FLTA.L Regulatory News (FLTA)

Filta Group Holdings plc

("Filta", the "Company" or the "Group")

Full year audited results for the financial year ended 31 December 2018

Financial Highlights

· Revenue (from Continuing Operations) up 23% to £14.2m (2017: £11.5m) increased in all divisions:

o Fryer Management revenue up 11% to £9.3m (2017: £8.4m)

o FiltaSeal revenue up 24% to £1.6m (2017: £1.3m)

o FiltaGMG revenue £1.7m (2017, 4 months: £0.4m)

o Franchise Development revenue £1.5m (2017: £1.3m)

· Gross margin improved to 49.8% from 49.2%.

· Adjusted EBITDA* from Continuing operations up 25% to £2.6m (2017: £2.1m).

· Operating profit £1.8m (2017: £1.7m) after non-cash charges of £0.7m - depreciation and amortisation of £0.4m (2017: £0.2m) and share based payments of £0.3m (2017: £0.1m).

· Deferred revenue balance up £0.7m (including £0.2m FX gain) to £3.7m of which £0.9m to be released in 2019.

· Net cash of £2.1m at 31 December 2018.

· Proposed final dividend of 0.92 pence per share, which together with the interim dividend of 0.72 pence, makes a total dividend for the year of 1.64 pence per share, an 26% increase over prior year.

*Adjusted for non-recurring items being acquisition related costs, share based payments as well as finance costs, taxes, depreciation and amortization.

Operational Highlights

· Net increase in Franchise Owner base to 199 and a 14% increase in the number of MFUs (mobile filtration units) from 394 to 450.

· Two Franchise Owners achieved over $2m (£1.6m) in revenue and six (2017 - four) Franchise Owners recorded revenue over $1m (£0.8m).

· Significant growth in fryer management services driven by organic growth and new franchise development which, in turn, enlarges the platform for increasing Fryer Management Services.

· Robust revenue growth in Company-Owned Operations due to strong performances from, particularly, FiltaSeal whose revenues were up 24% and, a strong first full year from FiltaGMG.

· Buy-in of German master licence with 6 existing franchisees already grown to 12 franchisees and 15 MFUs providing a strong platform for further expansion into mainland Europe

· Acquisition of Watbio Holdings Limited, a provider of grease and drain management solutions, which adds over £10m revenues to FiltaGMG business

Jason Sayers, CEO, commented:

"2018 was an active year for the Group as we continued to experience strong organic growth whilst completing two strategically significant acquisitions. The buy-in of the German master franchise gave us an immediate foothold in the German market, where we are experiencing good initial results applying the US franchise model, provides a base for expansion into mainland Europe. Late in the year we completed the acquisition of Watbio Holdings Limited, which fits squarely with our strategy of increasing high margin repeat revenue business and moves Filta into a market-leading position in the FOG (fats, oils and greases) market.

"We are focused on the integration of Watbio in the first half of 2019 and we anticipate an increase in its existing £10m revenue base and profitability as we grow its client base and we realise the benefits of already identified synergies. 

"Whilst we anticipate a slowdown in new franchise sales as our territory coverage gets closer to maturity in the US, our European operation has picked up the mantle and we are encouraged both by the strength of the new business pipeline and the opportunities that will come from a broader geographic base.

"We also see a strong path for growth in FiltaSeal and our other company-operated offerings and, with the implementation of a new scheduling system, anticipate improved efficiencies and gross margin."

15th April 2019

Enquiries:

Filta Group Holdings plc Tel: +1 407 996 5550

Jason Sayers, Chief Executive Officer

Brian Hogan, Chief Financial Officer

Cenkos Securities plc (NOMAD and Broker) Tel: 020 7397 8900

Stephen Keys

Harry Hargreaves

This announcement contains inside information.

CHAIRMAN'S STATEMENT

Introduction

2018 saw two significant developments for the Group, being the buy-in, in January, of our master franchise in Germany, which provided us with the base to expand our franchise activities into mainland Europe, and the acquisition, in December, of Watbio, one of the leading operators in the Fats, Oils and Grease ("FOG") market, which in combination with FiltaGMG has established Filta as a major force in that market.

I am pleased to report that, alongside these developments, we enjoyed another year of growth across all of our core businesses, with the addition of 25 new franchises, including eight in mainland Europe, 56 additional MFUs, an increase of 23% in the number of seals fitted and an increase of 12% in the number of FiltaGMG jobs performed, prior to any acquisition effect of Watbio. 

We have continued to invest in business systems, infrastructure and personnel both to take advantage of market opportunities and to ensure the highest level of support to our growing and diverse customer base.

Results

Reported profit before tax for the year ended 31 December 2018 was £1.7m (2017: £1.6m) on revenue up by 23% at £14.2m (2017: £11.5m) and net attributable profit was £1.3m (2017: £0.8m). Gross profit for the year was up by £1.4m at £7.1m, with a slightly improved gross margin of 49.8% (2017: £5.7m and 49.2%). The EBITDA, adjusted to exclude acquisition-related costs and share-based payments, was £2.6m (2017: £2.1m), an increase of 25%.

The Group also increased its deferred revenue balance by a net amount of £0.7m, including a £0.2m positive impact from a stronger US dollar, to a year-end balance of £3.7m.

Operating costs were up by £1.3m, supporting the increased size of the business and level of activity, but also reflecting the acquisition-related costs of £0.2m (2017: £0.1m) being legal and other costs related primarily to the acquisitions of the German master franchise and Watbio Holdings Limited, a £0.3m charge in relation to awards made under the Company's Share Schemes, specifically the US Stock Appreciation Rights (2017: £0.1m) and a greatly increased depreciation and amortisation charge, primarily related to intangible assets, of £0.4m (2017: £0.2m).

Divisional Performances

The £0.5m increase in adjusted EBITDA reflects strong performances in all areas of our business and was achieved from both higher turnover and improved gross profit margins.

FiltaFry, our franchised fryer management business, has continued to expand its number of territories as demonstrated by a net increase in our Franchise Owner base to 199 whilst realising a 14% increase in the number of MFUs (mobile filtration units) from 394 to 450. FiltaFry remains the core of our business and it provides the platform for further growth across the Group. Revenues and gross profits from Fryer Management Services grew 11% and 10% respectively to £9.3m and £4.1m. We are particularly encouraged by our European and Canadian operations, where our franchise counts have grown to twelve and three respectively.

The Company-owned activities, which are UK-based, have also had a good year. FiltaSeal, whose revenues for the year were £1.6m, has enjoyed growth of some 24% and started the new year with a strong order book. FiltaGMG contributed £1.7m in revenue but, more importantly, it grew 41% against the prior year on an annualised basis. Watbio was under our ownership for only ten days of the year and its contribution was, therefore, not significant.

Strategic Developments

As stated above, we bought in the German master franchise at the beginning of the year and, at the end of the year, acquired Watbio. Both acquisitions align with existing platforms and continue to support our strategy of focusing Filta on businesses with high margins and low working capital requirements.

FiltaFry GmbH was acquired for a total consideration of €250,000, satisfied as to €175,000 in cash and €25,000 by the issue of 10,971 new Ordinary Shares. Further consideration of €25,000 was paid by the issue of 9,225 Filta shares on 30 January 2019, with a final payment of €25,000 remaining to be satisfied by the issue of Filta shares on 30 January 2020. FiltaFry GmbH is being developed along the same lines as our North American business with the aim being to establish a strong foothold in Germany before extending into other European countries. We have been delighted at the momentum that has already been built up with six new franchises in Germany, one in Austria and one in Spain, giving us a total franchise count in Europe of twelve already.

The acquisition of Watbio for a total consideration of up to £6.4m represents a significant step in building our FOG business, which we consider, due to the nature and timing of the service, to be more suitable to direct ownership than to a franchise structure. The consideration for Watbio has been satisfied by the payment of £5.3m in cash and as to £0.8m by the issue to the vendors of 400,000 Filta shares. Additional cash consideration of up to £0.3m million is contingent on certain debtor collections before 31 May 2019. The cash element of the consideration was funded by a placing of 1,500,000 new Filta shares to raise £3.0m (gross) and a fixed term bank loan of £4.0m.

We envisage continuing to pursue an Infill strategy to acquire and develop additional service offerings, which, typically, will require only modest capital investment, will be complementary to our existing activities and will contribute to earnings as well as improving return on capital.

Dividends

We have a stated policy to distribute one third of annual earnings by way of dividends to shareholders in respect of each year.

The Board is therefore proposing a final dividend of 0.92 pence per share, which together with the interim dividend of 0.72 pence paid on 28 September 2018 makes a total dividend of 1.64 pence per share in respect of the year and represents an increase of 26% over prior year. The proposed final dividend, if approved by shareholders, will be paid on 14 June 2019 to shareholders on the register at the close of business on 31 May 2019.

Current trading and outlook

We saw growth in all our core businesses in 2018 and this has continued into 2019. We have secured four new franchisees, allocated six further territories and added ten MFUs in the year to date, all of which will contribute to additional revenues from Fryer Management Services through the year. Our FiltaSeal activity in the first quarter was 11% up on the same period last year and FiltaGMG has continued to gain new clients, thus increasing the repeat revenue base.

With the additional business to be derived from the acquisition of Watbio and the encouraging activity that we are seeing from our new European operations your Board is confident of achieving further growth through the remainder of the year.

Management, staff and Franchise Owners

The Board much appreciates the considerable efforts of our management and staff. I welcome to the Group those who have joined us during the year, and I thank all our employees for their continuing hard work and commitment to the Group.

I also take this opportunity to recognise our Franchise Owners, whose own performance and client commitment are critical to our success and reputation.

Finally, our Business Model and Strategy is set out below. It was approved by the Board on 12 April 2019.

Tim Worlledge

Chairman

12 April 2019

OPERATIONS REVIEW

Introduction

I am very pleased to report that the Group delivered a strong performance with an operating profit of £1.8 m, adjusted EBITDA of £2.6m, an increase of 25% over the previous year, and profit before tax of £1.7m. We have also increased our deferred revenue balance and therefore go into 2019 with higher revenue visibility than at the start of 2018.

Fryer Management Services delivered a 11% increase in revenue, driven by both organic growth and new franchises which, in turn, provide the platform for increased Fryer Management Services revenue in the future.

Filta's plan has been to expand organically and through acquisitions of high margin, repeat revenue businesses in the grease management market. In line with this, our Company owned operations experienced robust organic revenue growth. FiltaSeal revenues were £1.6m, up 24%, and FiltaGMG completed its first full year with revenue of £1.7m an annualised growth of 41%. Additionally, the business took a significant step forward at the end of the year with the acquisition of Watbio Limited which brings additional revenue of over £10m.

Franchise Development

Our strategy is to recruit quality franchise owners who have the ambition and business ability to expand their franchises, thereby enlarging the platform for Filta's own Fryer Management repeat revenues to increase year after year. 

Development in North America remained relatively strong in 2018 and, although the UK continued to be weak, mainland Europe gathered momentum with sales in Germany, Austria and Spain.

With the increasing coverage in North America, we will see a reduction in the number of available territories for sale which will result in a decrease in the number of new franchise sales in North America. However, we expect Franchise Development in mainland Europe to strengthen during the next few years.

As our franchise base grows, we are experiencing an increased demand and opportunity for franchise resales with nine Filta franchise owners selling their businesses during 2018, generating fees of £0.1m. We expect resale transactions to grow in number and value in the coming years, which will not only generate increasing fees but will also provide opportunities to strengthen the franchise network.

Fryer Management Services

Fryer Management Services contributed £9.3m of revenues in the year (2017: £8.4m). Our franchise network is both the showpiece and the cornerstone of our business - our franchisees connect us to our markets and our performance reflects their performance. We are committed to providing the franchisees with the necessary support to give them the best chance of success.

One of our strategic objectives is to encourage multi-MFU franchisees, which helps to allay financial risk and also provides owners with higher investment returns. In 2018, our two highest grossing franchise owners achieved over $2m (£1.6m) in revenue and six (2017: four) franchise owners recorded over $1m (£0.8m) of revenue.

Network revenue, defined as the total revenue of our U.S. based franchisees for all services provided to customers, represents the best indicator of the Filta brands growing strength in the market. Our U.S. franchise network generated $42m (£33m) of revenues in 2018 (2017: $36m/£28m).

In supporting our franchise owners, we endeavour to lower as many barriers as possible for them with programmes such as:

· Inside Sales - our Inside Sales Team, which is our "growth engine", has daily contact with franchise owners and helps them win new customers and upsell new products to existing customers. The team excelled again in 2018.

· Tech recruitment - with 450 trucks on the road at year-end and growing quickly, hiring and keeping good technicians is the lifeblood of our franchisees' businesses. To help them in managing this resource, Filta has a full-time recruiter to assist in the recruitment and retention of technicians.

· National Accounts - we continue to grow our national account customer base with new contracts being signed and greater penetration being driven within existing contracts.

· Coaching - ongoing assigned coaching for franchise owners at key stages of their growth.

Europe

We spent 2018 putting the building blocks in place for the franchise support model in Germany before replicating the US model by expanding the business into adjacent countries with multi-MFU franchise owners in the years to come.

In fact, we quickly expanded into Austria and, towards the end of the year, started our first pilot franchise owner in Spain. The plan is to prove the model in Spain before expanding further in Europe.

Company Owned Operations (UK)

FiltaSeal

Revenue from FiltaSeal was £1.6m (2017: £1.3m), reflecting a 23% increase in the number of seals fitted. The increase was driven by higher volumes from our existing customers alongside several new key account wins. The fundamentals of the business remain strong and this, along with FiltaSeal's compelling market proposition, should support further growth opportunities.

FiltaGMG

Revenue from FiltaGMG was £1.7m (2017: £0.4m in 4months). With a solid customer base and experienced team, Grease Management Limited was integrated into our existing FiltaDrain business to create FiltaGMG in 2017, sharing the existing call-centre resources and implementing new operational systems. The integration was relatively straightforward, and the results fully justified our enthusiasm for expansion into this market.

The aim was to grow this activity through organic growth and further in-fill acquisitions and, in December, we acquired one of the largest operators in this market, Watbio Limited.

Watbio Acquisition and Integration

The majority of Watbio's revenue is derived from the same services as those being offered by FiltaGMG and, similarly, they are mostly in the nature of repeat business. With revenues of over £10m, an experienced team and a high-quality customer base, the acquisition of Watbio at the end of the year was a significant step for the Group.

The additional revenue will change the geographic split of the revenue towards the UK in 2019 but keep the key attributes of being high margin and repeat by nature.

We are well on the way to having the two businesses fully integrated and expect, by mid-year, to be realising some of the efficiency benefits with the full-year impact of these being seen in 2020.

People

Good people are key to any business and we continue to build a great team at Filta, many of whom have worked for the Group for well over 10 years. They have been a key component to our success in that period both through their hard work and dedication to the brand and by the strong relationships that they have developed with customers and franchise owners alike.

In North America, the management team remains stable with Tom Dunn, Chief Executive Officer North America, continuing to run the day to day business, enabling us to continue executing on our plans. 

In the UK, Edward Palin, former Watbio Managing Director, was recently appointed as Managing Director of Filta's UK operations, strengthening the experience and skills needed for our expansion in the coming years.

Jos van Aalst, Managing Director of Filta's mainland Europe business, proved a great addition last year and continues to drive growth in Europe.

Lloyd Martin recently joined the Filta Board as a non-executive director and brings with him more than 35 years of experience in the water industry. Lloyd recently retired from his role as Chief Executive of British Water, the leading association supporting the UK water industry.

One of the benefits of taking Filta public was that it enabled us to offer all employees share options in the business (SARs in the US), thereby helping to align all goals and giving everybody the opportunity to share in the long-term success of the business. All employees, including the recently acquired Watbio staff, have been offered share options.

Market Conditions

The strength of the US economy has led to very low unemployment and, whilst this helps in service sales, it has the potential to reduce the number of people looking to buy franchises. However, we have experienced a steady level of enquiries from potential franchise owners, with many superior quality candidates coming forward, through the course of the year.

In mainland Europe, we have experienced a good level of interest from potential franchisees, as is evidenced by the fact that we added eight in the year, and service revenue from existing franchises continues to grow. We are excited by the prospect of further progress, both in Germany and Austria as well as in Spain and other territories, in the years ahead.

The market for each of Filta's services has been largely unaffected by economic swings in our operating territories and we believe that with the ever-increasing health, safety and food hygiene requirements the demand for our services is unlikely to diminish.

Current Trading & Outlook

2018 was an active year for the Group as we continued to experience strong organic growth whilst undertaking two acquisitions. The acquisition of FiltaFry Deutschland GmbH ushered us into the German market and, more broadly, the mainland Europe franchise market where we are experiencing good initial results with the US franchise model. The acquisition, late in the year, of Watbio Holdings Limited was also a significant move for us. Importantly, both transactions fit squarely with our strategy of increasing high margin recurring revenue business and will support further growth in the years ahead.

We are focused on the successful integration of Watbio in the first half of 2019 and we anticipate an acceleration in revenue and profitability as it builds its client base and we begin to realise identified and significant synergy benefits. 

Whilst we anticipate a slowdown in new franchise sales in the US, our European operation has picked up the mantle and we are encouraged both by the strength of the new business pipeline and the market opportunity that will come from the broader geographic base.

Additionally, we are experiencing strong growth in FiltaSeal and our other company operated offerings and, with the implementation of a new scheduling system, anticipate improved efficiencies and gross margin.

Jason Sayers

Chief Executive Officer

12 April 2019

FINANCIAL REVIEW

Summary

• Group revenue from continuing operations increased 23% to £14.2m (2017: £11.5m)

• Revenue grew across each service offering with a Group gross margin of 49.8% (2017: 49.2%)

• Profit from continuing operations increased 69% to £1.3m (2017: £0.8m)

• Adjusted EBITDA from continuing operations was up 25%

• Deferred income balance grew by £0.7m to £3.7m

• Basic earnings per share from continuing operations of 4.86p (2017: 2.90p) up 68%

Discontinued Operations

Following an agreement to sell certain assets of the Group subsidiary, Filta Refrigeration Limited, the transaction was completed on 4 January 2018, and the Group exited its refrigeration business. The results of Filta Refrigeration are therefore disclosed as a discontinued operation and will not make any measurable contribution to the Group's future earnings. In 2018, Filta Refrigeration contributed a net profit of £0.02m (2017: £0.03m).

The tax impact of discontinued operations is £Nil (2017: £Nil).

Acquisitions

On 31January 2018, we acquired FiltaFry Deutschland GmbH, the entity that held the master franchise license for Germany, for a total consideration of €0.25 (£0.2m). Consideration will be satisfied by the payment of €0.2m in cash and €0.1m through the issue of new ordinary shares in Filta to the vendor. This business contributed £0.2m to group revenue, £0.003m to the group's adjusted EBITDA and £0.2m to the group's deferred revenue at 31 December 2018.

On 22 December 2018, we acquired Watbio Holdings Limited, a provider of grease and drain management solutions to commercial kitchens across the UK, for a total consideration of £6.4m. Consideration was satisfied as to £0.8 million by the issue of 400,000 new Ordinary Shares in Filta to the vendors and by the payment of up to £5.6m in cash, of which £0.3m remains contingent on the collection of certain debtor balances by 31 May 2019. The business contributed £0.2m to Group revenue, £0.02m to the Group's adjusted EBITDA and £0.2m to the Group's deferred revenue at 31 December.

Taxation

We manage all taxes, both direct and indirect, to ensure that we pay the appropriate amount of tax in each country while ensuring that we respect the applicable tax legislation and utilise, where appropriate, any legislative reliefs available. This tax strategy is reviewed, regularly monitored and endorsed by the Board. The blended effective tax rate was 24.2% and the total tax charge was £0.4m (2017: £0.8m).

Earnings per share

The basic and diluted earnings per share for the year, from continuing operations, were 4.86p and 4.82p (2017: 2.90p and 2.87p) whilst the basic and diluted earnings per share, from continuing and discontinued operations, were 4.93p and 4.89p (2017: 3.03p and 2.99p) respectively. 

Cash flows and cash balance

The Group generated cash flow from operations of £2.0m (2017: £1.8m) reducing to £0.8m (2017: £1.3m) after the payment of taxes. These were increased in the current year by the transition in the US of corporate tax liability previously being paid in arrears to now being estimated and paid in advance. This effectively resulted in the payment of both 2017 and 2018 US tax liabilities in 2018. The main cash outflows related to the acquisition of FiltaFry Deutschland GmbH of £0.2m (2017: £Nil), cash taxes £1.2m (2017: £0.5) and dividends £0.4m (2017: £0.2).

At the year end the Group had cash balances of £6.8m (2017: £4.0m) and outstanding borrowings of £4.7m (2017: £1.1m), including a term loan of £4m drawn down to provide part of the consideration paid for the Watbio acquisition.

Brian Hogan

Chief Financial Officer

12 April 2019

BUSINESS MODEL & STRATEGY

Filta operates principally in the North America, the UK, and mainland Europe, providing a range of commercial kitchen-related services through franchise networks and Company-owned operations.

Region 1 - North America (USA & Canada)

Corporate HQ in Orlando, Florida, USA

· Principally a franchise network business

o Franchisees mostly multi-MFU operators

o Exclusive rights to defined area

· All services provided through Filta Franchise Network

o Fryer management is principal service

o Ancillary services include FiltaBio waste oil collection, FiltaGold new oil supply, FiltaCool humidity control and FiltaDrain kitchen drain solution

· Revenues generated mainly from franchise sales, franchise services and oil resales

· Business growth drivers:

o New Franchise Sales & Resales

o Existing Franchise Owners expanding

o National Accounts

o New services and products offered through Franchise Network

Region 2 - UK

Corporate HQ in Rugby, England

· Franchise network business and Company-owned operations

· Franchise network business:

o Franchisees mostly single MFU operators

o Services are solely fryer management under FiltaFry brand

· Company-owned Operations:

o FiltaSeal, replacement of refrigeration seals

o FiltaGMG, incorporating Watbio, kitchen drain solution

· Revenues derived principally from FiltaFry, FiltaSeal and FiltaGMG.

· Business growth drivers:

o Expanding existing Company-owned services organically and by infill acquisitions

o Development of additional related services

o Increased focus on national accounts

Region 3 - Mainland Europe

Corporate HQ in Debbeshoek, the Netherlands

· Principally a franchise network business

o Franchisees both single and multi-MFU operators

o Exclusive rights to defined area

· All services provided through Filta Franchise Network

o Fryer management is principal service

o Ancillary services include FiltaBio waste oil collection, FiltaGold new oil supply

· Revenues generated mainly from franchise sales, franchise services, oil resales

· Business growth drivers:

o New Franchise Sales

o Existing Franchise Owners expanding

· Adapted North America model in Germany and have started expanding into surrounding countries.

Services

One customer - multi-services

· FiltaFry - Fryer Management

· FiltaSeal - First Time Seal Replacement

· FiltaGMG - Fats Oil and Grease ("FOG") Drain and Pump Management

Fryer Management - The FiltaFry Service

FiltaFry, our unique Fryer Management service, is the cornerstone of the Group's activities and service offering in North America, the UK and mainland Europe. It provides an effective, hygienic and economic service for commercial kitchens, cleaning fryers, reducing cooking oil costs and disposing of waste cooking oil. 

· FiltaFry provides a total fryer management service, including the on-site micro-filtration, removal and replacement of cooking oil.

· 6,000+ restaurant and food service customers receive FiltaFry services on a weekly basis.

· Fryer Management also includes supplemental services such as FiltaCool and FiltaDrain provided by our Franchise Owners to customers.

· Franchisees operate a total of 450 MFUs of which 392 are in North America, 43 in the UK and 15 in mainland Europe

FiltaSeal

FiltaSeal service is sold in the UK and is a patented system for replacing damaged or perished refrigerator and freezer door seals on-site in a cost and time effective manner. Specifically, the system allows engineers, using patented on-Board equipment and materials to replace a seal in one visit, producing cost and time savings for its clients, who would otherwise experience ordering and fitting delays following an initial engineer's visit. The benefit of this service, apart from avoiding the disruption that multiple engineer visits causes, is the energy cost saving and avoidance of longer-running food hygiene risks.

FiltaGMG

FiltaGMG is a UK-wide provider of drain-related services including live bacteria drain dosing, the installation and servicing of Grease Recovery Units, and wastewater pump servicing. The majority of FiltaGMG's revenue is recurring in nature, with work typically being carried out quarterly under scheduled maintenance programmes.

The Franchise Model

Our Fryer Management service is provided through a network of Franchise Owners, who operate under 10-year franchise licences in North America and under 5-year franchise licences in the UK and mainland Europe.

Filta, as the franchisor, owns the intellectual property ("IP") comprised in the equipment and systems and, through its Franchise Model, allows its Franchise Owners to make use of that IP and of the FiltaFry name in providing the Fryer Management Service to its customers. 

There are two key components to the creation of a successful franchise:

· The quality of the franchisee and

· The provision by the franchisor of constant advice and support to the franchisee as he first establishes and then develops the business

Filta takes a great deal of time and care in selecting its franchisees, who undergo an extensive interviewing and assessment process before being awarded a franchise. Care is taken to establish that the applicant has the necessary funds, drive and enthusiasm to run and build the business.

Typically, in North America, franchisees are likely to develop into multi-MFU operations, while, in the UK, they more often remain as single MFU operators. Mainland Europe is being developed as a multi-MFU operator model.

As the franchisees grow their businesses, both by increasing their customer base and by adding extra units, they receive extensive support from Filta. Filta believes that this high level of support is critical to the success of its Franchise Owners.

Filta considers that its role is to bring down barriers, identify opportunities, pass on experience and, above all, help to set up all the normal business practices and systems that are needed in young businesses. 

Business Model

There are three key components of revenue generation in the Group and each of these is important, not just to revenues, but in providing the platform for growth in the future.

1 - Franchise Development

· New Franchise Owners and territories

· Territory Fee and Opening Package Fee paid by franchisee

· 10 year Franchise Agreements (5 year in UK and mainland Europe) with annual royalties

· Key objective is continuing improvement of our Franchise Owner quality to provide a platform for growth as they add units, take on new territories and enhance our brand and reputation

2 - Fryer Management Services

· All services are provided by or through Franchise Owners

· Franchisees pay a fixed royalty per MFU

· All products are provided by Filta, generating additional margin

· Franchise Owners' customer growth drives additional Filta revenues at little or no resource cost to Filta, providing increasing revenue visibility (2018 - repeat revenues at 94%)

· Key objective is growth of franchisees' revenue, driving predictable Group revenues at increasing marginal profit

3 - Company Owned Operations (UK Only)

· FiltaSeal provides an essential service to customers with a high level of visibility

· FiltaGMG provides services under contract to commercial kitchens

· Key objective is to build repeat revenues, providing high revenue-visibility maintenance contract customers

Repeat Revenues Underpinned by Growing Royalty Income

A significant base of the Group's total revenues (80%) are earned by way of royalties and other income from an existing customer base which requires continuing and regular service. It provides strong cash flow and, together with a large deferred revenue position, provides good revenue visibility into future years. Repeat revenue includes those revenues earned from existing customers, which are recurring in nature, and consist of our Fryer Management revenue, FiltaSeal revenue and non-installation related FiltaGMG revenue. 

Blue Chip Client Base

The Group has a broad client base in North America, the UK and Germany with clients ranging from small single outlet enterprises to many blue-chip clients with multi outlets and national coverage including major supermarket groups, national pub chains and restaurant chains. The high quality and breadth of the client base helps mitigate the risks of exposure to any single business or organisation.

Strategy

Our objective is to deliver sustainable, predictable and profitable growth founded upon the following strategic operational pillars:

1. Recruit the best staff and Franchise Owners possible

2. Drive and support the growth of the Franchise Owners

3. Grow key and national accounts

4. Increase our range of products and services

5. Attract and develop the best people

6. Increase the use of technology to improve our offering

Growth Opportunities

North America

Fryer Management Services are the cornerstone of our business and we continue to seek to grow this activity both by securing new franchisees and by increasing the numbers of customers serviced by our franchisees through higher penetration of the NCA (National and Centralised Accounts) market. This, in turn, drives royalty and other repeat revenue growth.

UK

Continue to support our Fryer Management franchisees and continue to grow the Company Owned Operations, FiltaSeal and FiltaGMG, through gaining key accounts.

Mainland Europe

With the recent expansion into Germany, we spent 2018 perfecting the same model that we have developed in North America. Growth in mainland Europe will come from both the sale of new franchises and by helping our acquired franchisees to expand.

New Markets

Now we have proven the model in Germany, the plan is to expand further within mainland Europe in the coming years using the resource base in Filta's offices in the Netherlands.

Key Performance Indicators ("KPIs")

We focus intently on a number of KPIs that measure and help us drive our success;

· Sale of new franchises

· Sale of new territories to existing franchise base

· The number of MFUs in the field

· National Account penetration

· Number of seals fitted

· Adjusted EBITDA

· Cash flow

· Deferred revenue

The strategic report was approved by the Board on 12 April 2019.

Brian Hogan

Chief Financial Officer

12 April 2019

PRINCIPAL RISKS AND UNCERTAINTIES

The Board has carried out an assessment of the principal risks facing the business, which are seen to be as follows:

INDEPENDENT AUDITOR'S REPORT

Opinion

We have audited the financial statements of Filta Group Holding plc (the "parent company") and its subsidiaries (the "group") for the year ended 31 December 2018, which comprise:

· the group statement of comprehensive income for the year ended 31 December 2018;

· the group and parent company statements of financial position as at 31 December 2018;

· the group and parent company statements of cash flows for the year then ended;

· the Group and parent company statements of changes in equity for the year then ended; and

· the notes to the financial statements, including a summary of significant accounting policies.

The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

In our opinion:

· the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 31 December 2018 and of the group's profit for the year then ended;

· the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

· the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 2006; and

· the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when:

· The directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or

· The directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group's or the parent company's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

Overview of our audit approach

Materiality

In planning and performing our audit we applied the concept of materiality. An item is considered material if it could reasonably be expected to change the economic decisions of a user of the financial statements. We used the concept of materiality to both focus our testing and to evaluate the impact of misstatements identified.

Based on our professional judgement, we determined overall materiality for the group financial statements as a whole to be £130,000 based on a percentage of adjusted EBITDA.

We use a different level of materiality ('performance materiality') to determine the extent of our testing for the audit of the financial statements. Performance materiality is set based on the audit materiality as adjusted for the judgements made as to the entity risk and our evaluation of the specific risk of each audit area having regard to the internal control environment. 

Where considered appropriate performance materiality may be reduced to a lower level, such as, for related party transactions and directors' remuneration.

We agreed with the Audit Committee to report to it all identified errors in excess of £7,000. Errors below that threshold would also be reported to it if, in our opinion as auditor, disclosure was required on qualitative grounds.

Overview of the scope of our audit

The finance functions of the parent company and its UK subsidiaries are based in the US and UK, respectively. A member firm of Crowe Global in the US (the 'component auditor') undertook a full scope audit of Filta Group Inc., under our direction. Filta Group Inc., accounts for approximately 65% of the group's revenue

We were involved in the audit of Filta Group Inc., from the planning stage through to completion. This involved a combination of conference call meetings, detailed working paper review and meetings and discussions with the audit committee. We reviewed a complete set of working papers for Filta Group Inc. and challenged the findings of the component auditor and discussed matters with management. Our audit of the group's UK operations was performed at the UK headquarters in Rugby. The consolidation and annual report are prepared by management in the US and we audited these through regular conference call meetings with management, the use of a file sharing platform and challenging management's assumptions and conclusions throughout the audit.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

This is not a complete list of all risks identified by our audit.

Our audit procedures in relation to these matters were designed in the context of our audit opinion as a whole. They were not designed to enable us to express an opinion on these matters individually and we express no such opinion.

Other information

The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

Opinion on other matter prescribed by the Companies Act 2006

In our opinion based on the work undertaken in the course of our audit

· the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

· the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

In light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report.

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

· adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

· the parent company financial statements are not in agreement with the accounting records and returns; or

· certain disclosures of directors' remuneration specified by law are not made; or

· we have not received all the information and explanations we require for our audit.

Responsibilities of the directors for the financial statements

As explained more fully in the directors' responsibilities statement the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the group's and parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

Use of our report

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Leo Malkin (Senior Statutory Auditor)

for and on behalf of

Crowe U.K. LLP

Statutory Auditor

London

12 April 2019

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The financial statements were approved and authorised for issue by the Board on 12 April 2019 and were signed on its behalf by:

________________________

Brian Hogan, Chief Financial Officer

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

PARENT COMPANY STATEMENT OF FINANCIAL POSITION

No statement of comprehensive income is presented by the company as permitted by section 408 of the Companies Act. The loss dealt within the financial statements of the parent Company for the year ended 31 December 2018 is £322,435 (2017: £324,658).

The financial statements were approved and authorised for issue by the Board on 12 April 2019 and were signed on its behalf by:

____________________

Brian Hogan, Chief Financial Officer

PARENT COMPANY STATEMENT OF CHANGES IN EQUITY

PARENT COMPANY STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Filta Group Holdings plc was incorporated in England and Wales on 31 March 2016. Its registered office is at The Locks, Hillmorton, Rugby, Warwickshire, England, CV21 4PP.

The Company is listed on the AIM market of the London Stock Exchange. The Company acts as the holding company of a group of subsidiaries that are involved in the franchising of on-site environmental kitchen solutions to restaurants, catering establishments and institutional kitchens. The services include microfiltration of cooking oil, fryer cleaning, temperature calibration, waste oil disposal and specially designed filters for refrigeration units and coolers. The Filta Group sells franchises and operates in the UK, the United States and Canada. Additionally, the Company operates two direct sale businesses including refrigeration seal replacement and the installation, repair and maintenance of drain dosing and grease recovery units. Further details of the Company's subsidiaries are provided in Note 14.

2. BASIS OF PREPARATION

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union including interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The consolidated financial statements have been prepared under the historical cost convention except for financial instruments that have been measured at fair value through profit and loss. The presentational and functional currency of the Company is Pounds Sterling. The functional currency of the subsidiaries is determined by the primary economic environment in which they operate.

Group reconstruction in prior year

Filta Group Holdings plc entered into an agreement to acquire the entire issued share capital of each of The Filta Group Limited and The Filta Group, Inc. on 26 October 2016 from Cookband Limited for Nil consideration. The reorganisation was affected by way of share for share exchanges whereby each of The Filta Group Limited and The Filta Group, Inc. became wholly-owned subsidiaries (the "Subsidiaries") of Filta Group Holdings plc as it is currently constituted. 

The directors consider the substance of the acquisition of the Subsidiaries by Filta Group Holdings plc is that of a combination of entities under common control and therefore it fell outside the scope of IFRS 3 (revised 2008).

In accordance with IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors, in developing an appropriate accounting policy, the Directors have considered the pronouncements of other standard setting bodies and specifically looked to accounting principles generally accepted in the United Kingdom ("UK GAAP") for guidance (FRS 102) which does not conflict with IFRS and reflects the economic substance of the transaction.

Under UK GAAP, the assets and liabilities of both entities are recorded at book value, not fair value. Intangible assets and contingent liabilities are recognised only to the extent that they were recognised by the legal acquirer in accordance within applicable IFRS. No goodwill is recognised, any expenses of the combination are written off immediately to the income statement and comparative amounts, if applicable, are restated as if the combination had taken place at the beginning of the earliest accounting period presented.

Therefore, although the Group reconstruction completed in October 2016, and Filta Group Holdings plc was incorporated on 31 March 2016, the consolidated financial statements are presented as if the Group structure has always been in place, including the activity from incorporation of the Group's principal subsidiaries. All entities had the same management as well as controlling shareholders.

The Directors decided that it is appropriate to reflect the combination using merger accounting principles as a group reconstruction under FRS 102 in order to give a true and fair view. No fair value adjustments were made as a result of the combination.

Basis of consolidation

The consolidated financial statements comprise the financial information of the Company and its subsidiaries (the "Group") made up to the end of the reporting period.

The consolidated financial statements present the results of the Company and its subsidiaries and joint arrangements as if they formed a single entity. Subsidiaries are consolidated from the date of their acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. Control comprises the power to govern the financial and operating policies of the investee to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights; currently exercisable or convertible potential voting rights; or by way of contractual agreement. Where necessary, adjustments are made to the financial statements of subsidiaries to align with the Group accounting policies.

Where a subsidiary undertaking is sold, the profit or loss on disposal is calculated as the difference between the aggregate of the fair value of the consideration received and the carrying amount of the assets and liabilities of the subsidiary on the date of disposal less any transaction costs relating to the disposal. Cash received on disposal of businesses is shown within investing activities in the Consolidated cash flow statement, net of cash and cash equivalents disposed of and transaction costs.

All intercompany transactions and balances between Group entities, including unrealised profits arising from them, are eliminated upon consolidation.

Going concern

The Directors have at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and therefore continue to adopt the going concern basis of accounting in preparing the financial statements.

Parent Company

The parent company has taken advantage of s.408 of the Companies Act 2016 not to publish

the parent company profit and loss account.

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies of Filta Group Holdings plc and its subsidiaries are set out below. These policies have been consistently applied unless otherwise stated.

3.1 Foreign currencies

Functional and presentation currency

The consolidated financial statements are presented in Pounds Sterling, which is also the functional currency of the parent company.

Foreign currency transactions and balances

Foreign currency transactions are translated into the functional currency of the respective Group entity, using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and form the remeasurement of monetary items denominated in foreign currency at year-end exchange rates are recognised in profit or loss.

Non-monetary items are not retranslated at year-end and are measured at historical cost (translated using the exchange rates at the transaction date), except for non-monetary items measured at fair value which are translated using the exchange rates at the date when fair value was determined.

Foreign operations

In the Group's financial statements, all assets, liabilities and transactions of Group entities with a functional currency other than Pounds Sterling are translated into Pounds Sterling upon consolidation. The functional currency of the entities in the Group has remained unchanged during the reporting period.

On consolidation, assets and liabilities have been translated into Pounds Sterling at the closing rate at the reporting date. Income and expenses have been translated into Pounds Sterling at the average rate, as an approximation of rates on the dates of the transactions over the reporting period. Exchange difference are charged/credited to other comprehensive income and recognised in the currency translation reserve in equity.

3.2 Segment reporting

The results of operating segments are reported in a manner consistent with internal reporting.

The Group has four operating segments. In identifying these operating segments, management follows the Group's service lines representing its main products and services. Further details of segment reporting are provided in Note 5.

3.3 Revenue

For the year ended 31 December 2018 the Group used the five-step model as prescribed under IFRS 15 on the Group's revenue transactions. This included the identification of the contract, identification of the performance obligations under same, determination of the transaction price, allocation of the transaction price to performance obligations and recognition of revenue. The point of recognition arises when the Group satisfies a performance obligation by transferring control of a promised good or service to the customer, which could occur over time or at a point in time.

Revenue represents the amount of consideration to which the Group expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

Revenue from goods and services provided to customers not invoiced as at the balance sheet date is recognised as accrued income within trade and other receivables.

The Filta Group executes franchise agreements for each franchise area which set out the terms of the arrangement with the franchisee.

These agreements require the franchisee to pay an initial, non-refundable franchise fee and royalties based upon the number of filtration machines operating in each franchise area.

The franchise fee consists of two distinct components:

· the opening package; and

· the territory fee

The revenue associated with the opening package is recognised when substantially all initial services required by the franchise agreement are performed, which is generally upon the completion of training of the franchisee. Therefore, there is no deferral of this revenue unless the training period spans the year-end.

The territory fee represents the exclusive right to operate in a designated territory for a stated length of time. The territory fee is deferred over the length of the franchise agreement and released to the combined statements of comprehensive income on a straight-line basis.

In circumstances where franchise territories are resold, on an arm's length basis, between our franchisee and a third party, it is our policy to continue to recognise the deferred revenue over the life of the original franchise agreement. Should there be an additional opening package, or territory sale, as part of the resale, these components will follow the aforementioned revenue recognition process under the new franchise agreement policy.

Royalty income is recognised as earned with an appropriate provision for estimated uncollectible amounts, which is included in operating expenses.

Supplies and other revenues are recognised when the product or service is delivered or shipped to customers. Provision for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period in which the related sales are recorded.

There has been no significant change to the Group's accounting policy for revenue as a result of the adoption of IFRS 15 from 1 January 2018.

3.4 Contract acquisition costs

The incremental costs to directly obtain a contract with a customer are capitalised and recognised within contract assets where management expects to recover those costs. Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained are recognised as an expense in the period where incurred. Contract assets are subsequently amortised over the period consistent with the Group's transfer of the related goods or services to the customer.

The costs capitalised include sales commission paid to employees and broker fees paid to third parties where payment is identified as relating directly to the sale of a territory license and initially recognised upon the signing of a customer contract. The costs are amortised over the contract life.

The Group was not impacted by the adoption of IFRS 15 on 1 January 2018 as the previous accounting policies also recognised an asset in relation to sales commissions costs and broker fees paid to third parties.

Management is required to determine the recoverability of contract related assets at each reporting date. An impairment exists if the carrying amount of any asset exceeds the amount of consideration the Group expects to receive in exchange for providing the associated goods and services, less the remaining costs that relate directly to providing those goods and services under the relevant contract. An impairment is recognised immediately where such losses are forecast.

The movement in the contract asset balance in the period therefore represents additional payments made, subsequent amortisation and any required impairment.

3.5 Investments in subsidiaries

Investments in subsidiaries are valued at cost less provision for any impairment, and an impairment review is carried out annually by the directors.

3.6 Property, plant and equipment

All items of property, plant and equipment are initially recorded at cost. All repair and maintenance expenses are recognised in profit or loss when incurred.

After initial recognition, property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment loss.

All items of property, plant and equipment are depreciated to write off the cost of the assets over their estimated useful lives as follows:

Annual rate

Freehold property 2%

Plant and machinery 10-15%

Motor vehicles 25%

Fixtures and fittings 20%

The estimated useful life and depreciation method are reviewed, and adjusted as appropriate, at each reporting date. Fully depreciated assets are retained in the financial statements until they are no longer in use.

3.7 Business combinations and goodwill

Business combinations are accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the group in exchange for control of the acquiree. Acquisition costs are expenses and included in Administrative expenses. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition are recognised at their fair value at the acquisition date.

Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of any contingent consideration deemed to be an asset or liability will be recognised in accordance with IFRS 9, either in profit or loss or in other comprehensive income.

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of cost of the business combination over the group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. It is reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss and is not subsequently reversed.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash generating units (or groups of cash generating units) that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Each unit or group of units to which goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. On disposal of a subsidiary the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

3.8 Intangible assets

Intangible assets identified in a business combination are capitalised at fair value as at the date of the acquisition and their costs are amortised over a straight-line basis over their expected useful lives. Software and development expenditure is capitalised as an intangible asset if the asset created can be identified, if it is probable that the asset created will generate future economic benefits and if the development cost of the asset can be measured reliably. Amortisation expense is charged to administrative expenses in the income statement on a straight-line basis over its useful life. 

The expected useful lives of the assets are as follows:

Customer relationships - 5 to 10 years

Customer contracts - 5 to 10 years

Supply contracts - 15 years

Reacquired Rights - 6.75 years

Software development - 3 years

Those costs associated with maintaining computer software programmes are recognised as an expense as incurred.

3.9 Impairment of tangible and intangible assets

At each reporting end date, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any).

3.10 Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is based on the first in, first out principal and comprise direct materials and, where applicable, direct labour costs and overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. A provision is made, where necessary, in all inventory categories for obsolete, slow moving and defective items.

3.11 Financial instruments

Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the relevant financial instrument. Upon adoption of IFRS 9 on 1 January 2018 the accounting policy for financial instruments is as follows:

Financial assets

(i) Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term liquid investments with original maturities of three months or less. Bank overdrafts are shown within borrowings in current liabilities. For the purpose of the Consolidated Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

(ii) Trade and other receivables

Trade receivables are recognised initially at the invoice amount and subsequently measured at amortised cost, less provision for impairment.

Under IFRS 9, effective from 1 January 2018, the Group elected to use the simplified approach to measure the loss allowance at an amount equal to lifetime expected credit losses for trade receivables and contract assets that result from transactions that are within the scope of IFRS 15, irrespective of whether they contain a significant financing component or not.

IFRS 9 requires the Group to consider forward looking information and the probability of default when calculating expected credit losses. The measurement of expected credit losses reflects an unbiased and probability weighted amount that is determined by evaluating the range of possible outcomes as well as incorporating the time value of money. The Group considers reasonable and supportable customer-specific and market information about past events, current conditions and forecasts of future economic conditions when measuring expected credit losses.

The amount of the provision is the difference between the carrying amount and the present value of estimated future cash flows of the asset, discounted, where material, at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the Income Statement within 'administrative costs'. When a trade receivable is uncollectable, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against 'administrative costs' in the Income Statement.

Financial liabilities

(i) Trade and other payables

Trade payables are not interest-bearing and are initially measured at fair value. Subsequent to initial recognition these liabilities are measured at amortised cost. The Group has contract liabilities in the form of deferred income which arises from consideration received in advance of the satisfaction of performance obligations.

(ii) Borrowings

Interest-bearing loans and overdrafts are initially measured at fair value, net of direct issue costs. These financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised over the period of the relevant liabilities.

3.12 Equity

Equity comprises the following:

· "Share capital" represents the nominal value of equity shares.

· "Share premium" represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue.

· "Other reserves" represent the equity element in the form of share options and warrants, see notes 29 and 32 for additional information on these instruments.

· "Retained earnings" represents retained profits and accumulated losses.

· "Merger reserve" arises on business combination (Note 2).

Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs.

3.13 Share-based payments

(I) Equity-settled share-based payments

Equity-settled share-based payments are measured at the fair value of the awards based on the market value of the shares at the grant date. Fair value excludes the effect of non-market-based vesting conditions. The fair value is charged to the consolidated statement of income and credited to retained earnings on a straight-line basis over the period the estimated awards are expected to vest.

At each balance sheet date, the Company revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in the consolidated statement of income such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to retained earnings.

(II) Cash-settled share-based payments

For cash-settled share-based payments, a liability is initially recognised at fair value based on the estimated number of awards that are expected to vest, adjusting for market and non-market-based performance conditions. Subsequently, at each reporting period until the liability is settled, it is remeasured to fair value with any changes in fair value recognised in the consolidated statement of income.

3.14 Taxation

The income tax expense for the year comprises current and deferred tax.

Current tax

The charge for current taxation is the tax currently payable based on taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting end date.

Deferred tax

Deferred tax is provided using the liability method on differences between the carrying amounts of assets and liabilities in the consolidated balance sheet and the tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition of other assets and liabilities in a transaction which is not a business combination and at the time of the transaction affects neither the tax profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each reporting end date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset is realised based on tax rates that have been enacted or substantively enacted by the reporting end date. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax arising from a business combination is included in the resulting goodwill or excess of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over the business combination costs.

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority.

3.15 Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessees. All other leases are classified as operating leases.

Rentals payable under operating leases, less any lease incentives received, are charged to income on a straight-line basis over the term of the relevant lease except where another more systematic basis is more representative of the time pattern in which economic benefits from the lease asset are consumed.

3.16 Adjusted EBITDA

Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortisation, exceptional items and share based payment expense. The separate reporting of these items helps provide a better picture of the Group's underlying performance. Items which may be included within this category include:

· Costs associated with acquisitions; and

· Other particularly significant or unusual items.

Adjusted EBITDA is presented separately in the statement of comprehensive income as the Directors believe that it needs to be considered separately to gain an understanding of the underlying profitability of the trading businesses.

3.17 Critical accounting judgments and key sources of estimation uncertainty

Revenue recognition (Judgement)

Under IFRS 15, revenue recognition is based on the principle that revenue is recognised when control of a good or service transfers to a customer. Revenue is measured based on the consideration specified in a contract with a customer and is recognised when a customer obtains control of the services. The Group's franchise contracts are defined as having two distinct performance obligations, the Opening Package and the Territory Fee.

A degree of judgement arises with respect to the recognition of revenue on initial franchise fees, giving rise to estimation uncertainty. Management reviews on a regular basis the allocation within an initial franchise fee between the opening package and the territory fee. Whereas the opening package fee is recognised, as explained in note 3.3, generally upon the completion of the training of the franchisee, the portion related to the territory fee is deferred and recognised over the life of the franchise agreement. The total amount currently in deferred income in this respect amounts to £3,659,919 (2017: £2,937,327). The revenue recognised in respect of the opening package and the apportioned territory fee in the current year was £1,374,324 (2017: £1,348,193).

Recoverability of trade receivables (Judgement)

The Group provides credit to customers and as a result there is an associated risk that the customer may not be able to pay outstanding balances.

Under IFRS 9 the Group uses an allowance matrix to measure Expected Credit Loss (ECL) of trade receivables from customers. Loss rates are calculated based on the probability of a receivable progressing through successive chains of non-payment to write-off. The rates are calculated at a business unit level which reflects the risks associated with geographic region, age mix of customer relationship and type of product purchased.

Business combinations (Judgement and estimates)

Where the Group undertakes business combinations, the cost of acquisition is allocated to identifiable net assets and contingent liabilities acquired and assumed by reference to their estimated fair values at the time of acquisition. The remaining amount is recorded as goodwill. The valuation of identifiable net assets involves an element of judgement related to projected results. Fair values that are stated as provisional are not finalised at the reporting date and final fair values may be determined that are materially different from the provisional values stated.

In undertaking this assessment, the Group has performed a valuation of the intangible fixed assets acquired, on the multi-period excess earnings method, for customer relationships and customer contracts. For supply contracts, the royalty relief model has been used. In performing this assessment, it has obtained a third-party assessment of the fair values of these intangibles, based on the expected cashflows arising from the existing customer relationships at the time of acquisition, discounted for depletion in contract revenue.

The multi-period excess earnings methodology is based on expected income streams of the cash generating unit, the significant assumptions used in the model were the discount rate (12%) and the attrition rates (2.5%-5%). If the attrition rates were increased by 10% the intangible asset value would decrease by £93,000. If the discount rate was increased by one percentage point the intangible asset would be £195,000 lower.

The key assumptions in the royalty relief calculation is the royalty rate (2.5%), if this was reduced by one percentage point then the asset would be £289,000 lower.

Given the proximity to the year-end no amortisation charge has been recognised on the intangible assets identified. The expected amortisation charge for the year ended 31 December 2019 relating to the customer relationships and contracts is £583,000 and £48,000 for the supply contract.

Impairment (Judgement and estimates)

The Group is required to review assets for objective evidence of impairment. It does this on the basis of a review of the budget and rolling forecasts, which by their nature are based on a series of assumptions and estimates. The Group has performed impairment tests on those cash generating units which contain goodwill, and on any assets where there are indicators of impairment. The key assumptions associated with these reviews are detailed in Note 17.

Taxation (Judgement and estimates)

The Group is subject to income tax in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions for which the ultimate tax determination is uncertain. The Group recognises liabilities based on estimates of whether additional taxes will be due. Once it has been concluded that a liability needs to be recognised, the liability is measured based on the tax laws that have been enacted or substantially enacted at the end of the reporting period. The amount shown for current taxation includes an estimate for tax uncertainties and is based on the Directors' best probability weighted estimate of the probable outflow of economic resources that will be required to settle the liability. Where the final tax outcome of these matters is different from the amounts that were initially estimated, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised. The Group estimates the most probable amount of future taxable profits, using assumptions consistent with those employed in impairment calculations, and taking into consideration applicable tax legislation in the relevant jurisdiction. These calculations also require the use of estimates.

4. ADOPTION OF NEW AND REVISED STANDARDS EFFECTIVE DURING 2018

Financial instruments

The Group adopted IFRS 9 'Financial Instruments' at 1 January 2018 and applied the new rules in accordance with the transitional provisions. Comparatives for 2017 have not been restated. The Group has assessed the impact of adopting IFRS 9 and the only adjustment is an increase in the provision for losses against trade debtors which was reflected as an adjustment to retained earnings at 1 January 2018 as shown below.

2018

1 January

The adjustment arises from adoption of the expected credit loss model for impairments under IFRS 9. The adoption of this model requires the recognition of impairment provisions based on expected credit losses rather than only incurred credit losses, as is the case under IAS 39. Although there is a transition impact from adoption of the new model there was no material impact on profit before tax for 2018.

The following table shows the original classification and measurement categories of financial assets and liabilities under IAS 39 and the new classification and measurement categories under IFRS 9 as at 1 January 2018. The effect of adopting IFRS 9 on the carrying amounts of financial assets and liabilities relates solely to the new impairment requirements as shown in the previous table, all other carrying values remained the same.

Revenue recognition

The Group has adopted IFRS 15 from 1 January 2018, using the modified retrospective approach and has not restated comparatives for 2017. The Group used the five-step model to develop an impact assessment framework to assess the impact of IFRS 15 on the Group's revenue transactions. The results of our IFRS 15 assessment framework and contract reviews indicated that the impact of applying IFRS 15 on our consolidated financial statements was not material for the Group and there was no adjustment to retained earnings or material impact on the timing of revenue recognition on application of the new rules at 1 January 2018.

A number of other new pronouncements are also effective from 1 January 2018 but they do not have a material impact on the consolidated financial statements. Additional disclosure has been given where relevant.

New standards and interpretations not applied.

New accounting standards and interpretations have been published that are not mandatory for the year ended 31 December 2018. The Group has elected not to early-adopt these new standards and interpretations. The Group's assessment of the impact of these new standards is set out below.

The Group will apply IFRS 16 on 1 January 2019 using the modified retrospective approach. Under this approach, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings on 1 January 2019, with no restatement of comparative information.

The Group has assessed the impact of adopting IFRS 16 with reference to its existing lease portfolio. The most significant part of the portfolio are property and vehicle leases, together with a number of low value equipment leases. The lease liability has been measured at the present value of the remaining lease payments, discounted using the incremental borrowing rate at transition. The right-of-use asset is measured at an amount equal to the lease liability plus any lease payments made at or before the commencement date and any initial direct costs incurred by the lessee. Transition recognition exemptions relating to short-term and low value leases have been applied as well as practical expedients taken, where available, to simplify the transition process.

It is estimated that on transition the Group will recognise a right-of-use asset and corresponding lease liability of approximately £0.5m. The impact on the income statement in 2019 is expected to be negligible with the operating lease expense recognised under the existing standard (IAS 17) being replaced by depreciation and finance costs. There will be no impact on the Group's cash and cash equivalents.

5. SEGMENT ANALYSIS

Operating segments have been identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker (which takes the form of the Board of Directors), in order to allocate resources to the segment and to assess its performance.

The Directors consider that the Group currently has four reportable segments: the marketing and execution related to Franchise Development; provision of services and supplies to the fryer management sector; servicing the refrigerator seal replacement market; and the provision of design, installation and services provided to the grease management market. The Group also has three geographic segments: UK, North America and Europe.

Revenue and non-current assets by origin of geographical segment for all entities in the Group is as follows:

Product and services revenue analysis

Management measures revenues by reference to the Group's core services and products and related services, which underpin such income. No customer has accounted for more than 10% of total revenue during the periods presented. Assets and liabilities are not fully allocated to the individual categories as such information is not provided to the chief operating decision maker.

Operating segment performance for the year ended 31 December 2018:

Operating segment performance for the year ended 31 December 2017:

Exceptional items consist of the following:

Acquisition related costs are attributable to the FiltaFry Deutschland GmbH and Watbio Holdings Limited acquisitions while the legal and professional costs relate primarily to the disposal of Filta Refrigeration assets.

8. REMUNERATION OF KEY MANAGEMENT PERSONNEL

Reconciliation of corporation taxation:

The Filta Group's effective tax rate for the year ended 31 December 2018 was 24.2% (2017: 51.3%). The effective rate is an amalgamation of mainly UK, US and Canadian rates for the periods reported. The change from prior year has been particularly affected by the 2017 non-recurring/non-cash tax charge related to the revaluation of U.S. deferred tax assets due to the U.S. rate reduction. For the prior year the effective tax rate excluding the tax charge on the U.S. rate reduction was 35.1%.

The Filta Group has tax losses of approximately £667,480 (2017: £667,480) to carry forward against future profits. The UK tax losses have no expiry date and a deferred tax asset of £128,460 (2017: £124,249) has been recognised in respect of them.

The U.S. subsidiary has no available tax losses.

11. DEFERRED TAX ASSETS / LIABILITIES

The deferred tax balances relate to temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial information as summarised below.

The movement in the Group's deferred tax liability during the year is as follows:

12. Discontinued operations

In December 2017, the Group agreed terms to sell certain assets of its Filta Refrigeration business to Scotia Cooling Solutions Ltd ('Scotia'). The deal completed on 4 January 2018. 

Consideration for the disposal is a combination of £0.1m cash and Scotia agreed to take on all employees and to novate and/or refinance certain Filta Refrigeration vehicles.

The results of the discontinued operations, which have been included in the consolidated income statement, were as follows: