to ensuring that entities within the Group will be able to continue as going concerns. The Group and Company finance their operations through retained earnings, cash resources, bank borrowings, share placings and the management of working capital. It is the intention to issue new shares when satisfying share based incentive schemes. Capital is defined as total equity as set out in the balance sheet. Management of financial risk The main risks associated with the Group’s financial instruments have been identified as credit risk, liquidity risk and foreign currency risk. The main risks associated with the Company’s financial instruments have been identified as liquidity risk. The Board is responsible for managing these risks and the policies adopted, which have remained largely unchanged throughout the year. 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 68 68 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) 26 Financial risk management continued Credit risk The carrying amount of financial assets included in the balance sheet, which represents the maximum credit risk, and the headings in which they are included are as follows: Current assets Trade receivables Other receivables Cash and cash equivalents Group Company 2018 £000 2,236 – 2,117 4,353 2017 £000 2,771 – 1,324 4,095 2018 £000 – 229 85 314 2017 £000 – 722 30 752 Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers. The Group’s risk is influenced by the nature of its customers. The majority of sales are made to government agencies and blue chip companies. New customers are analysed for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered and appropriate credit limits set. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis. The carrying amount of trade receivables in the balance sheet represents the maximum exposure to credit risk and further details are given in note 19 to the financial statements. The Board considers the Group’s exposure to credit risk to be acceptable and normal for an entity of its size given the industries in which it operates. Surplus cash balances are placed on short term deposit with UK banks. Interest rate risk The Group has financed its operations from its own cash resources and a bank loan for the acquisition of RTS Solutions (Holdings) Limited. The Group’s bank borrowings bear interest at LIBOR plus 3.19%. The interest rate risk profile of the Group’s and Company’s interest bearing financial instruments was as follows: Interest rate risk profile of financial assets Floating rate assets (by currency): Sterling US dollar Euro Interest rate profile of financial liabilities Fixed rate liabilities (by currency): Sterling Floating rate liabilities (by currency): Sterling The fixed rate financial liabilities comprises finance leases. Group Company 2017 £000 1,186 135 3 1,324 38 – 2018 £000 2017 £000 85 – – 85 – 1,125 30 – – 30 – – 2018 £000 1,937 123 57 2,117 23 1,125 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 69 Financial statements Petards Group plc Annual Report & Accounts 2018 | 69 26 Financial risk management continued While the Group and Company have access to a revolving credit facility which carries a variable interest rate, this facility was not used in the year and so the Group and Company are not exposed to interest rate risk on this facility. Liquidity risk The carrying amount of financial liabilities included in the balance sheet and the headings in which they are included are as follows: Current liabilities Trade and other payables Finance leases Bank loan Amounts owed to group undertakings Non-current liabilities Finance leases Bank loan Amounts owed to group undertakings Group Company 2018 £000 5,438 15 250 – 8 875 – 2017 £000 4,859 15 – – 23 – – 2018 £000 201 – 250 1,239 – 875 901 2017 £000 258 – – 1,616 – – 870 6,586 4,897 3,466 2,744 The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the effect of netting agreements: Non-derivative financial liabilities Finance lease liabilities Bank loan Trade and other payables Carrying amount £000 Contractual cash flows £000 23 1,125 5,438 24 1,230 5,438 6,692 The contractual cash flows include interest estimated at a rate of 4%. Non-derivative financial liabilities Finance lease liabilities Trade and other payables Carrying amount £000 Contractual cash flows £000 38 4,859 40 4,859 4,899 2018 1 to <2 years £000 2 to <5 years £000 5 years and over £000 8 280 – 288 – 665 – 665 – – – 2017 1 to <2 years £000 2 to <5 years £000 5 years and over £000 24 – 24 – – – – – – 1 year or less £000 16 285 5,438 5,739 1 year or less £000 16 4,859 4,875 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 70 70 | Petards Group plc Annual Report & Accounts 2018 Notes (continued) (forming part of the financial statements) 26 Financial risk management continued Liquidity risk is the risk that the Group and Company will not be able to access the necessary funds to finance their operations. Their own cash resources and bank borrowings are the predominant source of funds. Surplus cash is placed on short term deposit with UK banks. The Group manages its liquidity risk by monitoring existing facilities and cash flows against forecast requirements based on a rolling cash forecast. The directors consider that the carrying amounts of financial assets and liabilities approximate their fair values. Foreign currency risk The Group is exposed to currency risk on sales and purchases that are denominated in a currency other than the respective functional currencies of Group entities. About 21 percent (2017: 32 percent) of the Group’s sales are to customers in Continental Europe and a further 2 percent (2017: 3 percent) are to customers in the Rest of the World. These sales are priced in sterling and euros. The Group’s policy is to reduce currency exposures on sales through, where appropriate, forward foreign currency contracts. The Group also makes purchases in sterling, euros and US dollars and this provides an element of natural hedge. All the other sales are denominated in sterling. Currency risk of financial assets and liabilities The Group also has non-structural currency exposures i.e. those exposures arising from sales and purchases by group companies in currencies other than that company’s functional currency. These exposures give rise to net currency gains/losses recognised in the income statement, and represent monetary assets and liabilities of the Group that were not denominated in the functional currency of the company involved. At 31 December 2017 and 2018 the significant exposures in this respect were trade receivables and payables and were as follows: Currency US Dollar Euro 2018 Receivables £000 2018 Payables £000 2017 Receivables £000 2017 Payables £000 – 465 465 (177) (269) (446) – 419 419 (546) (306) (852) In the opinion of the directors the business has no significant exposure to market risk arising from currency exchange or other price fluctuations at 31 December 2018 and it has therefore not been deemed necessary to include a sensitivity analysis. 27 Operating leases Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years More than five years Group Company 2018 £000 113 359 – 472 2017 £000 122 400 67 589 2018 £000 2017 £000 – – – – – – – – Group During the year £123,000 was recognised as an expense in the income statement in respect of operating leases (2017: £132,000). 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 71 Financial statements Petards Group plc Annual Report & Accounts 2018 | 71 27 Operating leases continued The Group leases office and factory facilities under operating leases and these comprise £95,000 of the above total (2017: £95,000). Land and buildings have been considered separately for lease classification. 28 Capital commitments At 31 December 2018 the Group was committed to capital expenditure of £48,000 (2017: none). The Company had no such commitments (2017: none). 29 Contingent liabilities The Company has guaranteed the contract performance of subsidiary companies amounting to £4,605,000 (2017: £4,519,000). 30 Related party transactions Transactions/balances with subsidiaries – Company During the year the Company provided administrative services to subsidiary undertakings totalling £946,000 (2017: £949,000). The balances due by subsidiaries at year end are shown in note 19 and comprised amounts owed by RTS Solutions (Holdings) Ltd of £200,000 and by Petards Joyce-Loebl Ltd of £13,000. At 31 December 2017 the Company was not due any amounts from its subsidiary undertakings. The balances due to subsidiaries at year end shown in note 22 comprised amounts owed to QRO Solutions Ltd of £614,000, Water Hall Group plc £901,000 and to RTS Solutions (UK) Ltd £625,000 (2017: Petards Joyce-Loebl Ltd £923,000, QRO Solutions Ltd £693,000 and Water Hall Group £870,000). There is no ultimate controlling party of Petards Group plc. Transactions with directors – Group Fees of £171,000 (2017: £182,000) were paid to Adcel Limited, a company wholly controlled by P Negus, in respect of fees for the provision of consultancy services (note 6). Key Management Compensation Key management compensation comprises salaries and fees, employer pension contributions, share based payment charges and employer social security costs. The key management of the Group are the directors of Petards Group plc and their compensation is as follows: Salaries and fees Employer pension contributions Share based payment charges Employer social security costs Group 2017 £000 416 – 22 26 464 2018 £000 436 – 22 28 486 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 72 72 | Petards Group plc Annual Report & Accounts 2018 Alternative Performance Measures Glossary This report provides alternative performance measures (“APMs”), which are not defined or specified under the requirements of International Financial Reporting Standards. The Board believes that these APMs provide management with useful performance measurement indicators and readers with important additional information on the business. Adjusted EBITDA Adjusted EBITDA is earnings before financial income and expenses, tax, depreciation, amortisation, exceptional items, acquisition costs and share based payment charges. Adjusted EBITDA is considered useful by the Board since by removing exceptional items, acquisition costs and share based payment charges, the year on year operational performance comparison is more comparable. Order intake The value of contractual orders received from customers during any period for the delivery of performance obligations. This allows management to monitor the performance of the business. Order book The value of contractual orders received from customers yet to be recognised as revenue. This allows management to monitor the performance of the business and provides forward visibility of potential earnings. Net funds Net funds comprises cash and cash equivalents less interest bearing loans and borrowings. This allows management to monitor the indebtedness of the Group. Current net funds Current net funds comprises cash and cash equivalents less current liabilities in respect of interest bearing loans and borrowings. This allows management to monitor the short term indebtedness of the Group. 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 73 AGM and information Petards Group plc Annual Report & Accounts 2018 | 73 Directors, officers and advisors Directors Raschid Abdullah (Chairman) Osman Abdullah Terry Connolly FCA Paul Negus Company Secretary James Murray FCCA Registered Office Parallel House 32 London Road Guildford Surrey GU1 2AB Company Registration Number 02990100 Independent Auditor KPMG LLP Quayside House 110 Quayside Newcastle upon Tyne NE1 3DX Bankers Santander UK plc 1 Dorset Street Southampton SO15 2DP Nominated Advisor & Joint Broker WH Ireland Limited 4 Colston Avenue Bristol BS1 4ST Joint Broker Hybridan LLP 20 Ironmonger Lane London EC2V 8EP Registrar Share Registrars The Courtyard 17 West Street Farnham GU9 7DR Website www.petards.com 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 74 74 | Petards Group plc Annual Report & Accounts 2018 Notice of Annual General Meeting Notice is hereby given that the 2019 Annual General Meeting of Petards Group plc (the “Company”) will be held at The County Club, 158 High Street, Guildford, GU1 3HJ on 9 May 2019 at 11.00 a.m. for the following purposes: Ordinary Business 1. To receive and consider the audited accounts of the Company for the year ended 31 December 2018 together with the directors’ report and the auditor’s report. 2. To re-elect Raschid Abdullah as a director of the Company. 3. To re-appoint KPMG LLP as auditor to hold office from the conclusion of the meeting until the conclusion of the next general meeting at which the accounts are laid before the Company. 4. Subject to resolution 3 being approved, to authorise the directors to fix the auditor’s remuneration. Special Business To consider and, if thought fit, pass the following resolutions of which resolution number 5 shall be passed as an ordinary resolution and resolution number 6 shall be passed as a special resolution: 5. That, in substitution for all existing authorities, to the extent unused, and pursuant to section 551 of the Companies Act 2006 (the “Act”) the directors of the Company be and they are hereby generally and unconditionally authorised to exercise all the powers of the Company to allot shares in the Company or to grant rights to subscribe for or convert any security into shares in the Company up to an aggregate nominal amount of £189,645 (being approximately 33% of the present issued ordinary share capital of the Company) provided that this authority shall, unless renewed, varied or revoked, expire on the conclusion of the annual general meeting of the Company to be held in 2020, save that the directors be and they are hereby entitled, as contemplated by section 551(7) of the Act, to make at any time prior to the expiry of such authority any offer or agreement which would or might require shares to be allotted or rights to subscribe for or convert securities into shares to be granted after the expiry of such authority and the directors may allot shares or grant rights to subscribe for or convert securities into shares in pursuance of such an offer or agreement as if the authority conferred hereby had not expired. 6. That, subject to and conditional on resolution 5 above being duly passed, the directors of the Company be and they are hereby empowered pursuant to section 570 of the Act to allot equity securities (within the meaning of section 560 of the Act) in the capital of the Company for cash pursuant to the authority conferred by resolution 5 above as if section 561(1) of the Act did not apply to such allotment, provided that this power shall be limited to the allotment of equity securities: (a) in connection with an offer of such securities by way of rights, or other pre-emptive offer, to holders of ordinary shares in proportion (as nearly as may be practicable) to their respective holdings of such shares, but subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to fractional entitlements or any legal or practical problems under the laws of any relevant territory, or the requirements of any regulatory body or stock exchange; and (b) otherwise than pursuant to (a) above up to a maximum aggregate nominal amount of £86,202 (being approximately 15% of the present issued ordinary share capital of the Company): (c) provided that such power shall expire at the conclusion of the annual general meeting of the Company to be held in 2020, save that the Company may make an offer or agreement prior to such expiry which would or might require equity securities to be allotted after the expiry of such power, and the directors may allot equity securities in pursuance of that offer or agreement as if such power had not expired. BY ORDER OF THE BOARD James Murray Company Secretary 16 April 2019 Registered Office: Parallel House 32 London Road Guildford GU1 2AB Company Number: 02990100 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 75 AGM and information Petards Group plc Annual Report & Accounts 2018 | 75 Notes: 1 Pursuant to Part 13 of the Act and paragraph 18(c) of The Companies Act 2006 (Consequential Amendments) (Uncertificated Securities) Order 2009, only those members registered in the register of members of the Company at 11.00am. on 7 May 2019 (or if the AGM is adjourned, 11.00am. on the date falling two days before the date (not including non-working days) fixed for the adjourned AGM) shall be entitled to attend and vote at the AGM in respect of the number of shares registered in their name at that time. Any changes to the register of members after such time shall be disregarded in determining the rights of any person to attend or vote at the AGM. 2 Members who wish to attend the AGM in person should ensure that they arrive at the venue for the AGM in good time before the commencement of the meeting. Members may be asked to provide proof of identity in order to gain admission to the AGM. 3 A member who is entitled to attend, speak and vote at the AGM may appoint a proxy to attend, speak and vote instead of him. A member may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares (so a member must have more than one share to be able to appoint more than one proxy). A proxy need not be a member of the Company but must attend the AGM in order to represent you. A proxy must vote in accordance with any instructions given by the member by whom the proxy is appointed. Appointing a proxy will not prevent a member from attending in person and voting at the AGM (although voting in person at the AGM will terminate the proxy appointment). 4 A form of proxy accompanies this document. The notes to the proxy form include instructions on how to appoint the Chairman of the AGM or another person as a proxy, and should be followed carefully. 5 To be valid, a proxy form, and the original or duly certified copy of the power of attorney or other authority (if any) under which it is signed or authenticated, should reach the Company’s registrar, Share Registrars, The Courtyard, 17 West Street, Farnham, Surrey GU9 7DR, by no later than 11.00 a.m. on 7 May 2019. 6 In the case of joint holders of shares, the vote of the first named in the register of members who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of other joint holders. 7 A member that is a company or other organisation not having a physical presence cannot attend in person but can appoint someone to represent it. This can be done in one of two ways; either by the appointment of a proxy (described in Notes 3 to 6 above) or by a corporate representative. Members considering the appointment of a corporate representative should check their own legal position, the articles of association and the relevant provision of the Act. 8 In order for a proxy appointment made by means of CREST to be valid, the appropriate CREST message (a CREST Proxy Instruction) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by Share Registrars (ID 7RA36) no later than 48 hours, excluding non-working days, before the time fixed for the AGM. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which Share Registrars is able to retrieve the message by enquiry to CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular messages and normal system timings and limitations will apply in relation to the input of a CREST Proxy Instruction. It is the responsibility of the CREST member concerned to take such action as shall be necessary to ensure that a message is transmitted by means of the CREST System by any particular time. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. 253591 Petards pp35-end.qxp 12/04/2019 10:29 Page 76 Perivan Financial Print 253591 253591 Petards cover spread 5mm spine.qxp 12/04/2019 10:31 Page 1 8 1 0 2 t r o p e R l i a c n a n F i l a u n n A c l p p u o r G s d r a t e P Petards Group plc Parallel House, 32 London Road, Guildford, GU1 2AB, United Kingdom Tel: +44 (0) 1483 230345 www.petards.com Annual Financial Report 2018 Petards Group plc Registered number 02990100 Petards Group plc

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