React Group Regulatory News (REAT)

REACT GROUP PLC

15 February 2019

Publication of 2018 Report & Accounts

The Board of REACT Group PLC has today published the Report & Accounts for the year ended 30 September 2018.

The accounts, which will be sent to shareholders who have elected to receive a hard copy, are otherwise available also from the Company Secretary at c/o International Registrars Limited, Finsgate, 5-7 Cranwood Street London EC1V 9EE and are also available on the Company's website: www.reactplc.co.uk. Extracts are set out below.

Notice of the Annual General Meeting, which will be held at 12 noon on Tuesday 12 March 2019, at The Holiday Inn Leicester, 129, Nicholas Circle, Leicester, LE1 5LX is also available on the Company's website.

For further information, please contact:

REACT Group PLC

Executive Chairman's Statement

For the year ended 30 September 2018

The financial year has been one of significant change to address the challenges in the structure of the Company and opportunities in the business. The Company severed the final administrative ties with its previous owner, Autoclenz. This resulted in REACT Group establishing its own fit-for-purpose administration and office infrastructure in Swadlincote, Derbyshire.

The Company simplified its business model from three operating businesses to just one, focusing all its resource on the REACT Specialist Cleaning business, where the Company provides a strong competitive proposition and enjoys good customer advocacy within a broad mix of often high-profile organisations in both the private and public sector.

To support the evolution of the Company there have been several management changes, some of which have taken place post-period, all designed to establish a strong, well-motivated team aimed at building a growing and profitable specialist cleaning business.

Throughout the year management has put in place the infrastructure and financial controls to provide clarity on the business relationships with its Clients and the profitability of each of its service streams. This is helping the Company to focus on creating value for its Clients in key areas of demand and thereby differentiate its proposition to generate profit and recurring business for its unique brand of service.

Whilst re-engineering the business the Company has successfully taken on new Clients and continued to work for important existing ones too. The Company provides its services through both intermediaries such as Facility Management firms (FM) and direct to end-Clients, although we are beginning to see demand increasing for a direct relationship with end-Clients.

Financial Review

During the year ended 30 September 2018 turnover was £3.30m, an increase of 25% on the prior year (2017: £2.64m). The overall reported loss for the year was £1.93m, which includes a (non-cash) impairment charge of £1.11m against purchased goodwill of £1.28m in the balance sheet and an impairment charge of £76,000 against the Acquired Customer List (this relates to the value of consideration paid for REACT Group during the reverse takeover of 2015).

The operating loss for the Group from continuing operations (excluding the impairment charge) was £769,000 (2017: £393,000). Of this £155,000 relates to one-off charges due to redundancies and other one-off restructuring charges. Also, as a prudent measure, an increase to the bad debt provision is also included within the operating loss, it is £339,000 at the year end (2017: £40,000). Cash at the year-end was £423,000 (2017: £631,000). Within these figures the Company has re-engineered the business and established its own independent administration and office infrastructure. In addition, it has begun to eliminate poorly priced contracts and re-structure its fleet of vans (used to operate the business), which as a result will lead to a material reduction in operating costs going forward.

Strategy

REACT Group has core skills and experience in specialist cleaning beyond many of our competitors, allowing us to be a reliable solution to the challenging circumstances that arise across the Company's Client base.

REACT Group is an extreme cleaning company that tackles cleaning problems that non-specialists cannot or do not wish to cope with. Our highly trained operators deal with many difficult, yet essential cleaning tasks, across a broad range of circumstances, including on the UK's transport system, in prisons and custody cells, at crime scenes, clearing drug dens and property damaged by tenants and squatters, specialist vehicle cleans, clearing anti-social waste and damage in public spaces and both routine and specialist cleaning in hospitals and the health service.

Approximately half the business turnover comes from 24/7 emergency specialist cleaning and the other half arises from several long-term specialist contracts for various public and private Clients. Most of the new business during the year has come because of the Company's reputation, due to the excellent standard of work performed by our operators. We intend to leverage this further alongside sensible levels of investment in targeted sales and marketing resource, some of which has already been put in place post-period.

Outlook

With a rationalised infrastructure, a fit-for-purpose and well-motivated management team and a competitive service proposition in an area of the market often left well alone by competitors, we have established a solid platform from which we can now grow and begin our return to profit.

As we complete the changes to the management team, the Board and its advisors, the Company has the strength in depth to execute on its strategy of growth in both the 24/7 emergency service and through taking on new long-term specialist contracts in our core areas of expertise.

Work on greater financial controls means that the Company is moving closer to establishing a sound financial outlook in the current year.

Gill Leates

Executive Chairman

14 February 2019

Consolidated Statement of Comprehensive Income

For the year ended 30 September 2018

Consolidated Statement of Financial Position

As at 30 September 2018

These financial statements were approved by the Board of Directors on 14 February 2019 and were signed on its behalf by:

Gill Leates

Director

Consolidated Statement of Changes in Equity

For the year ended 30 September 2018

Share capital is the amount subscribed for shares at nominal value. Share premium represents amounts subscribed for share capital in excess of nominal value.

Merger relief reserve arises from the 100% acquisition of REACT SC Holdings Limited and REACT Specialist Cleaning Limited in August 2015 whereby the excess of the fair value of the issued ordinary share capital issued over the nominal value of these shares is transferred to this reserve in accordance with section 612 of the Companies Act 2006.

Accumulated deficit represents the cumulative losses of the Group attributable to the owners of the company.

Reverse acquisition reserve is the effect on equity of the reverse acquisition of REACT Specialist Cleaning Limited.

The capital redemption reserve represents the value of deferred shares cancelled as a result of a share buyback.

Consolidated Statement of Cash Flows

For the year ended 30 September 2018

Notes to the Consolidated Statement of Cash Flows

For the period ended 30 September 2018

1. Reconciliation of loss before income tax to cash outflow from operations

2. Cash and cash equivalents

Company Statement of Financial Position

As at 30 September 2018

These financial statements were approved and authorised for issue by the Board of Directors on 14 February 2019 and were signed on its behalf by:

G M Leates

Director

Company Registration no. 05454010

Company Statement of Changes in Equity

For the year ended 30 September 2018

Share capital is the amount subscribed for shares at nominal value. Share premium represents amounts subscribed for share capital in excess of nominal value.

Merger relief reserve arises from the 100% acquisition of REACT SC Holdings Limited and REACT Specialist Cleaning Limited in August 2015 whereby the excess of the fair value of the issued ordinary share capital issued over the nominal value of these shares is transferred to this reserve in accordance with section 612 of the Companies Act 2006.

Accumulated deficit represents the cumulative losses of the company attributable to the owners of the company.

The capital redemption reserve represents the value of deferred shares cancelled as a result of a share buyback.

Company Statement of Cash Flows

For the year ended 30 September 2018

Notes to the Company Statement of Cash Flows

1. Reconciliation of loss before income tax to cash generated from operations

2. Cash and cash equivalents

Notes to the Financial Statements

For the year ended 30 September 2018

1. General Information

Basis of preparation and consolidation

The Company is based in the United Kingdom and has been incorporated in England and Wales. Details of the registered office, the officers and advisors to the Company are presented on the Company Information page at the start of this report.

The consolidated financial statements present the results of the company and its subsidiaries ('the Group') as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full. Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

The equity structure appearing in the Group financial statements reflects the equity structure of the legal parent, REACT Group PLC, including the equity instruments issued in order to effect reverse acquisition accounting.  The merger relief reserve represents a premium on the issue of the ordinary shares for the acquisition of subsidiary undertakings. The relief is only available to the issuing company securing at least a 90% equity holding in the acquired undertaking in pursuance of an arrangement providing for the allotment of equity shares in the issuing company on terms that the consideration for the shares allotted is to be provided by the issue of equity shares in the other company.

2. Accounting Policies

Statement of compliance

The consolidated financial statements of REACT Group PLC have been prepared in accordance with International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs) and International Financial Reporting Interpretations Committee (IFRIC) interpretations (collectively 'IFRSs') as adopted for use in the European Union and as issued by the International Accounting Standards Board and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

Basis of preparation

The financial statements have been prepared under the historical cost convention. The principal accounting policies are summarised below. They have all been applied consistently throughout the period under review.

Going concern

Following its review of the Group's financial plans, the board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

New and amended standards adopted by the Group

There are no IFRSs or IFRIC interpretations that are effective for the first time in this financial period that have had a material impact on the Group.

New Standards, amendments and interpretations issued but not effective

The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group. The Group does not intend to apply any of these pronouncements early.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods and services supplied, stated net of discounts, returns and value added taxes. The Group recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Group's activities, as described below. The Group bases its estimate of return on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Rendering of services

The Group provides extreme cleaning services. For rendering of services, revenue is recognised in the accounting period in which the services are rendered, by reference to stage of completion of the specific transaction and assessed on the basis of the actual service provided as a proportion of the total services to be provided.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

(i) Current tax

Current taxes are based on the results shown in the financial statements and are calculated according to local tax rules using tax rates enacted or substantially enacted by the statement of financial position date. Income tax is recognised in the income statement or in equity if it relates to items that are recognised in the same or a different period, directly in equity. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities.

(ii) Deferred tax

Deferred tax is provided, using the liability method, on temporary differences at the statement of financial position date between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences.

Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differenced, and the carrying forward or unused tax assets and unused tax losses can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilised. Conversely, previously unrecognised deferred tax assets are recognised to the extent that it is probable that sufficient taxable profit that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on the tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date.

Investments

Investments in subsidiaries are held at cost less any impairment.

Financial instruments

Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the instrument.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand.

Operating leases

Rent payable under operating leases is not recognised in the Group's Statement of Financial Position; such costs are expensed on a straight line basis over the term of the lease.

Trade and other receivables

Trade and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to the initial recognition, trade and receivables are measured at amortised cost less impairment losses for bad and doubtful debts, except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts. Impairment losses for bad and doubtful debts are measured as the difference between the carrying amount of financial asset and the estimated future cash flows, discounted where the effect of discounting is material.

Fair values

The carrying amounts of the financial assets and liabilities such as cash and cash equivalents, receivables and payables of the company at the statement of financial position date approximated their fair values, due to relatively short term nature of these financial instruments

Trade and other payables

Trade and other payables are initially recognised at fair value and thereafter stated in amortised cost, except where the payables are interest free loans made by related parties without any fixed repayment terms or the effect of discounting would be immaterial, in which case they are stated at cost.

Impairment of non-financial assets

At each statement of financial position date, the Group reviews the carrying amounts of its investments 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). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a re-valued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior periods. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Capital management

Capital is made up of stated capital, premium and retained earnings. The objective of the Group's capital management is to ensure that it maintains strong credit ratings and capital ratios. This will ensure that the business is correctly supported and shareholder value is maximised.

The Group manages its capital structure through adjustments that are dependent on economic conditions. In order to maintain or adjust the capital structure, the company may choose to change or amend dividend payments to shareholders or issue new share capital to shareholders. There were no changes to the objectives, policies or processes during the year ended 30 September 2018.

Equity instruments

Equity instruments issued by the company are recorded at the proceeds received. Incremental costs directly attributable to the issuance of new ordinary shares are deducted against share capital.

Share-based compensation

The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each statement of financial position date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

The fair value of share-based payments recognised in the income statement is measured by use of the Black Scholes model, which takes into account conditions attached to the vesting and exercise of the equity instruments. The expected life used in the model is adjusted; based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The share price volatility percentage factor used in the calculation is based on management's best estimate of future share price behaviour and is selected based on past experience, future expectations and benchmarked against peer companies in the industry.

Property, plant and equipment

Property, plant and equipment are stated at historical cost less subsequent accumulated depreciation and accumulated impairment losses, if any. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.

Depreciation on property, plant and equipment is calculated using the straight-line method to write off their cost over their estimated useful lives at the following annual rates:

Computer hardware 20%

Computer software 33%

Motor vehicles 25%

Plant, machinery & equipment 20%

Useful lives and depreciation method are reviewed and adjusted if appropriate, at the end of each reporting period. During the year ended 30 September 2018 the depreciation rates used were reviewed and, based on this review, the estimated useful lives of motor vehicles and plant, machinery and equipment were extended to 4 years and 5 years respectively.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the relevant asset, and is recognised in profit or loss in the period in which the asset is derecognised.

Intangibles

Purchased goodwill represents the excess of the cost of acquisition over the company's interest in the fair value of the identifiable assets and liabilities of a business acquired at the date of acquisition.

Purchased goodwill is recognized as an asset, reviewed for impairment at least annually and carried at cost less accumulated impairment losses. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. Purchased goodwill is deemed to have an indefinite useful life due to the expectation of the acquired business to operate in perpetuity, so is not amortised.

Customer list represents the value placed on the retained customer list at the acquisition date. The value recognises that customers, although contracted to the company are not under an obligation to use the company services.

The customer list will be amortised over a period of 5 years. An impairment review will be conducted each year and will look at significant changes in the turnover received from major customers.

Employee benefit costs

The group operates a defined benefit contribution pension scheme for eligible employees. Contributions payable are charged to the income statement in the period to which they relate.

Exceptional items

Exceptional items are material items of income or expenses which have arisen in the normal course of business but are not expected to re-occur on a regular basis.

Critical accounting judgments and key sources of estimation uncertainty

The preparation of the financial statements requires management to make estimates and assumptions concerning the future that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

The resulting accounting estimates will, by definition, differ from the related actual results.

· Estimated impairment of goodwill

The directors have carried out a detailed impairment review in respect of goodwill. The Group assesses at each reporting date whether there is an indication that an asset maybe impaired, by considering the net present value of discounted cashflow forecasts which have been discounted at 15%. The cashflow projections are based on the assumption that the Group can realise projected sales.

· Share based payments

The fair value of share based payments recognised in the income statement is measured by use of the Black Scholes model, which takes into account conditions attached to the vesting and exercise of the equity instruments. The expected life used in the model is adjusted; based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The share price volatility percentage factor used in the calculation is based on management's best estimate of future share price behaviour and is selected based on past experience, future expectations and benchmarked against peer companies in the industry.

· Amortisation

Management have estimated that the useful life of the fair value of the customer lists acquired on the acquisition to be 5 years. Although customers generally are on rolling annual contracts or projects management believe that a useful life of 5 years is a fairer representation based on the historical trading of the REACT division with its customers. The estimate will be reviewed annually and revised if the useful life is deemed to be lower or higher than 5 years based on the customer trading of existing clients of REACT division

· Customer list valuation

Management undertake an impairment review annually of all intangible assets held. Management review goodwill by assigning it to a cash generating unit (CGU) and calculate a discounted cash flow forecast based on the assumptions outlined in Note 9. These assumptions are reviewed annually as the business changes. Customer lists are reviewed for impairment annually also using similar assumptions.

· Bad debt provision

We perform ongoing credit evaluations of our customers and grant credit based on past payment history and industry conditions. Customer payments are closely monitored and a provision for doubtful debts is established based on management's assessment of the expected collectability of all accounts receivable.

3. Segmental Reporting

In the opinion of the directors, the Group has one class of business, being that of specialist cleaning and decontamination services. The Group's primary reporting format is determined by the geographical segment according to the location of its establishments. There is currently only one geographic reporting segment, which is the UK. All costs are derived from the single segment.

4. Employees and directors

Details of emoluments received by Directors of the Group for the year ended 30 September 2018 were as follows:

5. Administrative expenses

The non-recurring exceptional costs of £1,337,000 included in administrative expenses above include mainly relate to impairment charges totalling £1,182,000 relating to the Acquired Customer list, which has been fully impaired (£76,000) and Purchased Goodwill which has been assessed and partly impaired (£1,106,000). The balance of the exceptional costs mainly relates to recruitment fees and other employee related costs associated with the changes in the management of the business during the period under review.

6. Income Tax

Analysis of tax expense:

7. Loss per Share

Basic loss per share is calculated by dividing the earnings attributable shareholders by the weighted average number of ordinary shares outstanding during the year being 287,298,164 (2017: 275,407,753)

Basic and diluted earnings per share are the same, since where a loss is incurred the effect of outstanding share options and warrants is considered anti-dilutive and is ignored for the purpose of the loss per share calculation. As at 30 September 2018 there were 2,380,000 (2017: 2,380,000) outstanding share warrants and 2,754,077 (2017: 16,524,464) options which are potentially dilutive.

8. Company's result for the period

The company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the parent company income statement account. The result for the parent company for the period was a loss of £2,811,000 (2017: loss of £207,000).

9. Intangible assets

The purchased goodwill relates to intangible assets that do not qualify for separate recognition on the acquisition of the REACT specialist cleaning services business, an unincorporated division of Autoclenz Limited.

The Group assesses at each reporting date whether there is an indication that an asset may be impaired, by considering the net present value of discounted cash flow forecasts. Purchased goodwill has been allocated for impairment testing purposes to the individual businesses acquired which are also the cash‐generating units ("CGU") identified. The recoverable amount of a CGU is determined based on value in use calculations using cash flow projections based on financial budgets approved by the Directors. The projections are based on the assumption that the company can realise projected sales. A prudent approach has been applied with no residual value being factored into these calculations. If the projected sales do not materialise there is a risk that the total value of the intangible assets shown above would be impaired. A pre-tax discount rate of 15% per annum has been applied to the cashflow projections, taking into consideration the expected rate of return and various risks relating to the CGU.

As a result of this annual review, it was decided that given the current trading performance of the business and the short/medium term outlook, it would be prudent to fully impair the value of the Acquired Customer List and partially impair the carrying value of the Purchased Goodwill .

The key assumptions used in the estimation of the revised value of Purchased Goodwill are set out below. The values assigned to the key assumptions represent management's assessment of future revenues and cash flows of the CGU. The most recent financial results and forecast approved by management for the next five years were used and a terminal growth rate thereafter. The projected results were discounted at a rate which is a prudent evaluation of the time value of money and the risks specific to the CGU.

Key assumptions used:

10. Plant and equipment

11. Investment in subsidiary undertakings