Quartix Holdings plc
Annual Report 2016

Plain-text annual report

244069 Quartix Holdings Cover Spread 21/02/2017 15:07 Page 1 ginkrac Award-Winning Vehicle Tracking wAAw racTelciheV Winning Winnin --Wdraw Download from Do wnload from Windows Phone Store Wind eorSte onPhs ow Quartix Holdings plc Quartix Holdings plc Annual Report 2016 Annual Report 2016 ellingt Quartix Holdings plc uarQ tix Holdings plc Wellington House W on House East Road East R oad Cambridge C ambr idge CB1 1BH CB1 1BH tix.net www.quartix.net www .quar tix.net www www.quartix.fr .quar tix.fr .quar www.quartix.com om www .quar tix.c Quartix Holdings plc Financial statements for the year ended 31 December 2016 Contents Company information Highlights Chairman’s Statement Strategic Report: Operational Review Strategic Report: Financial Review Corporate Governance Report Directors’ Remuneration Report Directors’ Report Independent Auditor's Report to the Members of Quartix Holdings plc Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Independent Auditor's Report – Parent Company Parent Company Statement of Financial Position Parent Company Statement of Changes in Equity Notes to the Parent Company Financial Statements Notice of Annual General Meeting Notes to the Notice of Annual General Meeting 1 Page 2 3 4 6 10 14 17 19 22 24 25 26 27 28 48 50 51 52 59 61 Quartix Holdings plc Financial statements for the year ended 31 December 2016 2 Company Information Company registration number: 06395159 Registered office: Directors: Wellington House East Road Cambridge Cambridgeshire CB1 1BH Paul Boughton Andrew Walters David Bridge Jim Warwick Company secretary: David Bridge Bankers: Solicitors: Auditors: Nominated advisor and broker: Barclays Bank PLC PO Box 299 Birmingham B1 3PF Hewitsons LLP Shakespeare House 42 Newmarket Road Cambridge CB5 8EP Grant Thornton UK LLP 101 Cambridge Science Park Milton Road Cambridge CB4 0FY finnCap 60 New Broad Street London EC2M 1JJ Quartix Holdings plc Financial statements for the year ended 31 December 2016 3 Highlights Financial highlights • Group revenue increased by 19% to £23.3m (2015: £19.7m) o Fleet revenue grew by 15% to £14.9m (2015: £13.0m) o Insurance revenue increased by 25% to £8.4m (2015: £6.7m) • Operating profit increased by 8% to £6.5m (2015: £6.0m) • Earnings before interest, tax, depreciation, amortisation and share based payment expense (Adjusted EBITDA) increased by 9% to £6.8m (2015: £6.2m) • Profit before tax increased by 9% to £6.5m (2015: £6.0m) • Diluted earnings per share increased by 21% to 12.70p (2015: 10.53p) • Free cash flow increased by 10% to £6.0m (2015: £5.4m) • Cash inflow before tax remained at £6.8m (2015: £6.8m) • Net cash increased to £6.2m (2015 net cash: £3.0m) • Final dividend payment of 9.0p per share proposed (2015: 4.0p) including 4.7p for supplementary dividend (2015: nil) giving a total dividend for the year of 11.2p per share Operational highlights • Strong progress in the main fleet business: o 19% increase in subscription base to 87,889 units (2015: 73,744) o 16% increase in customer base to 9,105 (2015: 7,849) o Unit attrition fell to 10.0% (2015: 11.3%) and compares favourably with our estimate of the industry average of around 14-15 per cent o 3% growth in new fleet installations o Strong growth in France, ending the year with 1,428 customers (2015: 1,196) and 9,986 vehicles under subscription (2015: 7,910), an increase of 19% and 26% respectively o During its second full year of trading the USA grew its customer base to 1,075 (2015: 693), with 6,191 vehicles under subscription (2015: 3,179). • Continued growth in the insurance telematics business: o 22% growth in insurance installations to 69,300 (2015: 57,024) Quartix Holdings plc Financial statements for the year ended 31 December 2016 4 Chairman's Statement Introduction The past year has shown continued growth in demand for the Group’s vehicle tracking systems, software and services in both the fleet and insurance sectors. Sales in the UK and Ireland grew by 15%, reaching £21.3m (2015: £18.4m). The Group made good progress in France, where revenue increased by 25% to €1.8m (2015: €1.4m). 2016 was our second full year of operations in the USA, having launched our product and opened an office there in 2014. We are pleased with progress and completed the year with 6,191 vehicles under subscription (2015: 3,179) across 1,075 fleet customers (2015: 693). Revenue increased from $392,000 in 2015 to $907,000 in 2016 and the prospects for future business development remain encouraging. Results Group revenue for the year increased by 19% to £23.3m (2015: £19.7m). Operating profit for the year increased by 8% to £6.5m (2015: £6.0m), at the same time as the Group made increased investments in product and market development. Profit before tax increased by 9% to £6.5m (2015: £6.0m). Cash conversion was good, resulting in free cash flow from operations after tax and investing activities of £6.0m (2015: £5.4m), enabling the Group to increase its net cash by £3.2m to £6.2m at 31 December 2016, following the payment of £2.9m in dividends. Earnings per share Basic earnings per share rose by 20% to 12.87p (2015: 10.69p). Diluted earnings per share increased to 12.70p (2015: 10.53p). Dividend policy Our ordinary dividend policy is to pay a dividend set at approximately 50% of cash flow from operating activities, which is calculated after taxation paid but before capital expenditure. In addition to this the Board will distribute the excess of gross cash balances over £2m on an annual basis by way of supplementary dividends, subject to a 2p per share de minimis level. The surplus cash is calculated using the year end gross cash balance and after deduction of the proposed ordinary dividend, and is intended to be paid at the same time as the final dividend. The policy will be subject to periodic review. Quartix Holdings plc Financial statements for the year ended 31 December 2016 5 Dividend In the year ended 31 December 2016, the Board decided to pay an interim dividend of 2.2p per ordinary share. This totalled £1.04m and was paid on 15 September 2016 to shareholders on the register as at 19 August 2016. The Board is recommending a final ordinary dividend of 4.3p per share, together with a supplementary dividend of 4.7p per share, giving a final pay out of 9.0p per share and a total dividend for the year of 11.2p per share. The final and supplementary dividend amounts to approximately £4.3m in aggregate. Subject to the approval at the forthcoming AGM, this dividend will be paid on 5 May 2017 to shareholders on the register as at 7 April 2017. Governance and the Board The Board is comprised of two Non-Executive Directors, myself included, and two Executive Directors, Andrew Walters and David Bridge. Andrew Walters was a co-founder of the main trading entity, Quartix Limited, and has been one of its directors since 5 July 2001. I have over 29 years of experience in identifying, negotiating and completing acquisitions in the USA and Europe. I spent 13 years as Business Development Director for Spectris plc. From 2014 to early 2016 I was Head of Business Development at Brammer plc, leading its European acquisition programme. I also held senior positions at both Consort Medical plc and IMI plc and I am a Chartered Accountant (FCA). Jim Warwick was Chief Operating Officer at Abcam plc until 31 December 2016, having originally joined as Technical Director in 2001. Abcam is a global leader in the supply of innovative protein research tools. Prior to that, he worked on IT, software and web development initiatives for the telecommunications consultancy group Analysys Limited. For further details regarding Corporate Governance and the Board, please see the “Investors” section of our website (www.quartix.net/investors.php). Outlook The Group has made a good start to the year, in line with our expectations. The high levels of recurring revenue, a focus on growth in the core fleet markets in UK, France and the USA and targeting only those insurance opportunities which offer satisfactory margins, underpin our confidence for the rest of the year and beyond. AGM The Group’s AGM will be held on 28 March 2017 at the Group’s registered office at Wellington House, East Road, Cambridge CB1 1BH. Paul Boughton Chairman Quartix Holdings plc Financial statements for the year ended 31 December 2016 6 Strategic Report: Operational Review Principal activities Since 2001 Quartix has become one of Europe’s leading suppliers of vehicle tracking systems and services. Whilst the origins of the Group’s business are in the tracking of commercial vehicles in the UK, it has developed a significant market presence in the insurance telematics market. It set up a French branch in 2011 and in 2014 expanded its operations into the USA. The operations in both the USA and France are focused entirely on the fleet sector. Strategy and business model The Group’s main strategic objective is to grow its fleet business and develop the associated recurring revenue by increasing the number of vehicles under subscription. The related insurance business helps to provide economies of scale in product development, supply chain, production and system installation. Whilst the same technology is used for both commercial fleet tracking and insurance telematics, these markets exhibit different characteristics and the Group has established proven business models for each of them. Fleet customers typically use the Group’s services for many years, resulting in low rates of attrition. Accordingly, the Group focuses its business model on the development of subscription revenue based on system rental, providing the best return to the Group over the long term. The value of recurring subscription and rental revenue is the key measure of our performance in the fleet sector Insurance telematics customers use the Group’s technology to monitor the driving style and habits of higher-risk drivers, normally for a policy with a term of just 12 months. Quartix therefore treats this as an equipment sale, with the tracking system being sold, at policy inception, together with 12 month’s service and data usage included. This is standard practice in the industry, as the level of attrition is relatively high. Whilst the value of revenue has been the key measurement of our performance in the insurance sector, we will restrict our operations to those opportunities in this sector which provide an adequate return. People Our business performance was recognised by several independent bodies in 2016: Megabuyte, the independent technology financial analysts, placed us first amongst all UK public technology companies; the London Stock Exchange Group named us as one of “1000 companies to inspire Britain”; and we were also shortlisted in the Grant Thornton Quoted Company Awards, technology category. Each of these awards and nominations is a reflection of the commitment, teamwork, creativity and dedication of our people. Our financial performance derives from the customer service we deliver, backed by the technology we develop. I would like to register my personal thanks to every one of our employees who made 2016 another great year for Quartix. We are delighted to have been able to provide our employees with the ability to participate in the equity of the Company under our EMI share option scheme for the fourth year in a row. The Directors of Quartix Holdings plc are not included in these grants, which are intended for employees. Quartix Holdings plc Financial statements for the year ended 31 December 2016 7 Operational performance All of our business operations continued to perform at a high level in 2016. Although gross margins fell by 1.5 percentage points to 60.3%, this was due to an increase in unit costs with the devaluation of Sterling, an increase in the proportion of US units installed and higher distributor commissions. As a consequence, return on sales decreased by 2.7 percentage points compared to the prior year (31%). Cash conversion was strong with cash flow from operating activities after investing activities and tax (free cash flow) representing 92% of operating profit. We expense all R&D investment and tracking system and installation costs as they are incurred. Capex investments totalled £189,000, as we invested in systems and servers, including a data centre for France, and relocation to larger USA offices in Chicago to support our growth. Our accounts and operations teams continued to manage working capital well: trade debtors at the year- end represented just 30 days of sales, and inventory levels remained comparable despite sales growth of £3.7m in the year. During the course of the year we increased the level of investment in key product and market developments. We believe that the Company has significant opportunity for growth in its fleet business, particularly in the USA. We ended the year with good growth in fleet installations in the USA and have taken the decision to make additional investment in business development in 2017. Fleet Our core fleet business, which accounted for 64% of Group revenue, delivered considerable progress in a further year of investment. Continued growth in the UK was combined with excellent progress in France, where our business made a positive contribution to the Group’s results, and in the USA, where our second full year of trading saw us reach an installed base of 6,191 (2015: 3,179) vehicles under subscription. During the course of the year we won 2,336 new fleet customers (2015: 2,184). Sales leads continued to be generated through a broad range of media and channels. The efficiency improvements resulted largely from investments made in technology, processes and training, adding automation wherever possible and providing our sales and marketing teams with better information on the performance of each campaign. This investment will continue in 2017, and the knowledge and experience gained will be used across each of our three target markets. Fleet UK Demand for fleet tracking systems in the UK continues to grow rapidly. We are well-placed to expand our business, given the strengths of our product, systems and support capabilities. The economies of scale derived from the size of our combined fleet and insurance business also give us a considerable competitive advantage. Vehicles under subscription increased by 15% to 71,712 during the year, and our fleet customer base reached 6,602. We won 1,345 new customers in 2016, and the gains in customer and vehicle base were broadly spread between the channels we use. UK fleet revenue was £12.8m (2015: £11.7m). We added a number of new key accounts during the year and increased the number of fleet clients with 50 vehicles or more. Our UK website continued to perform well in terms of search engine placement and enquiries, and we continued to add new content to it. We will continue to focus on telephone based sales capacity to support our fleet marketing initiatives, and will look to find additional channels and partners to help us develop the market. Quartix Holdings plc Financial statements for the year ended 31 December 2016 8 Fleet (continued) Fleet France The number of new installations in the French market was 7% below the previous year, but there was a 26% increase in the unit base, ending the year with 9,986 vehicles (2015: 7,910) under subscription across 1,428 fleet customers (2015: 1,196). French fleet revenue increased by 25% to €1.8m (2015: €1.4m), making a profitable contribution to the Group. We made a senior management appointment to head up the French operations in the second half of 2016, and his focus will be on delivering strong sales growth in 2017 in both our direct and distributor channels. Fleet USA Our second full year of trading in the USA showed good progress: we concluded 2016 with 1,075 fleet customers (2015: 693) having a total of 6,191 vehicles under subscription (2015: 3,179). As in the UK and France, our fleet revenue derives from subscription income, which builds over time. Nonetheless USA fleet revenue increased to $0.9m from just $0.4m in 2015, and our subscription base value continues to increase each month. We see significant potential for growth in the USA in the next five years, and will continue to invest in digital marketing together with sales and support resources to back this up. At the end of the year we had a total of 9 employees in our Chicago office. Insurance We installed 69,300 new insurance tracking systems in 2016, an increase of 22%. Despite this growth, installations in the second half were 13% lower than in the first half. This trend was in keeping with the decision announced at the time of the Company’s interim results in July 2016 to focus on its core fleet market and on only those insurance opportunities which offer satisfactory margins and which are closely aligned to its fleet business, a trend we see increasing in 2017. In line with this strategy, the Group developed and launched an insurance platform which it believes will appeal to a range of specialist insurance brokers. The development for this ran in tandem with the new fleet capabilities on which it is based, namely the TCSV11 telematics system, the SafeSpeed Database and the display dashboards provided for fleet managers. By the end of the year this proposition had been adopted and used by one new insurance broker client, with a further client having chosen it for launch during the first half of 2017. These initial projects are relatively small in volume, but offer an opportunity for Quartix to deliver greater value to both insurer and broker, and to establish the benefits of the SafeSpeed database. We continue to take steps to manage our cost base in line with the strategies outlined above, particularly given continued price pressure in the insurance market. Quartix Holdings plc Financial statements for the year ended 31 December 2016 9 Research and development The Group is committed to continued investment in research in order to ensure that the functionality of its fleet tracking systems and software remains competitive across each of our three fleet markets as well as in the insurance sector. The principal areas of development focus in 2016 were: 1. An enhanced version of the TCSV11 product. This product is now equipped with backup battery and fast GPS and accelerometer capabilities. 2. The TCSV12 tracking system. This product is believed to be one of the most compact on the market, allowing ease of user installation in approximately 90% of European vehicles. The initial target for this is the fleet sector in Europe, but it has also been launched in the insurance sector and will be launched in the US following product approvals. 3. Electronic logging of driver hours for the US market. This application, which involves a direct connection to the vehicle’s own bus and the use of an Android tablet device by the driver, was delivered in beta version to customers during the second half of the year, and has so far received good reviews. 4. The “powered by Quartix” insurance platform. This software platform includes software tools for both insurers and brokers and allows driver scoring based on a range of factors, but most significantly it makes use of our “SafeSpeed Database”, which we believe offers a significant improvement in risk assessment of young drivers. 5. Configurable real-time dashboard for fleet managers. These were fully released at the mid-year point. 6. Enhancements to our API (QWS 2.0). These were completed towards the end of the year, and were also used as the basis of further developments to our mobile apps (point 7 below). 7. Enhance mobile apps including driving style monitoring. These apps, which are available for both iOS and Android operating systems, have been adapted to make use of our own API, and to include driving style monitoring as part of the functionality available in this environment. All of our investment in research and development was fully expensed in the year. The total cost amounted to£1.4m, which represents an increase of 31% compared to the prior year (2015: £1.1m). Strategic priorities We believe that the Company has significant opportunity for growth in its fleet business, particularly in the USA. We ended the year with good growth in fleet installations and have taken the decision to make additional investment in business development in 2017. By carefully coordinated management of our future growth we will strive to maintain the very high levels of customer satisfaction and financial performance for which Quartix is known. Within the insurance sector, following the strategic decision to move away from low margin insurance sales, we will seek to target those opportunities which allow us to demonstrate and deliver the levels of service quality and value for which we have become known. Andrew Walters Managing Director Quartix Holdings plc Financial statements for the year ended 31 December 2016 10 Strategic Report: Financial Review Key performance indicators (“KPIs”) Year ended 31 December Fleet installations (units) Fleet subscription base (units) Fleet customer base Fleet attrition (annualised) (%) 1 Fleet invoiced recurring revenue2 (£’000) Fleet revenue (£’000) Insurance installations (units) Insurance revenue (£’000) 2016 22,224 87,889 9,105 10.0 13,646 14,909 69,300 8,430 2015 21,518 73,744 7,849 11.3 11,828 12,957 57,024 6,718 % change 3.3 19.2 16.0 - 15.4 15.1 21.5 25.5 1 Attrition in the year is the number of units installed (excluding upgrades), less the increase in subscription base, expressed as a percentage of the mean subscription base. 2 Invoiced rental and communications charges before provision for deferred revenue 2016 was a year of good progress in our primary strategic objective of building our fleet subscription base. We achieved over 22,000 fleet installations, an increase of 3.3% compared to 2015, helped particularly by growth in our US operations. Our installed base grew by 19.2% to 87,889 units. Attrition during the period fell to 10.0%. Group invoiced recurring revenue (before adjusting for deferred revenue) grew at 15.4% to £13.6m (2015: £11.8m). The growth in fleet revenue at 15.1% was less than the growth of our recurring revenue as our primary focus is on growing subscription revenue. Insurance unit installations were up 21.5% at 69,300; but the second half was 13.1% lower than the first half, in keeping with the decision announced in July, to focus more on our fleet market. Quartix Holdings plc Financial statements for the year ended 31 December 2016 11 Financial Overview Year ended 31 December £’000 (except where stated) Revenue Fleet Insurance Total Gross profit Gross margin Operating profit Operating margin Adjusted EBITDA Net profit for the year Earnings per share Cash generated from operations Operating profit to operating cash conversion Free cash flow 2016 14,909 8,430 23,339 14,063 60% 6,543 28% 6,808 6,087 12.87 6,812 104% 6,005 2015 % change 12,957 6,718 19,675 12,150 62% 6,045 31% 6,248 5,014 10.69 6,781 112% 5,440 15.1 25.5 18.6 15.7 8.2 9.0 21.4 20.4 0.5 10.4 Revenue Revenue increased by 18.6% to £23.3m (2015: £19.7m). Fleet revenue benefitting from past investment was 15.1% up at £14.9m (2015: £13.0m). Sales to insurance customers increased by 25.5% to £8.4m (2015: £6.7m). Gross margin The fall in Sterling led to an increase in unit costs and there was also an increase in overseas installation costs, both of which contributed to the percentage gross margin falling from 62% to 60%, restricting the increase in gross profit to 15.7%. Operating profit and Adjusted EBITDA We continued to invest in our product offering, in our sales structure and in marketing which led to an increase in overheads of 23.2%. As a result, operating profit grew at a lower rate than gross profit at 8.2% to £6.5m, adding back depreciation and share-based payment expense gives £6.8m of adjusted EBITDA. Part of this investment was in the USA where our customer base almost doubled and revenue, as disclosed in note 3, more-than doubled to £677,000 ($0.9m) in 2016. As disclosed in note 9, losses in the USA were around £830,000 ($1.1m). Net profit for the year Our low effective tax rate reflects a benefit from research and development tax allowances. It fell to 7% in 2016 (2015: 16%) due to the impact of claiming patent box relief for the first time. The rate of tax for the current year is 12% but the overall charged fell due to a corporation tax refund of £0.3m for patent box claims made in 2016 in respect of prior periods. The overall impact of the above was that profit for the year rose by 21.4% to £6.1m (2015 £5.0m). Quartix Holdings plc Financial statements for the year ended 31 December 2016 12 Financial Overview (continued) Earnings per share Earnings per share increased by 20.4%, helped by a reduced tax charge. Statement of financial position Cash at the year-end was £6.2m and bank debt was nil, having repaid the bank loan in full during the year, (2015: net cash £3.0m). Cash flow Operating cash flow is impacted by the fall in Sterling as it is calculated after foreign exchange losses but ignores exchange gains on cash balances. Additionally, the Group qualified for VAT payments on account for the first time which resulted in £0.2m of additional VAT payments in 2016. Despite the above, cash generated from operations before tax at £6.8m was 104% of operating profit. Tax paid in 2016 was £0.6m, net of the £0.3m refund for patent box claims in respect of prior periods, so cash flow from operating activity after taxation but before capital expenditure was £6.2m (2015: £5.7m). Free cash flow, after £0.2m of capital expenditure, was £6.0m, a 10.4% increase. (2015: £5.4m) The translation of cash flow into dividends is covered in the Chairman’s Statement. Risk management policies The principal risks and uncertainties of the Group are as follows: Attracting and retaining the right number of good quality staff The Group believes that in order to safeguard the future of the business it needs to recruit, develop and retain the next generation of management. The impact of not mitigating this risk is that the Group ceases to be innovative and provide customers with the products and services they require. Considerable focus has been given to recruitment, development and retention. Particular attention has been given to the composition of the Operations Board. On 1 July 2016 Quartix Limited appointed Donato Quagliariello as a Director of the company responsible for operations in France. Following the year end, on 1 February 2017, Ed Ralph was appointed a Chief Operating Officer of Quartix Limited and Lynne Austin was appointed as Director of Quartix Limited with responsibility for the company’s UK fleet operations. The Group has a range of tailored incentive schemes which include the uses of share options. Reliance on M2M network The Group’s service delivery is dependent on a functioning M2M network covering both the internet and mobile data. The impact of not mitigating this risk is that the Group is exposed to an M2M outage. Quartix has dual site redundancy to cover a localised internet problem and we are constantly working on improving the reliability of our systems architecture. Business disruption Like any business the Group is subject to business disruption. This includes communications, physical disruption to our sites and problems with our key suppliers. The impact of not mitigating this risk is that the Group may not be able to service its customers. Quartix has a Business Continuity plan which is frequently updated and reviewed. Quartix Holdings plc Financial statements for the year ended 31 December 2016 13 Financial Overview (continued) Dependence on a key customer As disclosed in note 3, during 2016 revenue of £8.4m was derived from one insurance customer, a specialist reseller for the insurance industry. Losing this key contract could have a significant negative impact on cash flow in the short term as we have a high level of fixed overheads. The Group has taken the strategic decision to move away from low margin insurance sales and widen its insurance customer base. Cyber security The Group needs to make sure its data is kept safe and that there is security of supply. The reputational and commercial impact of a security breach would be immense. To combat this, the Group has a security policy and prepares a monthly security report which is reviewed by the Operations Board. This process includes the use of outside consultants for penetration testing and security review. Technology Technology risks are perceived to arise from possible substitutes for the current Quartix product. Risks cited include everything from smart mobile phones to driverless cars. The Group strategy is to review all new technical developments with the aim of adopting any which will provide a better channel for the information services which Quartix provides. David Bridge Finance Director The Strategic Report, comprising the Operational Review and Financial Review, was approved by the Board of Directors and signed on behalf of the Board on 24 February 2017. Andrew Walters Managing Director Quartix Holdings plc Financial statements for the year ended 31 December 2016 14 Corporate Governance Report Introduction As the Company is listed on AIM, it is not required to, and does not, comply with the UK Corporate Governance Code (the “Code”). The Directors are committed to maintaining a high standard of corporate governance and the Directors refer to the 2013 Quoted Companies Alliance Governance Guidelines for Smaller Quoted Companies (“QCA Guidelines”) to establish policies and procedures appropriate for a group of its size and nature. Directors and the Board Position Chairman Executive Directors Non-Executive Director Director Paul Boughton Andrew Walters David Bridge Jim Warwick Date of appointment 1 May 2014 29 January 2008 26 February 2008 1 May 2014 Board committees There are three Board committees: Audit, Nominations, and Remuneration. Each Committee is comprised of Non-Executive Directors. The attendance of each Director to Board meetings is outlined below and can be compared with the number of meetings they were invited to attend. Position Executive Directors Non-Executive Directors Director Andrew Walters David Bridge Paul Boughton Jim Warwick Board meeting attendance (invitations) 10 (10) 10 (10) 10 (10) 10 (10) Quartix Holdings plc Financial statements for the year ended 31 December 2016 15 Board committees (continued) Audit Committee Paul Boughton is Chairman of the Audit Committee which normally meets two times a year. The Committee exists to scrutinise and clarify any qualifications, recommendations and observations within the audited accounts and report of the Company’s auditor. When satisfied, the Committee presents the audited accounts and report to the Company’s Board and reviews the effectiveness of resultant corrective and preventative measures. In performing this function, the key duties of the Committee are to: • Monitor the integrity of the financial statements of the Group and any formal announcement relating to its financial performance • With regards to financial reporting, review and challenge the consistency of accounting policies, the use of accounting methods over alternatives, whether the Group has followed appropriate accounting standards, the clarity of disclosure, and all material information relating to the audit and risk management • Monitor the adequacy and effectiveness of the Group’s internal financial controls, including the internal control and risk management systems. The Group’s Risk Register is reviewed at least twice a year by the main board. A list of Matters Reserved for the Board was adopted in January 2016 including ensuring a sound system of internal control and risk management. All systems issues or unexpected outcomes are brought to the attention of the board. • Ensure that the Group’s arrangements for its employees and contractors to confidentially raise concerns about possible wrongdoing allow proportionate and independent investigation and appropriate follow up action • Consider the need to implement an internal audit function • Make recommendations to the Board and the Company’s shareholders regarding the appointment, re-appointment, and removal of the Company’s external auditor. It ensures that at least once every ten years the audit services contract is put out to tender to enable the Committee to compare the quality and effectiveness of the services provided by the incumbent auditor • Oversee the Company’s relationship with the external auditor Nominations Committee The Nominations Committee is chaired by Paul Boughton. The Committee reviews the structure, size and composition of the Board to ensure the leadership of the Group is the most proficient to facilitate the Group’s ability to effectively compete in the marketplace. It makes recommendations to the Board regarding the continued suitability of any Director, the re-election by shareholders of any Director under the ‘retirement by rotation’ provisions in the Company’s Articles of Association, and succession planning for Directors and other Senior Executives. If necessary, the Committee will identify and nominate candidates they believe suitable to fill Board vacancies. Quartix Holdings plc Financial statements for the year ended 31 December 2016 16 Board committees (continued) Remuneration Committee Jim Warwick chairs the Remuneration Committee. It acts to ensure sound Corporate Governance and meets at least twice a year. The Committee functions with the objective of attracting, retaining and motivating the executive management of the Company and ensuring they are rewarded in a fair and responsible manner for their contribution to the success of the Group. The role of the Committee is to determine and agree with the Board the framework or broad policy for the remuneration of the Company’s Chairman and Executive Directors, including pension rights and compensation payments. It also recommends and monitors the level and structure of remuneration for senior management. When setting the remuneration policy, the Committee reviews and considers the pay and employment conditions across the Group, especially when determining salary increases. Relations with shareholders The Group maintains regular dialogue with institutional investors who, along with City analysts, are invited to presentations immediately after the announcement of the Group’s interim and full year results. Shareholders have the opportunity to meet and question the Board and its Committees at the AGM. A detailed explanation of each item of special business to be considered at the AGM is included with the Notice of Annual General Meeting which is usually sent to shareholders at least 20 working days before the meeting. Internal financial control The key three controls are: • Segregation of duties • Monitoring and reporting • Requiring a high level of integrity for key roles The Board recognises the importance of robust and reliable financial reporting procedures and reviews the procedures it operates on a regular basis. There are Group wide minimum control standards for such issues as Health and Safety which are listed in around 30 policy documents. In addition, an extensive range of accounting systems and procedures are documented and maintained. Going concern The Board takes all reasonable steps to review and consider any factors that may affect the ability of the Group to continue as a going concern. The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group is able to generate sufficient liquidity. The Group enjoys a strong income stream from its fleet subscription base while current liabilities include a substantial provision for deferred revenue which is a non cash item. After assessing the forecasts and liquidity of the business for the next two calendar years and the longer term strategic plans, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing consolidated financial statements. Quartix Holdings plc Financial statements for the year ended 31 December 2016 17 Directors’ Remuneration Report Introduction The Remuneration Committee is chaired by Jim Warwick and also includes Paul Boughton. Its creation was confirmed by the Board of Directors on 3 October 2015 in accordance with the Company’s Articles of Association. The Committee’s fundamental purpose is to ensure sound Corporate Governance. In the year 2017 it will meet at least twice a year to ensure this is achieved. Remuneration Committee The Committee functions with the objective of attracting, retaining and motivating the executive management of the Company and ensuring they are rewarded in a fair and responsible manner for their contribution to the success of the Group. Their key duties are: • Agree a remuneration framework for the Chairman and Executive Directors and agree this with the Board of Directors • Determine the total individual remuneration package of the Chairman, Executive Directors, Company Secretary and other Senior Executives. This may include bonuses, incentive payments, and share options • Recommend and monitor the level and structure of remuneration for senior management • Oversee any major changes in employee benefits structures throughout the Group • Assess and submit the design of all share incentive plans for approval by the Board and shareholders. This will comprise whether any awards will be made, if so how much, the individual awards to Executive Directors, Company Secretary & other Senior Executives, and the performance targets to be used • Establish a policy for authorising expenses claims from the Directors • Review the ongoing appropriateness and relevance of the remuneration policy The Remuneration Committee may, in the course of its duties, obtain reliable, up-to-date information regarding remuneration in other companies of comparable scale, and appoint remuneration consultants to advise them if this is deemed necessary. Remuneration of Executive Directors The Directors’ remuneration packages are comprised of a salary and the opportunity to enrol in the Governments’ auto-enrolment pension scheme. At present the Remuneration Committee at the executive directors’ request have concluded that no bonus, other benefits, nor compensation for loss of office will be paid. See below for a breakdown of the Directors’ remuneration packages. Non-Executive Directors A Non-Executive Director is typically expected to serve two three-year terms but may be invited by the Board to serve for an additional period. Any term renewal is subject to Board review and AGM re-election. Paul Boughton Jim Warwick Chairman Date of contract Unexpired period at date of report 2 months 2 months 1 May 2014 1 May 2014 Subject to re-election at the forthcoming AGM, it is the Board’s intention to renew the Non-Executive Directors’ contracts for another three years from 1 May 2017. Quartix Holdings plc Financial statements for the year ended 31 December 2016 Directors’ detailed emoluments and compensation (audited) Executive Directors Andrew Walters1 David Bridge Non-Executive Directors Paul Boughton Jim Warwick Avril Palmer-Baunack2 2016 (£) Salary Pension - 83,388 834 82,105 834 165,493 50,000 35,000 85,000 - - - Total 83,388 82,939 166,327 50,000 35,000 85,000 18 2015 (£) Total 80,961 81,298 162,259 46,667 35,000 14,583 96,250 1 Highest paid director in 2016 2 Salary paid up to the date of resignation on 16 April 2015 Directors and their interests in shares Year ended 31 December Executive Directors Andrew Walters1 David Bridge Non-Executive Directors Paul Boughton Jim Warwick Ordinary shares £0.01 each 2016 17,855,986 2,663,000 20,518,986 40,000 40,000 20,598,986 2015 17,855,986 2,663,000 20,518,986 40,000 40,000 20,598,986 1 Includes shares held as family interests or by virtue of position as beneficiary or potential beneficiary of certain trusts The Directors received no options over ordinary shares in the year ending 31 December 2016 and the year ending 31 December 2015. Jim Warwick Chairman, Remuneration Committee Quartix Holdings plc Financial statements for the year ended 31 December 2016 19 Directors' Report The Directors present their annual report and the financial statements of the Company for the year ended 31 December 2016. Principal activity The principal activity of the Group during the year was the design, development and marketing of vehicle tracking devices and the provision of related data services. The Group has an overseas branch in France and an overseas subsidiary in the USA. The Parent Company is incorporated and domiciled in the UK. The registered office is Wellington House, East Road, Cambridge, CB1 1BH. Research and development Please see the Strategic Report on page 9 for further information about the Group’s approach to research and development. Future developments The Company’s intentions regarding investment and business development can be found under Strategic priorities on page 9. Proposed dividend In the year ending 31 December 2016, the Board decided to pay an interim dividend of 2.2p per ordinary share. This totalled £1.0m and was paid on 15 September 2016 to shareholders on the register as at 19 August 2016. The Board is recommending a final dividend of 4.3p per share, together with a supplementary dividend of 4.7p per share, giving a final payment of 9.0p a share amounting to approximately £4.3m in aggregate and giving a total dividend for the year equivalent to 11.2p per share. If this is approved at the forthcoming AGM on 28 March 2017, the final dividend will be paid on 5 May 2017 to shareholders on the register as at 7 April 2017. Substantial shareholdings On 23 February 2017, the Company had been notified that seven parties had holdings of 3% or more in the ordinary share capital of the Company. The number of ordinary shares and the percentage of the total shares held by each party is outlined below. Andrew Walters1 Andrew Kirk BlackRock Inc David Bridge William Hibbert Kenneth Giles Miton Group plc Number of £0.01 shares 17,855,986 5,009,853 4,718,025 2,663,000 2,663,000 2,371,800 2,236,345 % of total 37.7 10.6 10.0 5.6 5.6 5.0 4.7 1 Includes shares held as family interests or by virtue of position as beneficiary or potential beneficiary of certain trusts Quartix Holdings plc Financial statements for the year ended 31 December 2016 20 Directors The Non-Executive Directors who held office during the year are listed below: • Paul Boughton (Chairman) • Jim Warwick The Executive Directors who held office during the year are listed below: • Andrew Walters • David Bridge All Executive Directors have service agreements with the Company terminable by either party upon the minimum notice period being met. The minimum notice period is 12 months for Andrew Walters and David Bridge. The Company’s Articles of Association require all Directors to stand for re-election each year at the AGM. The next AGM will take place on 28 March 2017. Directors' responsibilities statements The Directors are responsible for preparing the Strategic Report, Remuneration Report, Directors’ Report and the financial statements in accordance with applicable law and regulations. Company Law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and have elected to prepare the Parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws including FRS 101 Reduced Disclosure Framework). Under Company Law the Directors must not approve the financial statements unless they give a true and fair view of the state of affairs and profit or loss of the Company and Group for that period. In preparing these financial statements, the Directors are required to: • Select suitable accounting policies and apply them consistently • Make judgements and estimates that are reasonable and prudent • State whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the consolidated financial statements • Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business • State whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Company financial statements The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Quartix Holdings plc Financial statements for the year ended 31 December 2016 21 Directors' responsibilities statements (continued) The directors confirm that: • • so far as each director is aware, there is no relevant audit information of which the company’s auditor is unaware; and the directors have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the company’s auditor is aware of that information. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Financial risk management policies and objectives The Group manages its key financial risks as follows. Further details are provided in note 26. Interest rate risk The Group has no debt so it is not exposed to fluctuations in interest rates. Liquidity risk The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs. Cash flow is forecast and monitored as are working capital requirements. Credit risk The principle credit risk relates to trade receivables and is mitigated by third party credit clearance for those customers benefitting from free installation and, for most contracts, collection by direct debit. The Group seeks to manage credit risk associated with cash deposits by using banks with high credit ratings assigned by international credit rating agencies. Currency risk This is managed by seeking to match currency inflows and outflows. Directors' and officers' liability insurance The Company maintains insurance cover for the Directors and key personnel against liabilities which may be incurred by them while carrying out their duties. Auditors The Directors have individually pursued all steps that they ought to have taken in their roles as Directors to ensure they are aware of any relevant audit information and that such information has been relayed to the Company’s auditors. The Directors each confirm that there is no relevant information of which the Company’s Auditors are unaware. The Auditor, Grant Thornton UK LLP, will be proposed for reappointment in accordance with section 485 of the Companies Act 2006. Approved by the Board of Directors and signed on behalf of the Board on 24 February 2017. Andrew Walters Managing Director Quartix Holdings plc Financial statements for the year ended 31 December 2016 22 Independent Auditor's Report to the Members of Quartix Holdings plc - Company number 06395159 We have audited the group financial statements of Quartix Holdings plc for the year ended 31 December 2016 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. 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. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 20, the directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the group financial statements: • • • give a true and fair view of the state of the group's affairs as at 31 December 2016 and of its profit for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • • the information given in the Strategic Report and Directors' Report for the financial year for which the group financial statements are prepared is consistent with the group financial statements. the Strategic Report and Directors' Report have been prepared in accordance with applicable legal requirements Matter on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the group and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and Directors' Report. Quartix Holdings plc Financial statements for the year ended 31 December 2016 23 Independent Auditor's Report to the Members of Quartix Holdings plc (continued) - Company number 06395159 Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • 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. Other matter We have reported separately on the parent company financial statements of Quartix Holdings plc for the year ended 31 December 2016. Alison Seekings Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Cambridge 24 February 2017 Quartix Holdings plc Financial statements for the year ended 31 December 2016 24 Consolidated Statement of Comprehensive Income Year ended 31 December Revenue Cost of sales Gross profit Administrative expenses Operating profit Finance income receivable Finance costs payable Profit for the year before taxation Tax expense Profit for the year Other Comprehensive income: Items that may be reclassified subsequently to profit or loss: Exchange difference on translating foreign operations Tax benefit(expense) Other comprehensive income for the year, net of tax Total comprehensive income attributable to the equity shareholders of Quartix Holdings plc Earnings per ordinary share (pence) Basic Diluted Notes 3 7 8 4 9 10 2016 £’000 2015 £’000 23,339 (9,276) 19,675 (7,525) 14,063 12,150 (7,520) (6,105) 6,543 6,045 21 (24) 13 (69) 6,540 5,989 (453) (975) 6,087 5,014 (255) - (255) (49) - (49) 5,832 4,965 12.87 12.70 10.69 10.53 Quartix Holdings plc Financial statements for the year ended 31 December 2016 25 Consolidated Statement of Financial Position Company registration number: 06395159 Notes 2016 £'000 2015 £'000 Assets Non-current assets Goodwill Property, plant and equipment Deferred tax assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Borrowings Deferred revenue Current tax liabilities Total liabilities Net assets Equity Called up share capital Share premium account Equity reserve Capital redemption reserve Translation reserve Retained earnings Total equity attributable to equity shareholders of Quartix Holdings plc 11 12 18 13 14 15 16 17 19 19 20 14,029 360 141 14,530 680 2,591 6,249 9,520 14,029 317 77 14,423 638 2,586 4,040 7,264 24,050 21,687 2,892 - 2,591 238 5,721 2,842 997 2,244 407 6,490 5,721 6,490 18,329 15,197 474 4,702 281 4,663 (304) 8,513 472 4,631 177 4,663 (49) 5,303 28 18,329 15,197 Approved by the Board of Directors, authorised for issue and signed on behalf of the Board on 24 February 2017. Andrew Walters Managing Director Quartix Holdings plc Financial statements for the year ended 31 December 2016 26 Consolidated Statement of Changes in Equity Share capital £’000 Share premium account £,000 Capital redemption reserve Equity reserve £’000 £’000 Translation reserve £’000 Retained earnings Total equity £’000 £’000 467 5 4,379 252 4,664 - 151 - Balance at 31 December 2014 Shares issued Increase in equity reserve in relation to options issued Adjustment for exercised options Deferred tax on share Options Dividend paid Transactions with owners Foreign currency translation differences Profit for the year Total comprehensive income Balance at 31 December 2015 Shares issued Increase in equity reserve in relation to options issued Adjustment for exercised options (note 20) Deferred tax on share Options Dividend paid Transactions with owners Foreign currency translation differences (note 26) Profit for the year Total comprehensive income Balance at 31 December 2016 - - - - 5 - - - - - - - 252 - - - 472 2 4,631 71 4,663 - - - - - 2 - - - - - - - 71 - - - - - - - - - - - - 71 (1) (144) - - (1) - - - 99 - 26 - - - 177 - 113 (56) 47 - 104 - - - - - - - - - - 2,493 - 12,154 257 - 144 71 (1) - 99 (2,348) (2,348) (2,204) (1,922) (49) - - 5,014 (49) 5,014 (49) 5,014 4,965 (49) - 5,303 - 15,197 73 - - - - - - 113 56 - - 47 (2,933) (2,933) (2,877) (2,700) (255) - - 6,087 (255) 6,087 (255) 6,087 5,832 474 4,702 4,663 281 (304) 8,513 18,329 Quartix Holdings plc Financial statements for the year ended 31 December 2016 27 Consolidated Statement of Cash Flows Cash generated from operations Taxes paid Cash flow from operating activities Investing activities Additions to property, plant and equipment Interest received Cash flow used in investing activities Cash flow used in operating activities after investing activities (free cash flow) Financing activities Repayment of long term borrowings Interest paid Proceeds from share issues Dividend paid Cash flow from financing activities Net changes in cash and cash equivalents Cash and cash equivalents, beginning of year Exchange differences on cash and cash equivalents Cash and cash equivalents, end of year 26 15 Notes 21 12 7 2016 £'000 6,812 (639) 6,173 (189) 21 (168) 2015 £'000 6,781 (1,092) 5,689 (262) 13 (249) 6,005 5,440 (1,000) (29) 73 (2,933) (3,889) 2,116 4,040 93 6,249 (1,000) (75) 257 (2,348) (3,166) 2,274 1,812 (46) 4,040 Quartix Holdings plc Financial statements for the year ended 31 December 2016 28 Notes to the Consolidated Financial Statements 1 Summary of significant accounting policies Basis of accounting These financial statements are consolidated financial statements for the Group consisting of Quartix Holdings plc, a company registered in the UK, and all its subsidiaries. These consolidated financial statements are for the year ended 31 December 2016 and are prepared in Sterling and are rounded to the nearest thousand pounds (£’000). They have been prepared in accordance with IFRS as adopted by the European Union (EU) (‘IFRS’) and in accordance with those parts of the Companies Act 2006 that are relevant to companies which report under IFRS. These financial statements have been prepared under the historical cost convention. The Group has not adopted any new standards or amendments that have a significant impact on the Group’s results or financial position. The standards and interpretations in issue but not effective for accounting periods commencing on 1 January 2016 that may impact on Quartix Holdings plc going forward are listed below. Quartix Holdings plc has not adopted these early. Outlook for adoptions of future standards (new and amended) At the date of authorisation of the consolidated financial information, the following standards and interpretations which have not yet been applied in the consolidated financial information were in issue but not yet effective (and in some cases had not yet been adopted by the EU): Number IFRS 9 IFRS 15 IFRS 16 Title Financial instruments Revenue from contracts with customers Leases Effective 1 January 2018 1 January 2018 1 January 2019 Number Annual Improvements Title (2014-2016 Cycle) Effective Not yet endorsed The Directors have not yet assessed the impact of the adoption of the standards listed above on the consolidated financial information of the Group in future periods. IFRS 15 may change the timing of recognition of revenue for units purchased by customers, although the majority of contracts are rental agreements, and IFRS 16 will require the operating leases held by the Group to be reflected within the Statement of Financial Position. Basis of consolidation The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. A list of subsidiaries is included note 29. Quartix Holdings plc Financial statements for the year ended 31 December 2016 29 1 Summary of significant accounting policies (continued) Going concern The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group is able to generate sufficient liquidity. The Group enjoys a strong income stream from its fleet subscription base while current liabilities include a substantial provision for deferred revenue which is a non cash item. After assessing the forecasts and liquidity of the business for the next two calendar years and the longer term strategic plans, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing consolidated financial statements. Segmental reporting The Group has concluded that it operates only one segment as defined by IFRS 8. The information used by the Group’s chief operating decision makers, who are considered to be the Operations Board, to make decisions about the allocation of resources and assessing performance is presented in a format consistent with that repeated in the financial statements. Assets are not directly attributable to any separate activity. Revenue Revenue is the amount receivable for goods and services, excluding VAT. It is measured at the fair value of consideration received or receivable, excluding sales taxes, rebates, and trade discounts. Revenue comprises the provision of telematics-based fleet and vehicle management solutions • • the provision and installation of hardware, and the maintenance of software and provision of communications Amounts received in advance of the provision of services are included within deferred income. Revenue from hardware sales, including insurance telematics contracts, is recognised upon transfer of economic benefit which is normally upon installation of the unit or despatch of the unit if the customer does their own installation. Revenue from installation is recognised upon installation. Revenue from other services, including the provision of communications, are recognised over the period in which services are provided. Revenue from a fixed term contract is spread on a straight line basis over the life of the contract. The associated cost including installation of hardware is recognised as incurred and not spread over the life of the contract: likewise, distributors’ commissions are accounted for when incurred and not spread over the life of the contract. Intangible assets Goodwill arising on consolidation represents the excess of the consideration transferred and the amount of any non-controlling interest in the acquiree over the fair value of the identifiable assets and liabilities (including intangible assets) of the acquired entity at the date of the acquisition. Goodwill is recognised as an asset and assessed for impairment annually or as triggering events occur. Any impairment is recognised immediately in profit or loss. Quartix Holdings plc Financial statements for the year ended 31 December 2016 30 1 Summary of significant accounting policies (continued) Property, plant and equipment Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment. Depreciation Depreciation is charged so as to write off the cost of assets over their estimated useful lives, using the straight-line method, on the following bases: • Tools and equipment • Office equipment • Leasehold improvements The life of the lease 25% straight line 25% straight line Research and development Expenditure on research activities is recognised as an expense in the period in which it is incurred. In the event that an internally generated intangible asset arises from the Group’s development activities then it will be recognised only if all of the following conditions are met: • Technical feasibility of completing the intangible asset • The ability to use the asset. • An asset is created that can be identified (such as software and new processes) • It is probable that the asset created will generate future economic benefits • The development cost of the asset can be measured reliably Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Impairment testing of intangible assets and property, plant and equipment An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount, which is the higher of fair value less costs of disposal and value-in-use. To determine the value-in-use, management estimates expected future cash flows and determines a suitable interest rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Group’s latest approved budget. Discount factors are determined individually for each cash-generating unit and reflect management’s assessment of respective risk profiles, such as market and asset-specific risks factors. The cash-generating units are the separate legal entities within the Group as there is no segmentation in the subsidiaries. Property, plant and equipment are tested for impairment if events or changes in circumstances (assessed at each reporting date) indicate that the carrying amount may not be recoverable. If a cash-generating unit is impaired, provision is made to reduce the carrying amount of the related assets to their estimated recoverable amount. Impairment losses are allocated firstly against goodwill, and secondly on a pro rata basis against intangible and other assets. Operating lease agreements Payments made under operating leases are charged to profit or loss on a straight line basis over the lease term. Lease incentives are spread over the term of the lease. Quartix Holdings plc Financial statements for the year ended 31 December 2016 31 1 Summary of significant accounting policies (continued) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is based on the cost of purchase on a first in first out basis. Net realisable value is based on estimated selling price less additional cost to completion or disposal. Provision is made for obsolete, slow moving or defective items where appropriate and recognised as an expense in the period in which the write-down or loss occurs. Taxation Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted at the Statement of Financial Position date. Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets and are recognised to the extent that it is regarded as more likely than not that they will be recovered from future trading profits. Deferred tax liabilities are provided in full, with no discounting. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the Statement of Financial Position date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in profit or loss, other comprehensive income or equity as appropriate. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash, maturities of 95 days or less from inception, and which are subject to an insignificant risk of changes in value. Financial assets Trade and other receivables are classified as loans and receivables, and are initially recognised at fair value. Subsequently, loans and receivables are measured at amortised cost using the effective interest method, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in profit and loss. Provision against trade receivables is made when there is objective evidence that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write-down is determined as the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted using the original effective interest rate. Financial liabilities Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group becomes a party to the contractual provisions of the instrument. Financial liabilities are recorded initially at fair value and subsequently at amortised cost using the effective interest method, with interest-related charges recognised as an expense in finance cost in the profit and loss. A financial liability is derecognised when the obligation is extinguished. Quartix Holdings plc Financial statements for the year ended 31 December 2016 32 1 Summary of significant accounting policies (continued) Equity Equity comprises the following: • • • • • • "Called Up Share capital" represents the nominal value of equity shares "Share premium account" represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue “Capital redemption reserve” represents the amount by which the Company's issued share capital is diminished when shares are redeemed or purchased wholly out of the Company's profits “Equity reserve” is used to reflect the expenses associated with granting share options to employees and the issue of warrants “Translation reserve” represents the exchange difference arising on the consolidation of foreign operations. "Retained earnings" represents retained profits Foreign currencies The Parent Company's functional currency is Sterling. Whilst, the French branch invoices in Euros, it also has a functional currency of Sterling, since its results are included in Quartix Limited’s Sterling accounts. Quartix Inc has a functional currency of US Dollars. The consolidated financial statements are presented in Sterling, which is the Group’s presentation currency. Transactions in foreign currencies are translated into the respective currencies of Group companies at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Statement of Financial Position date. Foreign exchange differences arising on translation of monetary assets and liabilities are recognised in the Consolidated Statement of Comprehensive Income. Non-monetary assets and liabilities that are measured at historical costs in a foreign currency are translated using the exchange rates at the dates for the transactions. Income and expenses for all the Group entities that have a functional currency other than Sterling are translated at the average rate prevailing in the month of the transaction. The assets and liabilities are retranslated at the closing exchange rate at the reporting date. On consolidation, exchange differences arising from the translation of the net investment in foreign entities are recognised in the translation reserve, as a separate component of equity. Employee benefits The only pension provision is participation in the UK Government’s NEST pension scheme, which is a defined contribution scheme. Contributions to defined contribution pension schemes are recognised as an employee benefit expense within personnel expenses in the income statement, as incurred. Other employee benefits including holiday pay, company sick pay and a range of tailored incentive schemes, some of which include the grant of share options, are recognised in the period that related employee services are received. Dividends Dividends attributable to the equity holders of the Company approved for payment during the year are recognised directly in equity. Quartix Holdings plc Financial statements for the year ended 31 December 2016 33 1 Summary of significant accounting policies (continued) Employee benefits: share based payments The Group operates a number of employee share schemes under which it makes equity-settled share-based payments to certain employees. Where employees are rewarded using share-based payments, the fair values of employees' services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is assessed at the grant date, using the Black-Scholes method, and excludes the impact of non-market vesting conditions. The expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting. 2 Key judgements and estimates The Group make estimates and assumptions regarding the future. Actual results may differ from these estimates. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are addressed below. Key judgement: capitalisation of development costs The point at which development costs meet the criteria for capitalisation is critically dependent on management’s judgment of the probability and measurability of future economic benefits. No development expenditure was capitalised in the year ended 31 December 2016. The research and development expenditure primarily related to the on-going research work on the Group’s existing fleet tracking unit to ensure that the functionality of the unit is maintained. The research work undertaken may successfully come to fruition in the development of a marketable product or technology but this development work cannot be identified or separated from the research work and therefore the entire expenditure has been expensed in the year. Key estimate: impairment testing of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated (Quartix Limited). Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Further details are given in note 11. Quartix Holdings plc Financial statements for the year ended 31 December 2016 34 3 Segmental analysis The Group has concluded that it operates only one operating segment as defined by IFRS 8, being the design, development and marketing of vehicle tracking devices and the provision of related data services. The information used by the Group’s chief operating decision makers to make decisions about the allocation of resources and assessing performance is presented on a consolidated Group basis. All revenue, costs, assets and liabilities relate to the single activity; and accordingly no segmental analysis is presented. An analysis of turnover by type of customer and geography is stated below: By customer base Fleet Insurance Geographical analysis by destination United Kingdom France Republic of Ireland United States of America 2016 £’000 14,909 8,430 23,339 2016 £’000 21,249 1,408 5 677 23,339 2015 £’000 12,957 6,718 19,675 2015 £’000 18,390 1,025 4 256 19,675 During 2016 revenue of £8.4m (2015: £6.7m) was derived from one insurance customer. There are no material non-current assets based outside the UK. Quartix Holdings plc Financial statements for the year ended 31 December 2016 35 4 Profit for the year before taxation The profit for the year for the Group is stated after charging: Research and development expenses Rentals under operating leases: Other operating leases Land and buildings Depreciation on property, plant and equipment, owned Share-based payment expense Foreign exchange gains Audit services: Fees paid to Company auditor for the audit of the Company and consolidated financial statements The audit of the Company’s subsidiary pursuant to legislation Other services Earnings before interest, tax, depreciation and amortisation (EBITDA): Operating profit Depreciation EBITDA Share-based payment expense Adjusted EBITDA 5 Employee remuneration Expenses recognised for employee benefits is analysed below for the Group. Staff costs, including Directors, during the year were as follows: Wages and salaries Social security costs Contributions to defined contribution pension plan Share-based payment 2016 £’000 1,442 14 150 152 113 (265) 15 18 3 2016 £’000 6,543 152 6,695 113 6,808 2016 £’000 3,889 366 26 113 4,394 The average number of employees, including all Directors, during the year was as follows: Administration Operations Sales Customer service Research and development 2016 21 31 43 15 25 135 2015 £’000 1,097 12 53 132 71 (18) 14 16 3 2015 £’000 6,045 132 6,177 71 6,248 2015 £’000 3,123 302 8 71 3,504 2015 13 21 35 11 21 101 Quartix Holdings plc Financial statements for the year ended 31 December 2016 36 6 Key management remuneration and directors’ remuneration Key management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including any Directors (whether Executive or otherwise) of the entity. For 2016, the Group identified 9 such individuals: two Executive Directors, two Non-Executive Directors, and five members of Senior Management, a reduction on 2015 to include only those Managers on the Operations Board of Quartix Limited. In 2015, the Group identified thirteen such individuals: two Executive Directors, three Non-Executive Directors, and eight members of Senior Management. Wages and salaries Social security costs Contributions to defined contribution pension plan Share-based payment Total employee benefits 2016 £’000 653 76 2 51 782 2015 £’000 730 88 1 29 848 Key management had 402,662 share options outstanding at 31 December 2016 (2015: 670,900). Key management held 28,349,839 shares at 31 December 2016 (2015: 32,342,711) on which dividends were paid in the year. Details of Directors’ remuneration and the highest paid director is disclosed on page 18. The Group introduced the NEST pension arrangements in 2015 for all employees. One director joined the scheme. No Director was a member of any other pension scheme or other post-employment benefit to which the Group contributed in either the current or the prior years. There were no termination payments and no bonuses for Directors. At 31 December 2016 the directors held no share options (2015: nil) and no share options were exercised in the year. 7 Finance income receivable Bank interest 8 Finance costs payable Interest on bank loans and overdrafts 2016 £’000 21 2015 £’000 13 2016 £’000 24 2015 £’000 69 Quartix Holdings plc Financial statements for the year ended 31 December 2016 9 Tax expense Analysis of tax charge in the year Current tax UK corporation tax charge on profit for the year Adjustments in respect of prior periods Total corporation tax Deferred tax Origination and reversal of temporary differences Adjustments in respect of prior periods Total deferred tax Tax on profit of ordinary activities 37 2015 £’000 957 - 957 23 (5) 18 975 2016 £’000 818 (348) 470 (17) - (17) 453 The current tax credit in respect of prior periods relates to patent box claims submitted during 2016 in respect of the two years ended 31 December 2014 and 31 December 2015. The current tax charge for the year to 31 December 2016 also includes the benefit of a Patent box credit of £244,000 as highlighted below. The impact of the patent box claim for the year ended 31 December 2016, ignoring the adjustments in respect of prior periods, is to reduce the effective rate of tax from 16.0%, broadly in line with the year ended 31 December 2015, to 12.3%. The impact of the prior year adjustments is to reduce the effective rate of tax from 12.3% to 6.9%. The relationship between the expected tax expense based on the effective tax rate of the Group at 20.00% (2015: 20.25%) being the UK rate of corporation tax for the year and the tax expense actually recognised in profit or loss can be reconciled as follows: Result for the year before taxation Tax rate (%) Expected tax expense Adjustments to tax charge in respect of prior periods Expenses not deductible for tax purposes Losses in the USA not provided Research and development tax credit Patent box credit Remeasurement of deferred tax Tax adjustment on exercise of options Tax on profit on ordinary activities 2016 £’000 6,540 2015 £’000 5,989 20.00 20.25 1,308 (348) 1 166 (332) (244) (9) (89) 453 1,213 (5) 3 116 (262) - (4) (86) 975 Effective rate of tax Effective rate of tax ignoring adjustments in respect of prior years’ 6.9% 12.3% 16.3% 16.4% Quartix Holdings plc Financial statements for the year ended 31 December 2016 38 10 Earnings per share The calculation of the basic earnings per share is based on the profits attributable to the shareholders of Quartix Holdings plc divided by the weighted average number of shares in issue during the year. All earnings per share calculations relate to continuing operations of the Group. Profits attributable to shareholders £’000 Weighted average number of shares Basic profit per share amount in pence Fully diluted weighted average number of shares Diluted profit per share amount in pence Earnings per ordinary share Year ended 31 December 2016 Year ended 31 December 2015 6,087 47,292,755 5,014 46,912,132 12.87 10.69 47,929,813 47,595,383 12.70 10.53 For diluted earnings per share, the weighted average number of ordinary shares is adjusted to assume the conversion of all dilutive potential ordinary shares. Dilutive potential ordinary shares are those share options where the exercise price is less than the average market price of the Company’s ordinary shares during that year. 11 Goodwill and other intangible assets Goodwill Cost and net book value At 1 January and 31 December 2015 and 2016 Goodwill on consolidation £’000 14,029 Goodwill arose on the consolidation of the Group following the acquisition of Quartix Limited in 2008. Goodwill is recognised as an asset and assessed for impairment annually or where there is indication of impairment. Any impairment is recognised immediately in profit or loss (see note 2). The Group considers its subsidiary Quartix Limited to be the sole cash-generating unit (CGU) for the assessment of goodwill and as such, it is reviewed annually for impairment. The Group has determined its recoverable amount based on value in use calculations. The value in use was derived from discounted management cash flow forecasts for the business, using the budgets and strategic plans based on past performance and expectations for the market development of the CGU, incorporating an appropriate business risk. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period based on industry sector forecasts. These budgets and strategic plans cover a four-year period. The growth rate in years one and two were based on detailed management expectations. The growth rate used for the third and fourth year is 2% which is in line with the long-term GDP forecasts. The discount rate used is 4.12% based on the Group’s weighted average cost of capital. Sensitivity analysis is carried out on all budgets, strategic plans and discount rates used in the calculations. Management’s key assumptions are based on past experience and the current trading performance of Quartix Limited. These value in use calculations have not identified any requirement for impairment of the Goodwill stated above. Management is not aware of any probable changes that would necessitate changes in key estimates that indicate any impairment sensitivity. Quartix Holdings plc Financial statements for the year ended 31 December 2016 39 12 Property, plant and equipment Leasehold improvements £’000 Tools and equipment £’000 Office equipment £’000 Total £’000 Cost: At 1 January 2015 Additions At 31 December 2015 Additions Foreign exchange At 31 December 2016 Depreciation: At 1 January 2015 Provided in the year At 31 December 2015 Provided in the year Foreign exchange At 31 December 2016 Net book amount: At 31 December 2016 At 31 December 2015 At 1 January 2015 13 Inventories Raw materials Work in progress Finished goods and goods for resale 12 5 17 - - 17 - 3 3 3 - 6 11 14 12 12 - 12 - - 12 12 - 12 - 12 - - - 401 257 658 189 10 857 226 129 355 149 4 508 349 303 175 425 262 687 189 10 886 238 132 370 152 4 526 360 317 187 2016 £’000 334 109 237 680 2015 £’000 335 161 142 638 Included in the analysis above are impairment provisions against inventory amounting to £80,000 (2015: £80,000). The cost of inventories recognised as an expense and included in “cost of sales” amounted to £2.9m (2015: £2.4m). Quartix Holdings plc Financial statements for the year ended 31 December 2016 40 14 Trade and other receivables Trade receivables Other receivables Prepayments and accrued income 2016 £’000 2,318 12 261 2,591 2015 £,000 2,313 126 147 2,586 All the amounts are short term. The carrying value of trade receivables is considered a reasonable approximation of fair value. All of the receivables have been reviewed for indicators of impairment. Certain trade receivables were found to be impaired, due to the age of the debt, and a provision for doubtful debts has been recorded as follows. Provision at 1 January (Release of provision)/additional provision Foreign exchange Provision at 31 December 2016 £’000 48 (3) 2 47 2015 £’000 15 33 - 48 In addition, some of the unimpaired trade receivables are past due as at the reporting date. The age of financial assets past due but not impaired is as follows: Not more than 1 month More than one month but not more than 3 months More than 3 months but not more than 6 months 15 Cash and cash equivalents Cash and cash equivalents include the following components: Cash at bank and in hand 2016 £’000 122 19 - 141 2015 £’000 156 64 - 220 2016 £'000 6,249 2015 £’000 4,040 Quartix Limited uses Barclay’s Business Premium account to aggregate Sterling instant access balances and earn interest, which is -0.15% below the Base Rate. Since September 2016, the Group has placed deposits with Investec Bank plc on 95 day notices with interest currently at 0.7%. At 31 December 2016, Investec deposit were £2.0m. 16 Trade and other payables Amounts falling due within one year: Trade payables Social security and other taxes Other payables Accruals 2016 £'000 1,572 626 222 472 2,892 2015 £’000 1,632 783 152 275 2,842 Quartix Holdings plc Financial statements for the year ended 31 December 2016 41 17 Borrowings: amounts falling due within one year Bank loan 2016 £’000 - 2015 £’000 997 The Group repaid its bank loans during the year ended December 2016. The loan had been subject to an effective interest rate of 3.88% over LIBOR secured by way of a debenture. 18 Deferred tax Deferred tax asset recognised by the Group at 31 December 2016 and 31 December 2015 are as follows: Provision for deferred tax Accelerated Capital Allowances Short term temporary differences Equity settled share options (Credit)/charge to profit and loss Accelerated Capital Allowances Short term temporary differences Equity settled share options 2016 £’000 42 (7) (176) (141) (5) (1) (11) (17) 2015 £’000 47 (7) (117) (77) 21 (3) - 18 There are unprovided tax losses related to the USA business of $946,000 (2015: $568,000). 19 Equity Allotted, called up and fully paid At 1 January 2016 Shares issued At 31 December 2016 Number of ordinary shares of £0.01 each 47,175,704 170,250 47,345,954 Share capital £’000 Share premium £’000 472 2 474 4,631 71 4,702 All the shares issued in the year to 31 December 2016 related to the exercise of share options. Quartix Holdings plc Financial statements for the year ended 31 December 2016 42 20 Share-based payment The Company has share option schemes for certain employees. Share options are exercisable at prices determined at the date of grant. The vesting periods for the share options range between vesting on issue and starting to vest after 14 months. Options are forfeited if the employee leaves the Company before the options vest. Movements in the number of share options and warrants outstanding and their related weighted average exercise prices are as follows: 2016 2015 Weighted average exercise price per share in pence 76.5 316.6 1.0 42.7 55.3 Weighted average exercise price per share in pence 47.1 192.9 0.7 53.1 76.5 Options number 757,900 332,612 (3,450) (170,250) 916,812 Options number 1,076,954 170,400 (5,750) (483,704) 757,900 Outstanding at 1 January Granted Lapsed Exercised Outstanding at 31 December Exercisable at 31 December 110.6 207,000 43.5 131,500 The weighted average fair value of options issued during the year ended 31 December 2016 was 78.73p (2015: 87.73p). Included in the options granted in 2016, 3,662, were granted to a senior manager with performance conditions relating to the Group for the year ended 31 December 2016 and subsequent service conditions. The remaining options granted during the year have only service conditions. The weighted average share price at the date of exercise of options during the year ended 31 December 2016 was 371.84p (2015: 197.6p). On 30 September 2014, the Company reorganised its share capital. For options already granted at that date, each option holder is required to pay at least the new nominal value, of 1p per share. In order for each option holders’ total exercise value to remain unchanged, the Board sought authority from its shareholders to capitalise reserves. That authority was granted in a shareholder resolution passed to effect the reorganisation on 30 September 2014. Included in the share options exercised during the year, were 1,500 (2015: 70,500) of options issued in December 2013, with an exercise price of £0.001 per share. These options are covered by the authority outlined above and the difference between the original exercise price and the nominal value of £13.50 (2015: £634) has been charged to the capital redemption reserve to reflect the capitalisation. Quartix Holdings plc Financial statements for the year ended 31 December 2016 43 20 Share based payments (continued) At 31 December 2016 Quartix Holdings plc had the following outstanding options, warrants and exercise prices: Expiry dates Period when exercisable Starting from November 2014 1 November 2019 Starting from July 2016 March 2017 January 2019 Starting from October 2017 March 2018 29 July 2021 16 December 2020 01 January 2019 28 October 2023 06 December 2021 Expiry dates Period when exercisable Starting from November 2014 1 November 2019 19 December 2018 March 2015 3 January 2020 Starting from March 2015 16 December 2019 March 2016 29 July 2021 Starting from July 2016 16 December 2020 March 2017 2016 Options number 420,000 147,000 17,200 3,662 312,000 16,950 916,812 2015 Options number 520,000 1,500 50,000 16,000 150,000 20,400 757,900 Weighted average remaining contractual life in months 35 55 48 24 82 59 55 Weighted average remaining contractual life in months 47 36 49 36 67 60 51 Average exercise price per share in pence 44.0 219.0 1.0 1.0 337.5 1.0 55.3 Average exercise price per share in pence 44.0 0.1 44.0 0.1 219.0 1.0 76.5 The fair value of share based payments have been calculated using the Black-Scholes option pricing model. Expected volatility was determined based on the historic volatility of the Group’s share price. The expected life is the expected period from grant to exercise based on management’s best estimate. The risk free return is the rate offered for building society deposits at the time of the grant. The following assumptions were used in the model for options granted during the year ended 31 December 2016: Number granted Grant date Share price at grant date (pence) Exercise price (pence) Fair value per option (pence) Expected life in years Expected volatility (%) Risk-free interest rate (%) Dividend yield (%) 3,662 1 Jan 252.5 1.0 230.5 3 49.4 0.87 2.9 2016 312,000 28 Oct 337.5 337.5 64.9 3 35.1 0.25 2.9 2015 16,950 6 Dec 150,000 29 Jul 20,400 16 Dec 330.0 1.0 301.5 1.25 36.0 0.25 2.9 219.0 219.0 72.0 3 55.5 0.5 2.3 241.0 1.0 203.4 1.25 52.2 0.5 2.3 Quartix Holdings plc Financial statements for the year ended 31 December 2016 21 Notes to the cash flow statement Cash flow adjustments and changes in working capital Profit before tax Foreign exchange Depreciation Interest income Interest expense Share based payment expense Operating cash flow before movement in working capital Decrease/(increase) in trade and other receivables (Increase) in inventories Increase in trade and other payables Cash generated from operations Notes 12 7 8 4 2016 £’000 6,540 (326) 152 (21) 24 113 6,482 5 (39) 364 6,812 44 2015 £’000 5,989 - 132 (13) 69 71 6,248 (650) (201) 1,384 6,781 22 Leases The Group’s future aggregate minimum lease payments under non-cancellable operating leases are as follows: No later than one year Later than one year and no later than four years Later than five years Land & buildings 2015 £’000 58 4 - 62 2016 £’000 156 218 12 386 Other 2016 £’000 10 11 - 21 2015 £’000 10 3 - 13 Lease payments recognised as an expense during the year amount to £164,000 (2015: £65,000). 23 24 Related party transactions and controlling related party The Group’s related parties comprise its Board of Directors and its key management (see note 6). There were no related party transactions with Directors to disclose other than dividends received based on shareholdings disclosed in the Directors’ Remuneration Report on page 18 and note 6. The Directors consider the Board and shareholding structure to mean there is no directly identifiable controlling party. Purchase commitments Quartix Limited has signed agreements with suppliers which commit the Group to purchase inventory to the value of £324,000 (2015: £186,000). In December 2016, the Group entered into an agreement for the provision of data services which included a contractual obligation to pay a minimum of £40,000 per month, over a two-year term. There were no other financial commitments or contingent liabilities as at 31 December 2016 or 31 December 2015. 25 Capital commitments The Group had no capital commitments at 31 December 2016 (2015: £nil). Quartix Holdings plc Financial statements for the year ended 31 December 2016 45 26 Risk management objectives and policies Financial instruments The Group uses various financial instruments; these include cash deposits and bank loans and various items such as trade receivables and trade payables that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group's operations and manage working capital. The main risks arising from the Group's financial instruments are credit risk and currency risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. Credit risk The Group's exposure to credit risk is limited to the carrying amount of financial assets recognised at the Statement of Financial Position date, as summarised below: Loans and receivables Cash and cash equivalents Trade and other receivables 2016 £’000 6,249 2,330 8,579 2015 £’000 4,040 2,439 6,479 The Group’s management considers that all the above financial assets that are not impaired for each of the Statement of Financial Position dates under review are of good credit quality, including those that are past due. See note 14 for additional information on trade receivables that are past due. The Group's principal financial assets are cash deposits and trade receivables. Risks associated with cash deposits are limited as the banks used have high credit ratings assigned by international credit rating agencies. The principal credit risk relates to trade receivables and is mitigated by third party credit clearance for those customers benefitting from free installation and, for most contracts, collection by direct debit. The Group has one large customer whose debts have been as much as £0.9m and the credit risk on this balance is carefully monitored Currency risk The Group is exposed to transaction foreign exchange risk. The risk with the Euro has been mitigated by trading in France which generates marginally more Euros than the Group currently need. The Group has adopted a similar solution to the US Dollar by trading in the USA. Currently it purchases about $3.7m a year, to purchase components for the fleet tracking unit as well as the investment in Quartix Inc (2015: $3.0m). Transaction exposures, including those associated with forecast transactions, are managed through the use of bank accounts held in foreign currencies. Quartix Holdings plc Financial statements for the year ended 31 December 2016 46 26 Risk management objectives and policies (continued) Currency risk (continued) It is estimated that a 5% strengthening of Pound Sterling to the US dollar would have reduced purchase costs £140,000 and vice versa (2015: £100,000). (This is assuming that Dollar denominated prices do not adjust for currency movements.) It is estimated that a 5% strengthening of Pound Sterling to the Euro would have reduced net profit by £34,000 and vice versa (2015: £23,000). The Group’s financial instruments dominated in currencies were: Cash and cash equivalents Trade receivables Trade payables 2016 2015 £’000 US$ 279 - (459) (180) £’000 € 172 166 (181) 157 £’000 US$ 418 32 (483) (33) £’000 € 109 140 (126) 123 As set out in the accounting policies (note 1), the assets and liabilities of Group entities that have a functional currency other than Sterling are translated at the closing exchange rate at the reporting date. The US dollar exchange rate fell by 16% from 31 December 2015 to 31 December 2016. The impact of this movement on the retranslation of Quartix Inc’s net liabilities at 31 December 2015 is a translation reserve loss of £(212,000). The total translation reserve movement during the year, including movements in the net liability, reported in the Consolidated Statement of Changes in Equity was £(255,000). Quartix Inc’s net liabilities mainly relate to amounts owed to other Group entities. The foreign exchange differences arising on translation of these monetary liabilities are recognised in the Consolidated Income Statement and was the main reason for the increase in the foreign exchange gain in 2016 (see note 4). The retranslation of the amounts owed to Group entities by Quartix Inc at 31 December 2015 amounted to £(198,000). It is estimated that a 5% weakening of Pound Sterling to the US dollar would give an exchange gain of around £115,000 from the retranslation of amounts owed by Quartix Inc and vice versa. 27 Summary of financial assets and liabilities by category The carrying amounts of the assets and liabilities as recognised at the Statement of Financial Position date of the years under review may also be categorised as follows: Loans and receivables Trade and other receivables Cash and cash equivalents Financial liabilities measured at amortised cost Trade and other payables Bank borrowings 2016 £’000 2,330 6,249 8,579 2,044 - 2,044 2015 £’000 2,439 4,040 6,479 1,907 997 2,904 Quartix Holdings plc Financial statements for the year ended 31 December 2016 47 28 Capital management policies and procedures The Group's capital management objectives are to ensure the Group's ability to continue as a going concern and to provide an adequate return to shareholders, by balancing its trading performance with continuing investment in research and development. The Group monitors capital on the basis of the carrying amount of equity less cash and cash equivalents as presented on the face of the Statement of Financial Position. The Group makes adjustments to its capital in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets. Capital for the reporting years under review is summarised as follows: Capital Total equity Less cash and cash equivalents Overall financing Total equity Plus borrowings 2016 £’000 18,329 (6,249) 12,080 18,329 - 18,329 2015 £’000 15,197 (4,040) 11,157 15,197 997 16,194 Capital-to-overall financing ratio (%) 66 69 29 Subsidiaries As at the 31 December 2016 the subsidiaries of the Group were: Subsidiary Quartix Limited Quartix Inc Country of registration England & Wales Ordinary shares Common shares USA Class of share capital held Proportion held by the Company 100% 100% Nature of business Vehicle Tracking Vehicle Tracking Quartix Holdings plc Financial statements for the year ended 31 December 2016 48 Independent Auditor's Report to the Members of Quartix Holdings plc We have audited the financial statements of Quartix Holdings plc for the year ended 31 December 2016 which comprise the Parent Company Statement of Financial Position, the Parent Company Statement of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) including FRS 101 ‘Reduce Disclosure Framework’. 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. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 20, the directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the parent company financial statements: • • • give a true and fair view of the state of the company's affairs as at 31 December 2016 and of its profit for the year then ended; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • • the information given in the Strategic Report and Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements. the Strategic Report and Directors' Report have been prepared in accordance with applicable legal requirements. Quartix Holdings plc Financial statements for the year ended 31 December 2016 49 Independent Auditor's Report to the Members of Quartix Holdings plc (continued) Matter on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the parent company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and Directors' Report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or • • we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the group financial statements of Quartix Holdings plc for the year ended 31 December 2016. Alison Seekings Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Cambridge 24 February 2017 Quartix Holdings plc Financial statements for the year ended 31 December 2016 50 Parent Company Statement of Financial Position Company registration number 06395159 Fixed assets Investments Current assets Debtors Current tax asset Cash at bank and in hand Total current assets Creditors – amounts falling due within one year Net current assets/(liabilities) Total assets less current liabilities Net assets Capital and reserves Called up share capital Share premium account Equity reserve Capital redemption reserve Retained earnings Total equity attributable to equity shareholders of Quartix Holdings plc Notes 2016 £’000 2015 £'000 3 4 5 6 18,735 18,622 3,428 11 37 3,476 529 55 213 797 (35) (1,422) 3,441 (625) 22,176 17,997 22,176 17,997 474 4,702 135 4,663 12,202 472 4,631 78 4,663 8,153 22,176 17,997 Profit for the year and total comprehensive income attributable to the equity shareholders of Quartix Holdings plc was £6,926,000 (2015: £6,855,000) Approved by the Board of Directors, authorised for issue and signed on behalf of the Board on 24 February 2017. Andrew Walters Managing Director Quartix Holdings plc Financial statements for the year ended 31 December 2016 51 Parent Company Statement of Changes in Equity Balance at 31 December 2014 Shares issued Increase in equity reserve in relation to options issued Adjustment for exercised options Dividend paid Transactions with owners Profit for the year and total comprehensive income Balance at 31 December 2015 Shares issued Increase in equity reserve in relation to options issued Adjustment for exercised options (see note 20 of Group accounts) Dividend paid Transactions with owners Profit for the year and total comprehensive income Balance at 31 December 2016 Share capital £’000 467 5 Share premium account £,000 4,379 252 Capital redemption reserve Equity reserve £’000 £’000 151 4,664 - - Retained earnings Total equity £’000 £’000 13,163 3,502 257 - - - - 5 - 472 2 - - - 2 - - - 252 - 4,631 71 - - - 71 - (1) - (1) 71 (144) - (73) - 144 71 (1) (2,348) (2,348) (2,204) (2,021) - 4,663 - - - - - - 78 - 113 (56) - 57 - 135 6,855 8,153 - 6,855 17,997 73 - 113 56 - (2,933) (2,933) (2,877) (2,747) 6,926 6,926 12,202 22,176 - 474 - 4,702 - 4,663 Quartix Holdings plc Financial statements for the year ended 31 December 2016 52 Notes to the Parent Company Financial Statements 1 Summary of significant accounting policies Accounting convention These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101). The financial statements are prepared under the historical cost convention. No profit and loss account is presented by the Company as permitted by Section 408 of the Companies Act 2006. The financial statements are prepared in Sterling and are rounded to the nearest thousand pounds (£000). Basis of preparation The Company transitioned to FRS 101 in 2015 having previously adopted extant UK Generally Accepted Accounting Practice for all periods presented. There were no adjustments to the comparative figures for the year ended 31 December 2015 arising from the change in financial reporting framework. The accounting policies which follow were those applied in preparing the financial statements for the year ended 31 December 2016 and the year ended 31 December 2015. The Company has taken advantage of the following disclosure exemptions under FRS 101: a) Share-based Payment disclosure, as Quartix Holdings plc is the ultimate parent, the share-based payment arrangement concerns its own equity instruments and its separate financial statements are presented alongside the consolidated financial statements of the Group. b) Financial Instruments disclosures, given that equivalent disclosures are included in the consolidated financial statements of the Group in which the entity is consolidated. c) Fair Value Measurement disclosures. d) Certain disclosures required by IAS 1 Presentation of Financial Statements, including certain comparative information in respect of share capital movements. e) Statement of Cash Flows and related notes. f) Related Party Disclosures relating to key management personnel compensation. g) Disclosure of related party transactions entered into between two or more members of a group, given that any subsidiary which is a party to the transaction is wholly owned by such a member. h) Capital management disclosures. Going concern As a holding company, its main source of income is dividends receivable from its trading subsidiaries and in particular Quartix Limited. After assessing the forecasts and liquidity of the Group for the next two calendar years and the longer term strategic plans, the Directors have a reasonable expectation that the Company will continue to receive dividends for the foreseeable further. The Company therefore continues to adopt the going concern basis in preparing its individual entity accounts. Investment in subsidiaries The Company’s interests in investments presently comprise only interest in wholly owned subsidiary undertakings. Investments are recognised initially at cost. Subsequent to initial recognition the financial statements include the adjustments in respect of Share Based Payments or provision for impairment. Quartix Holdings plc Financial statements for the year ended 31 December 2016 53 1 Summary of significant accounting policies (continued) Impairment of assets The Company assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the Company estimates the recoverable amount of the asset, being the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use. To determine the value- in-use, management estimates expected future cash flows and determines a suitable interest rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Group’s latest approved budget. Discount factors are determined individually for each cash- generating unit and reflect management’s assessment of respective risk profiles, such as market and asset- specific risks factors. A reversal of an impairment loss for an asset shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount. Any reversal of an impairment loss of a revalued asset shall be treated as a revaluation increase. Taxation Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the Statement of Financial Position date. Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets and are recognised to the extent that it is regarded as more likely than not that they will be recovered from future trading profits. Deferred tax liabilities are provided in full, with no discounting. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the Statement of Financial Position date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in profit or loss, other comprehensive income or equity as appropriate. Dividends Dividends attributable to the equity holders of the Company approved for payment during the year are recognised directly in equity. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Financial assets Trade and other receivables are classified as loans and receivables, these are initially recognised at fair value. Loans and receivables are subsequently measured at amortised cost using the effective interest method, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the profit and loss. Provision against receivables is made when there is objective evidence that the Company will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write-down is determined as the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted using the original effective interest rate. Quartix Holdings plc Financial statements for the year ended 31 December 2016 54 1 Summary of significant accounting policies (continued) Financial liabilities Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Company becomes a party to the contractual provisions of the instrument. Financial liabilities are recorded initially at fair value and subsequently at amortised cost using the effective interest method, with interest-related charges recognised as an expense in finance cost in the profit and loss. A financial liability is derecognised only when the obligation is extinguished. The Company does not enter into derivative contracts for hedging or speculative purposes. Foreign currencies Transactions in foreign currencies are translated into Sterling at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Statement of Financial Position date. Any exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were initially recorded are recognised in profit or loss in the period in which they arise. Employee benefits: Share-based payments The Company operates a number of employee share schemes under which it makes equity-settled share based payments to employees of its UK trading subsidiary. The fair value of the employee services received in exchange for the grant of the options is recognised as an increase in the investment in the subsidiary, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The fair values of employees' services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is assessed at the grant date, using the Black-Scholes method, and excludes the impact of non-market vesting conditions. The expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting. Upon exercise of the share options the proceeds received are allocated to share capital and share premium. Share capital and reserves Share capital and reserves comprises the following: • • • • • "Called up share capital" represents the nominal value of equity shares "Share premium account" represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue “Capital redemption reserve” represents the amount by which the Company's issued share capital is diminished when shares are redeemed or purchased wholly out of the Company's profits “Equity reserve” is used to reflect the expenses associated with granting share options to employees and the issue of warrants "Retained earnings" represents retained profits Quartix Holdings plc Financial statements for the year ended 31 December 2016 55 2 Profit and loss account No Statement of profit and loss is presented for Quartix Holdings plc as provided by section 408 of the Companies Act 2006. The Company’s profit for the financial year was £6.93m (2015: £6.86m). Auditors' remuneration attributable to the Company is as follows: Audit fees – statutory audit Other services 2016 £’000 15 1 16 2015 £’000 14 1 15 Details of Directors’ emoluments are set out on page 18. 3 Investments – non current The amounts recognised in the Company’s Statement of Financial Position relate to the following: Cost: At 1 January 2015 Increase due to granting of share options to subsidiary employees: New investments At 1 January 2016 Increase due to granting of share options to subsidiary employees: New investments Net book amount at 31 December 2016 There is no provision for impairment for the investment in subsidiaries. Subsidiary undertakings £’000 18,551 71 18,622 113 18,735 Subsidiary Quartix Limited Quartix Inc Country of registration England & Wales Ordinary shares Common shares USA Class of share capital held Proportion held by the Company 100% 100% Nature of business Vehicle Tracking Vehicle Tracking Quartix Holdings plc Financial statements for the year ended 31 December 2016 56 4 Debtors Social security and other taxes Prepayments Amounts owed by subsidiary undertakings 2016 £’000 6 5 3,417 3,428 2015 £’000 5 5 519 529 All receivables fall due within one year of the Statement of Financial Position date. The amount owed by subsidiary undertakings includes a US dollar loan to Quartix Inc of £1.2m (2015: £0.5m) which is repayable on or before 31 December 2017 but can be extended by mutual agreement. Interest is charge quarterly at 1% per quarter on the quarter end balance. The remainder relates to a current account to Quartix Limited 5 Creditors: amounts falling due within one year Amounts owed to subsidiary undertakings Bank loan Social security and other taxes Accruals and deferred income 2016 £’000 - - 4 31 35 2015 £’000 388 997 4 33 1,422 The Company’s bank loans at December 2015 consisted of a £1.0m standard term loan with an effective interest rate of 3.88% over LIBOR secured by way of a debenture. For this repayments of £0.25m a quarter started in February 2016. 6 Called up share capital Allotted, called up and fully paid 47,345,954 (2015: 47,175,704) ordinary shares of £0.01 each 2016 £’000 2015 £’000 474 472 Details of movements in share options and warrants and those outstanding at 31 December 2016 are disclosed in note 20 of the Group accounts. Related party transactions and ultimate controlling party The Company has taken advantage of the exemption not to disclose transactions with wholly owned subsidiaries. Details of Directors’ remuneration and interests in shares are disclosed in the Directors’ Remuneration Report (see page 18) and key management remuneration in note 6 of the Group accounts. Contingent liabilities There are no material contingent liabilities subsisting at 31 December 2016 or 31 December 2015. Financial commitments The Company had no financial commitments at 31 December 2016 or 31 December 2015. 7 8 9 Quartix Holdings plc Financial statements for the year ended 31 December 2016 57 10 Risk management objectives and policies Financial Instruments The Company uses various financial instruments; these include cash deposits and bank loans and various items such as group receivables and group payables that arise directly from its operations. The main purpose of these financial instruments is to manage working capital. The main risks arising from the Company’s financial instruments are interest rate risk, liquidity risk, credit risk and currency risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. Interest rate risk The Company’s exposure to market risk for the changes in interest rates, which is not significant, relates primarily to the Company’s bank loans, which were repaid by 31 December 2016. The exposure to interest rate fluctuations on its loans has been managed historically by loan repayments to reduce the level of debt and related interest. As at the 31 December 2016, there was no interest payable risk. At the 31 December 2015 each 1% increase in interest rates would have added £10,000 to interest charges on an annual basis. Liquidity risk The Company seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs of the Group. It maintains cash to meet the Group’s working capital requirements, most of which earn interest via Barclay’s Money Transmission Plus, Barclays Business Premium account and Investec 95- day notice account. Liquidity needs of the Group are monitored on a weekly and monthly basis. The Company has no un-drawn committed overdraft facilities. As at 31 December the Company’s financial liabilities have contractual maturities as summarised below: Bank loans Within six months Six to twelve months One to five years 2016 £’000 - - - - 2015 £’000 521 509 - 1,030 Credit risk The Company’s exposure to credit risk is limited to the carrying amount of financial assets recognised at the Statement of Financial Position date, as summarised below: Loans and receivables Cash and cash equivalents Amounts owed by subsidiary undertakings 2016 £’000 37 3,417 3,454 2015 £’000 213 519 732 Risks associated with cash deposits are limited as the banks used have high credit ratings assigned by international credit rating agencies. The amount owed by subsidiary undertakings includes a US dollar loan to Quartix Inc of £1.2m (2015: £0.5m) which is repayable on or before 31 December 2017 but can be extended by mutual agreement. Interest is charge quarterly at 1% per quarter on the quarter end balance. The remainder relates to a current account to Quartix Limited. (see below and note 4). Quartix Holdings plc Financial statements for the year ended 31 December 2016 58 10 Risk management objectives and policies (continued) Currency risk The Company is exposed to transaction foreign exchange risk. The Group mitigates its risk to the US Dollar by trading in the USA; however the Company is exposed to exchange movements on its US Dollar loan to Quartix Inc to fund its start-up losses and working capital requirements. The Company’s financial assets denominated in currencies (all US dollars) were: Loan and receivables Cash at bank Amounts owed by subsidiary undertakings 2016 £’000 1 1,215 1,216 2015 £’000 1 519 520 The Company’s net profit would not be materially impacted by 5% strengthening of Pound Sterling to the US dollar or Euro. Notice of Annual General Meeting Notice is hereby given that the third Annual General Meeting (the “Meeting”) of Quartix Holdings plc will be held at Wellington House, East Road, Cambridge CB1 1BH on Tuesday 28 March 2017 at 11.00 am for the following purposes: To consider, and if deemed fit, to pass the following as ordinary resolutions: 59 1. 2. 3. 4. 5. 6. 7. 8. 9. To receive and adopt the audited annual accounts for the year ended 31 December 2016. To approve and declare a final dividend for the year ended 31 December 2016 of 4.3p per ordinary share and supplementary dividend of 4.7p per ordinary share, a total of 9.0p per share. This will be paid on 5 May 2017 to shareholders on the register as at the close of business on 7 April 2017. To re-elect Andrew Walters as a Director who, in accordance with the Company’s Articles of Association, retires as a Director and is eligible for re-election. To re-elect David Bridge as a Director who, in accordance with the Company’s Articles of Association, retires as a Director and is eligible for re-election. To re-elect Paul Boughton as a Director who, in accordance with the Company’s Articles of Association, retires as a Director and is eligible for re-election. To re-elect Jim Warwick as a Director who, in accordance with the Company’s Articles of Association, retires as a Director and is eligible for re-election. To re-appoint Grant Thornton UK LLP as the auditors of the Company until the end of the next Annual General Meeting. To authorise the Directors to determine the remuneration of the auditors. To give the Directors general and unconditional authorisation for the purposes of section 551 of the Companies Act 2006 (the “Act”) to exercise all powers of the Company to allot shares in the Company or to grant rights to subscribe for or to convert any security into shares in the Company up to a maximum nominal value of £157,820 (representing approximately 33% of the issued share capital of the Company as at 24 February 2017) to such persons at such times and on such terms they deem proper provided that this authority shall expire at the conclusion of the next Annual General Meeting of the Company or 30 June 2018, whichever is earlier, save that the Company may, before such expiry, make an offer or agreement which would or might require equity securities (as defined in section 560 of the Act) to be allotted after such expiry and the Directors may allot such securities in pursuance of such offer or agreement as if the authority conferred hereby had not expired; and all prior authorities to allot securities (to the extent unutilised) be revoked, but without prejudice to the allotment of any shares or securities already made or to be made pursuant to such prior authorisation. To consider, and if deemed fit, to pass the following as special resolutions: 10. That the Directors be and are empowered, pursuant to section 570 of the Companies Act 2006 (the “Act”), to allot equity securities (as defined in section 560 of the Act) for cash pursuant to the authority conferred upon them by resolution 9 above and to allot equity securities (as defined in section 560(3) of the Act (sale of treasury shares)) for cash in each case as if section 561 of the Act did not apply to any such allotment provided, however, that the power conferred by this resolution shall be limited to: a. The allotment of equity securities in connection with a rights issue, open offer or any other offer of, or invitation to apply for, equity securities in favour of holders of ordinary shares in the Company on the register of members at such record dates as the Directors may determine and other persons entitled to participate therein where the equity securities respectively attributable to the interests of the ordinary shareholders are proportionate (as nearly as may be) to the respective number of ordinary shares in the Company held or deemed to be held by them on any such record dates, subject to such exclusions or other arrangements as the Directors may consider necessary or expedient to deal with fractional 60 entitlements, treasury shares, record dates, or legal or practical problems arising or resulting from the application of the laws of any overseas territory or the requirements of any other recognised regulatory body or stock exchange in any territory or by virtue of shares being represented by depository receipts or any other matter whatever; and The allotment, other than pursuant to sub-paragraph ‘a’ above, to any person or persons of equity securities up to an aggregate nominal value not exceeding £23,680, representing approximately 5% of the ordinary share capital in issue as at 24 February 2017. b. This power shall expire at the conclusion of the next Annual General Meeting of the Company or 30 June 2018, whichever is the earlier, unless previously varied, revoked or renewed by the Company in general meeting provided that the Company may, before such expiry, make any offer or agreement which would or might require securities to be allotted, or treasury shares sold, after such expiry and the Directors may allot securities or sell treasury shares pursuant to any such offer or agreement as if the power conferred had not expired; and all prior powers granted under section 570 of the Act shall be revoked provided that such revocation shall not have retrospective effect. 11. That the Directors be generally and unconditionally authorised, for the purposes of section 701 of the Companies Act 2006 (the “Act”), to make market purchases, as defined in section 693(4) of the Act, of ordinary shares of £0.01 each in the Company on such terms and in such manner as the Directors shall determine, provided that: a. b. c. d. The maximum aggregate number of ordinary shares which may be purchased is 2,368,000 (representing approximately 5% of the ordinary share capital in issue as at 24 February 2017); The minimum price that may be paid for an ordinary share is its nominal value (£0.01); The maximum price that may be paid for an ordinary share shall be an amount equal to 105% of the average middle market quotations for the ordinary shares of the Company as derived from the AIM appendix to the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which the ordinary share is purchased; and This authority shall expire, unless previously renewed, revoked or varied, on the date of the next Annual General Meeting or 30 June 2018, whichever is earlier, save that the Company may enter into a contract for the purchase of ordinary shares under this authority which would or might be completed, wholly or partly, after this authority expires. By order of the Board on 24 February 2017. David Bridge Company Secretary 61 Notes to the Notice of Annual General Meeting Entitlement to attend and vote Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, the Company specifies that in order to have the right to attend and vote at the meeting (and also for the purpose of calculating how many votes a person entitled to attend and vote may cast), a person must be entered on the register of members of the Company by no later than close of business on 24 March 2017, or, in the event that the meeting is adjourned, at close of business on the date which is two days prior to the date of any such adjourned meeting.. Changes to entries on the register after this time shall be disregarded in determining the rights of any person to attend or vote at the meeting. Information regarding the meeting A copy of this Notice of Annual General Meeting and other information required by section 311A of the Companies Act 2006 is available online at www.quartix.net. Appointment of proxy Members of the Company are entitled to appoint one or more proxies to exercise all or any of their rights to attend, speak and vote at the Meeting instead of him or her. The person appointed does not need to be a member of the Company but they must attend the Meeting to represent the member. If you wish your proxy to speak on your behalf at the Meeting you will need to appoint your own choice of proxy (not the Chairman) and give your instructions directly to your appointee. If you appoint more than one proxy, each proxy must only be appointed to exercise the rights attaching to different shares. A proxy can be appointed using the form accompanying this Notice. Instructions for use are shown on the form. Please complete and return this form to the Company's registrars, Capita Asset Services, PXS 1, 34 Beckenham Road, Beckenham, Kent BR3 4ZF not later than 11.00 am on Friday 24 March 2017. You can only appoint a proxy using the procedures set out in these notes and the notes to the proxy form. The notes to the proxy form give details of how to appoint a proxy via the CREST system. Changing appointment of proxy A member may change the person they have appointed as proxy using the same process as outlined above. The appointment received last before the latest time for receipt of proxies will take precedence over any previous appointments (see note 3). Any amended proxy appointments received after the relevant cut-off time will be disregarded. Revoking proxy appointment A member may revoke the appointment of a proxy by sending a signed note to the Company’s registrars, Capita Asset Services, PXS 1, 34 Beckenham Road, Beckenham, Kent BR3 4ZF. If the member is a company, such a note must be executed under common seal or signed on the company’s behalf by an officer of the company or an attorney for the company. Any power of attorney or other authority under which the proxy form is signed must be included with the proxy form. If a revocation is received after the specified time (see note 3), the proxy appointment will remain valid. Alternatively, if a member appoints a proxy but attends the Meeting in person, the proxy appointment will be automatically terminated. Issued shares and total voting rights At close of business on 24 February 2017 the Company’s issued share capital comprised 47,345,954 ordinary shares of £0.01 each. Each ordinary share entitles the holder to one vote at a general meeting of the Company. Consequently, the aggregate number of voting rights in the Company at that time was 47,345,954. 1 2 3 4 5 6 62 7 8 Documents on display Copies of the Directors’ service contracts with the Company will be available for inspection at the registered office of the Company at least 15 minutes prior to and until the termination of the Annual General Meeting. Communication Any general queries by members about the Annual General Meeting should be addressed to the Company Secretary by letter or email at Quartix Holdings plc, Wellington House, East Road, Cambridge CB1 1BH or david.bridge@quartix.net. Perivan Financial Print 244069 244069 Quartix Holdings Cover Spread 21/02/2017 15:07 Page 1 ginkrac Award-Winning Vehicle Tracking wAAw racTelciheV Winning Winnin --Wdraw Download from Do wnload from Windows Phone Store Wind eorSte onPhs ow Quartix Holdings plc Quartix Holdings plc Annual Report 2016 Annual Report 2016 ellingt Quartix Holdings plc uarQ tix Holdings plc Wellington House W on House East Road East R oad Cambridge C ambr idge CB1 1BH CB1 1BH tix.net www.quartix.net www .quar tix.net www www.quartix.fr .quar tix.fr .quar www.quartix.com om www .quar tix.c 

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