NAFICI_ENVIRONMENTAL_RESE - Accounts

The directors present their annual report and financial statements for the year ended 31 March 2019.

The principal activity of the company is the development and exploitation of the EcoPulping process – a method, invented by the founders of the company, of converting agricultural waste such as wheat or rice straw into pulp suitable for use in paper or packaging mills. EcoPulping is an alternative to conventional methods of producing pulp, which use either hardwood or recycled material (or a mixture of the two). Compared to these conventional methods, EcoPulping uses 50% less energy, since the EcoPulping process takes place at significantly lower temperatures and pressures. The raw material for the EcoPulping process is agricultural material which would otherwise need to be ploughed into the ground after harvesting, left to rot, or (in some regions) burnt.

In addition to the company’s pilot plant in Sussex, UK, the EcoPulping process has made significant advances during the year:

•     A patent was granted for the EcoPulping process in the USA in March 2019. This extends the IP protection for the company’s proprietary process to one of the largest cereal growing regions in the world. A patent was granted in the UK in 2017, and applications are pending in Canada, China, the EU, Australia and India.

•     A joint venture agreement has been signed with a Chinese company for the exclusive exploitation of the EcoPulping process in China. A detailed design has been drawn up for a plant in Linqing, Shandong Province, for an initial 200 tonnes per day EcoPulping plant. The ground breaking ceremony for this new plant took place on 12 May 2019. NER will earn project management and engineering fees during the construction of this plant, and income on sales of the pulp produced.

•     A feasibility study is being undertaken for a 100 tonne per day EcoPulping plant in Cairo, Egypt, which will convert date palm leaf waste into paper pulp. During the year, NER earned fees for conducting this feasibility study. Should the project proceed, NER will undertake detailed plant design and equipment procurement for the customer in Egypt, and earn royalties on sales of pulp once the plant is in production.

•     During the year, a potential customer applied for EIS relief for a new company to be established in order to build the first production scale EcoPulping plant in the UK. Should EIS relief be granted NER expects to earn project management and design fees during the year ending 31 March 2020.

•     NER has been appointed to a study being conducted by the University of Bangor, supported by Innovate UK, into the feasibility of building small scale EcoPulping plants to convert maize stover into packaging pulp in Uganda. A significant proportion of farmers’ harvests in Uganda (and other developing countries) rots while stored, or before it can reach consumers. EcoPulping presents an opportunity to produce affordable packaging, locally, to help alleviate this problem.

The Directors are pleased with progress during the year, with the company having made the first positive EBITDA return of £247,000 (2018 – £12,000 loss). The directors look forward to expanding the ways in which the company’s EcoPulping intellectual property can be exploited for the benefit of the natural environment and local farming communities in the year ahead.

The directors who held office during the year and up to the date of signature of the financial statements were as follows:

This report has been prepared in accordance with the provisions applicable to companies entitled to the small companies exemption.

In order to assist you to fulfil your duties under the Companies Act 2006, we have prepared for your approval the financial statements of Nafici Environmental Research (NER) Limited for the year ended 31 March 2019 which comprise the profit and loss account, the balance sheet, the statement of changes in equity and the related notes from the company’s accounting records and from information and explanations you have given us.

As a practising member firm of the Institute of Chartered Accountants in England and Wales (ICAEW), we are subject to its ethical and other professional requirements which are detailed at http://www.icaew.com/en/members/regulations-standards-and-guidance.

This report is made solely to the Board of Directors of Nafici Environmental Research (NER) Limited, as a body, in accordance with the terms of our engagement letter dated 1 April 2019. Our work has been undertaken solely to prepare for your approval the financial statements of Nafici Environmental Research (NER) Limited and state those matters that we have agreed to state to the Board of Directors of Nafici Environmental Research (NER) Limited, as a body, in this report in accordance with ICAEW Technical Release 07/16 AAF. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than Nafici Environmental Research (NER) Limited and its Board of Directors as a body, for our work or for this report.

It is your duty to ensure that Nafici Environmental Research (NER) Limited has kept adequate accounting records and to prepare statutory financial statements that give a true and fair view of the assets, liabilities, financial position and profit of Nafici Environmental Research (NER) Limited. You consider that Nafici Environmental Research (NER) Limited is exempt from the statutory audit requirement for the year.

We have not been instructed to carry out an audit or a review of the financial statements of Nafici Environmental Research (NER) Limited. For this reason, we have not verified the accuracy or completeness of the accounting records or information and explanations you have given to us and we do not, therefore, express any opinion on the statutory financial statements.

For the financial year ended 31 March 2019 the company was entitled to exemption from audit under section 477 of the Companies Act 2006 relating to small companies.

The directors acknowledge their responsibilities for complying with the requirements of the Companies Act 2006 with respect to accounting records and the preparation of financial statements.

The members have not required the company to obtain an audit of its financial statements for the year in question in accordance with section 476.

These financial statements have been prepared in accordance with the provisions applicable to companies subject to the small companies regime.

Nafici Environmental Research (NER) Limited is a private company limited by shares incorporated in England and Wales. The registered office is Tetherstones Stables, Hammerpond Road, Horsham, West Sussex, RH13 6PE.

These financial statements have been prepared in accordance with FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (“FRS 102”) and the requirements of the Companies Act 2006 as applicable to companies subject to the small companies regime. The disclosure requirements of section 1A of FRS 102 have been applied other than where additional disclosure is required to show a true and fair view.

The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £.

The financial statements have been prepared under the historical cost convention. The principal accounting policies adopted are set out below.

These financial statements for the year ended 31 March 2019 are the first financial statements of Nafici Environmental Research (NER) Limited prepared in accordance with FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland. The date of transition to FRS 102 was 1 April 2017. The reported financial position and financial performance for the previous period are not affected by the transition to FRS 102.

Turnover is recognised at the fair value of the consideration received or receivable for goods and services provided in the normal course of business, and is shown net of VAT and other sales related taxes. The fair value of consideration takes into account trade discounts, settlement discounts and volume rebates.

When cash inflows are deferred and represent a financing arrangement, the fair value of the consideration is the present value of the future receipts. The difference between the fair value of the consideration and the nominal amount received is recognised as interest income.

Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer (usually on dispatch of the goods), the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the entity and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Revenue from contracts for the provision of professional services is recognised by reference to the stage of completion when the stage of completion, costs incurred and costs to complete can be estimated reliably. The stage of completion is calculated by comparing costs incurred, mainly in relation to contractual hourly staff rates and materials, as a proportion of total costs. Where the outcome cannot be estimated reliably, revenue is recognised only to the extent of the expenses recognised that it is probable will be recovered.

Research expenditure is written off against profits in the year in which it is incurred. Identifiable development expenditure is capitalised to the extent that the technical, commercial and financial feasibility can be demonstrated.

Intangible assets acquired separately from a business are recognised at cost and are subsequently measured at cost less accumulated amortisation and accumulated impairment losses.

Intangible assets acquired on business combinations are recognised separately from goodwill at the acquisition date where it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity and the fair value of the asset can be measured reliably.

Amortisation is recognised so as to write off the cost or valuation of assets less their residual values over their useful lives on the following bases:

Tangible fixed assets are initially measured at cost and subsequently measured at cost or valuation, net of depreciation and any impairment losses.

Depreciation is recognised so as to write off the cost or valuation of assets less their residual values over their useful lives on the following bases:

The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is credited or charged to profit or loss.

Interests in subsidiaries, associates and jointly controlled entities are initially measured at cost and subsequently measured at cost less any accumulated impairment losses. The investments are assessed for impairment at each reporting date and any impairment losses or reversals of impairment losses are recognised immediately in profit or loss.

A subsidiary is an entity controlled by the company. Control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities.

An associate is an entity, being neither a subsidiary nor a joint venture, in which the company holds a long-term interest and where the company has significant influence. The company considers that it has significant influence where it has the power to participate in the financial and operating decisions of the associate.

Entities in which the company has a long term interest and shares control under a contractual arrangement are classified as jointly controlled entities.

At each reporting period 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). Where it is not possible to estimate the recoverable amount of an individual asset, the company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

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 (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Recognised impairment losses are reversed if, and only if, the reasons for the impairment loss have ceased to apply. Where an impairment loss subsequently reverses, the carrying amount of the asset (or 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 (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, 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.

Cash at bank and in hand are basic financial assets and include cash in hand, deposits held at call with banks, other short-term liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities.

The company has elected to apply the provisions of Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instruments Issues’ of FRS 102 to all of its financial instruments.

Financial instruments are recognised in the company's balance sheet when the company becomes party to the contractual provisions of the instrument.

Financial assets and liabilities are offset, with the net amounts presented in the financial statements, when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

Basic financial assets, which include debtors and cash and bank balances, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.

Basic financial liabilities, including creditors, bank loans, loans from fellow group companies and preference shares that are classified as debt, are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.

Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.

Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.

Equity instruments issued by the company are recorded at the proceeds received, net of transaction costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the company.

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

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the profit and loss account 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 company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting end date.

Deferred tax liabilities are generally recognised for all timing differences and deferred tax assets are recognised to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits. Such assets and liabilities are not recognised if the timing difference arises from goodwill or from the initial recognition of other assets and liabilities in a transaction that 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. Deferred tax is charged or credited in the profit and loss account, 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 assets and liabilities are offset when the company 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.

The costs of short-term employee benefits are recognised as a liability and an expense, unless those costs are required to be recognised as part of the cost of stock or fixed assets.

The cost of any unused holiday entitlement is recognised in the period in which the employee’s services are received.

Termination benefits are recognised immediately as an expense when the company is demonstrably committed to terminate the employment of an employee or to provide termination benefits.

Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing at the dates of the transactions. At each reporting end date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the reporting end date. Gains and losses arising on translation are included in the profit and loss account for the period.

During the year the directors concluded that development costs previously written off to the profit and loss account should instead be capitalised in accordance with note 1.3 in order to better reflect the nature of the company’s activities, which is to develop processes to transform agricultural waste into paper pulp without causing any harm to nature. The directors believe that development expenditure to date is an asset to the company rather than a sunk cost and the accounting policy has been changed accordingly.

The comparative figures have been adjusted to show capitalised development expenditure of £383,705 together with accumulated amortisation of £109,777. Of this, administrative expenses of £57,704 relating to the year ended 31 March 2018 have been capitalised and amortisation of £35,485 has been charged increasing profit for that year by £22,219, with the remainder, £251,709 reflected as an increase in retained profit at 1 April 2017.

The effect of this change in accounting policy on the current year is to increase profit by the capitalised expenditure of £141,510 less the amortisation on that balance of £7,076.

Patent costs have also been capitalised for the same reason by way of a change in accounting policy (see note 1.4). The comparative figures have been adjusted to show capitalised patent expenditure of £32,760 although amortisation only commenced in the year ended 31 March 2019. Of this, administrative expenses of £12,458 relating to the year ended 31 March 2018 have been capitalised increasing profit for that year by £12,458, with the remainder, £20,302 reflected as an increase in retained profit at 1 April 2017.

The effect of this change in accounting policy on the current year is to increase profit by the capitalised expenditure of £16,694 less the amortisation on that balance of £835.

Corrections of prior period errors

Further adjustments have been made to these financial statements as a result of material, individual prior period errors.

A loan of £12,000 and a Paypal account with a balancing owing of £4,599 were previously included in creditors. These balances have been removed with a corresponding increase to retained profit at 1 April 2017 of £16,599.

Interest on other loans had however been excluded from prior year financial statements. The comparative figures have been adjusted to show an increase in loans of £32,478 of which £22,285 relates to the period before 1 April 2017 with an adjustment to retained profit at that date with a reduction to profit of £10,193 in the year ended 31 March 2018.

Share premium relating to an issue of shares in March 2018 had previously been incorrectly recorded only to the extent of a £66,842 loan. The comparative figures have therefore been adjusted to remove this loan and replace it with share premium of £86,842 and a debtor of £20,000.

Finally, it was agreed that £350,000 of the director’s loan account should not have been treated as due within one year. The comparative figures have been adjusted accordingly. The company plans to convert this amount into 3.5% cumulative redeemable preference shares as the directors regard this amount to be part of the core capital of the company.

The average monthly number of persons (including directors) employed by the company during the year was 4 (2018 - 4).