flowgroup annual report 2014.compressed

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Energy reimagined

Flowgroup plcAnnual Report and Accounts for the year ended 31 December 2014

Stock code: FLOW.L

Our Annual Report provides a summary of our achievements and finances in 2014. It explains the benefits of our patented technology platform and sets out our strategy for growth and for value creation both in the UK and internationally over the coming years.

Welcome to FlowFlowgroup is a new kind of energy company. By delivering affordable microCHP technology into the mass market for the first time, empowering millions of customers to generate their own low-cost, low-carbon electricity, well change the way people think about energy.

In the UK we provide competitive home energy alongside our patented electricity-generating microCHP boiler. In international markets were leveraging our microCHP technology platform to create partnerships and alliances with a vision of delivering over 1m sales a year, globally.

In achieving our goals we live our values. We believe in people and their potential, the power of inspiration, creating the clever alternative, the importance of changing the game and in delivering clear benefits for customers, society, the environment and our shareholders.

Welcome to our report

Why were different Patented technology platform providing the

worlds first electricity-generating boiler with the potential to be priced for the mass market

Close relationship with partner Jabil, leveraging their manufacturing expertise, global market access and product knowledge

UK home energy brand with significant potential for growth

Close, utility-based relationship with customers, facilitating potential cross-sell of additional products and services

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OPERATING REVIEW

HOW WE CREATE VALUE

Contents

Our Business and Strategy

02 Group Overview Highlights

04 Group Overview Our Organisation

06 Group Overview Value Creation

08 Chairmans Statement

10 Marketplace

11 Strategy

Our Performance

12 Strategic Report

19 Corporate Social Responsibility

Our Governance

20 Board of Directors

22 Directors Report

27 Directors Remuneration Report

Our Financials

29 Independent Auditors Report (Group)

30 Group Income Statement

31 Group Statement of Changes in Equity

32 Group Statement of Financial Position

33 Group Statement of Cash Flows

34 Notes to the Group Financial Statements

59 Independent Auditors Report (Company)

60 Company Balance Sheet

61 Notes to the Company Balance Sheet

Shareholder Information

69 Advisers and Company Information

70 Shareholder Notes

2014 was a year of achievement

For consumers, society and our shareholders

CSR

Flowgroup is a values-driven organisation

OUR ORGANISATION

Delivering success across our Group

STRATEGY

Energy, microgeneration, efficient products

MARKETPLACE

UK market and global opportunities

Following the launch of our electricity-generating Flow boiler we believe we are now in a position to take advantage of the commercial possibilities that this game-changing product presents. We believe we are well set for a year of good progress in 2015.

Clare Spottiswoode, Chairman of Flowgroup. said:

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Our Businessand Strategy

Our Performance

OurGovernance

OurFinancials

ShareholderInformation

www.flowgroup.uk.comAnnual Report 2014

Group overview Highlights

Flowgroup signed testing agreements with NRG Energy in the US and with a large global utility for potential expansion into key international markets.

Manufacturing of the Flow boiler by Jabil began in Livingston, just outside Edinburgh, in November 2014.

Post year-end, the Flow boiler launched to the UK market in January 2015, supported by regional PR and marketing campaigns.

Operational

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Flowgroup plc

02 03

Financial Operational Post year end Revenue of 33.4m (2013: 13.8m)

Operating loss of 10.0m (2013: 7.7m) reflecting infrastructure and resource costs to support business growth and commercialisation

Cash at 31 December 2014 of 8.4m (31 December 2013:17.4m)

Awarded CE Certification from the British Standards Institution (BSI), for the Flow boiler

Increased the number of Flow boilers covered by our exclusive manufacturing agreement with Jabil from 390,000 to 500,000, and agreed to collaborate on future product development

Opened dedicated installer training school with the capacity to train 3,000 installers a year

Signed agreements with Zopa for the provision of personal finance to Flow customers and ongoing discussions with partners for national surveying and installation services

Re-launched Flows home energy proposition, growing the customer base to around 66,000 customer fuel accounts at year end

Installed Flow Battery products in North American with Trane Canada and in the UK with National Grid UK

Market launch of the Flow boiler during January 2015

Boiler production line received CE Type Approval during April 2015

Re-entered the energy market with the Connect tariff

Raised 21.3m (net) in equity fundraise, including 7.4m from Jabil, to accelerate future growth

Powering the connected futureFlowgroup is a new kind of energy company and our vision reflects that. We want to change the way people think about energy by bringing them closer to it, by making them a part of it, by making energy real, understandable and valuable to consumers.

To achieve their full potential, energy companies need to move beyond the simple provision of power to the provision of a broader range of products and service. Thats why we believe the Flow boiler is so important. The electricity-generating Flow boiler will provide both heat and electricity, and in doing so it will become the heart of the home. In providing that product, we believe Flowgroup will be in the perfect position to then provide other energy-related products that offer comfort, safety and efficiency the connected home products that are now beginning to gain traction. This is the future of energy homes powered by microgeneration and optimised with a broad suite of energy products, adopted by customers who are genuinely engaged with the idea of energy. This is what we believe Flowgroup can deliver.

Smart Phone Controlled

Electric car

Flow boiler

Smart Thermostat

Smart plugs

Smart lighting Smart

white goods

Smart home hub

Delivering microCHP technology into the mass market in the UK has the potential to completely

change the heating industry

Leveraging our technology internationally, we can

create an organisation of global scope

Growing our energy business in the UK would deliver significant benefits

to the Group

Creation of large customer base allows

the potential to cross-sell other energy-efficient products

Becoming a trusted brand for these products allows growth in one of the most exciting markets around

Future benefits

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Our Performance

OurGovernance

OurFinancials



Group overview Our OrganisationFlowgroup comprises Flow Products, Flow Energy and Flow Battery.

Flow Products is behind the development of the Groups groundbreaking microCHP technology platform. Flow Energy is the Groups UK domestic energy supply business. Flow Battery provides award-winning compressed air backup power products to the data centre and telecoms markets. Although these are separate entities, both the Groups home energy and microCHP offers are provided under the same brand, simply Flow.

Flow Products

Flow Energy

Flow Battery

The game-changing, electricity-generating Flow boiler has now launched in the UK

Flow Energy increased its UK home energy customer base by 32%, maintaining one of the industrys best reputations for customer service in the process

Flow Battery installed product in North America, with Trane Canada, and in the UK under its three year framework agreement with National Grid UK

Manufacturing began November 2014Boiler launched January 2015

Grew to c.66,000 customer fuel accounts

Generated revenue of 33.3m

Replaced existing batteries in 29 National

Grid substations

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Flowgroup plc

04 05

The Flow Boiler

MicroCHP comes of age

Uses Organic Rankine Cycle technology quieter operation

Cost reduction in key scroll technology allows affordable product

Can generate around 40% of the electricity a larger household needs

Reduces household carbon emissions by up to 20%

Generates at peak making its generation potentially much more valuable

Innovative launch offer the boiler that pays for itself

Flue out

Electricity out

Hot waterout

HeatingSystem

Return

Scroll isdriven

Fuel burnsin the

combustionchamber

Natural gasor LPGgoes in

How the Flow boiler works

Our partners Jabil world-class

manufacturing partner

Zopa innovative peer-to-peer finance provider

To support the launch of the Flow boiler in the UK we have designed two packages that effectively provide a Flow boiler to our customers at no cost. This means the financial risk of installing a new technology is removed, so customers can concentrate on the benefits of the technology.

Flow FinanceCustomers can completely avoid the cost of a Flow boiler with our innovative Flow Finance package

Flow FreedomCustomers buying a boiler with Flow Freedom also effectively receive the Flow boiler at no cost over five years

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Our Performance

OurGovernance

OurFinancials



Customer value created Flow Energy provides some of the

best priced home energy in the UK energy market, saving customers significant sums compared to the standard variable tariffs of the Big 6 suppliers.

Flow maintains an excellent reputation for customer service, giving it a strong competitive advantage over other players.

Bundling home energy with Flows microCHP boiler allows the customer to receive a Flow boiler at effectively no cost over five years.

Flows special launch offer returns 4,800 to each customer who installs a Flow boiler, through a fixed monthly reduction of 80 in their home energy bills, every month for five years. This is more than the cost of the boiler, providing a strong incentive for the customer and removing any financial risk for them.

After five years, the Flow boiler can continue to reduce a customers home energy bills by up to 500 a year for the lifetime of the boiler (this includes the value of the generation and Feed-in Tariff payments).

The Flow boiler can reduce a customers household carbon emissions by up to 20%. This is one of the biggest reductions a household can make by installing a single product.

The deal effectively allows the customer to avoid the cost of one of the biggest single purchases they will make as a homeowner.

In some countries, the gas used by the Flow boiler to generate electricity is similar in price to the UK market but electricity prices are much higher. This gives the electricity the boiler generates even more value in those countries.

Wherever the Flow boiler is installed, it will play the same key role in reducing home energy bills and household carbon emissions.

Many countries provide support to the uptake of microCHP technology via similar mechanisms to the UKs Feed-in Tariff system.

Connected, energy-efficient products have the potential to save customers significant sums of money on their energy bills by reducing consumption, increasing control and enhancing understanding of energy use.

Intelligent thermostats, smart lighting, smart plugs and more can also provide additional comfort and convenience to users. Being able to remotely control home heating, for example, is a significant benefit.

These products can be offered under innovative finance solutions, potentially allowing uptake with no outlay.

Flowgroup value created Flow Energy generated revenues

of 33.3m in 2014. Growing the energy customer base further would increase revenue and create a larger pool of customers to whom to market both the Flow boiler and other energy-efficient products.

The provision of the Flow boiler and bundled home energy over five and potentially up to ten years creates a long term energy customer.

Flow earns margin on home energy supply, the installation and sale of the boiler and on the electricity the boiler generates. We also retain Feed-in Tariff payments.

We will also provide competitive warranty and servicing packages, a key revenue generator.

Longer term, we will earn additional revenue from the provision of parts for repair through our installation network.

Creating a successful UK home heating brand in our large and mature market will generate brand equity for the Group.

The UK market is large, with 1.7m installations a year, but the European market is much larger, with 8m installs a year.

Asian and US markets provide further significant opportunity.

Making our technology available to these markets expands the potential scale of our business.

The sale of energy-efficient products provides several potential revenue streams for the Group from their sale, lease and service.

Providing a broad suite of these types of products cements the relationship between the customer and Flow, potentially making it more likely to continue.

Wider stakeholder value created As a small supplier looking

to grow, Flow increases the competitiveness of the UK energy supply market. It saves customers money and improves the industrys reputation by providing excellent customer service.

Generating low-cost, low-carbon electricity in the home at times of peak demand is a significant benefit for the UK energy system, taking strain off the National Grid and helping the UK meet its carbon emission reduction targets.

Empowering customers to generate their own electricity engages them with the energy industry, something they have long felt divorced from.

All the key international target markets for the Flow boiler share the same energy-related issues that the UK experiences: rising bills, the need to reduce emissions, the difficulty of meeting demand.

As in the UK, the Flow boiler can help alleviate many of these problems.

Increases home energy efficiency and reduces bills and emissions, benefitting the economy and the environment.

Widespread adoption of these types of products normalises energy efficiency, playing an important role in reducing overall energy consumption.

Customer Joins Flow

01 02 03 04

Boiler generates electricity

Boiler pays for itself

Flow keeps the customer

Group overview Value creation

UK home energy offer

01 02 03 04Flowgroup is a leading

competitor in the UK home energy market with its Flow

Energy brand, and bundles the Flow boiler with home energy

in a unique package.

Designed and manufactured in the UK, the Flow boiler

generates low-cost, low-carbon electricity in the home, slashing electricity bills and household

carbon emissions.

We will design bespoke versions of the Flow boiler for international

markets and also provide our core technology to partners to incorporate in their own

products, significantly increasing our potential market size.

Flows position as a utility, with the close customer relationship that

creates, facilitates the provision of not only the microCHP boiler but a wider suite of energy-efficient

products for the home.

UK microCHP boiler offer

International microCHP boiler offer

Wider efficient energy product offer

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Flowgroup plc

06 07

UK launch model the boiler that pays for itself

Our model for introduction of the Flow boiler into the UK market is under an innovative proposition where the financial risk of adopting a new technology is removed from the customer and where the customer could effectively avoid the cost of a new boiler entirely.

This model, where the customer receives back 4,800 over five years in reduced home energy bills, more than the cost of the boiler, encourages adoption and delivers a long term, profitable customer to Flow. Research shows that one of the biggest barriers to adoption of microCHP technology in the past has been a combination of price and customer concern about the new technology. While we have reduced the price of a microCHP boiler far below its previous level, we also needed to address customer concern. Our model does this.

Customer also receives a fixed 80 reduction in their home

energy bill every month, equalling 4,800 after five years

Customer pays the finance payment every month but receives a fixed 80 reduction in their home

energy bill, totalling 4,800 after five years

Flow Freedom Customer buys the

Flow boiler

Flow Finance Customer avoids the upfront cost of a boiler by financing it

Customer switches their home energy to Flow and assigns Feed-in Tariff payments to Flow for five years

Two launch packages

This exceeds the sale price of the boiler, representing an excellent deal for the customer

After the initial five year period, the customer will receive a reduction in their home energy bill every month based on the amount of electricity their boiler

generates, rather than by a fixed amount, for the lifetime of their boiler

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Our Performance

OurGovernance

OurFinancials



Chairmans Statement

2014 saw one of the most important moments in the history of the Group as the Flow boiler went into manufacture in Jabils facility in Livingston, Scotland. This was closely followed by the launch of the Flow boiler in early 2015. Developing a genuinely game-changing technology is by no means easy and a huge amount of time and resource has rightly been invested in this project. That we now have the worlds first affordable electricity-generating boiler and the first genuine opportunity to commercialise microCHP technology for the mass market, both in the UK and internationally, is a testament to the dedication and expertise of all our teams and I would like to thank them for all their effort in leading up to this pivotal moment. Following a successful equity fundraise post-year end we believe we are in a position to accelerate our growth plans in 2015 and to achieve significant success for the Group and for shareholders.

Industry developmentsWe believe that our microCHP technology platform puts us at the forefront of two global shifts in the way energy industries work. The first is that, as with many industries, energy is becoming something people do rather than just corporations. This drive towards personal power - local, small scale solutions for the production of lower cost, lower carbon electricity - perfectly suits our technology. Our aim of allowing our customers to play an active role in the energy industry, by generating electricity in the home, chimes exactly with the growing expectation of empowerment from consumers everywhere.

The second shift is that energy companies are moving beyond the simple supply of energy to a broader offer which includes products. The reality of the connected, efficient, tech-powered home is drawing closer and is in part driven

by the relatively large scale adoption of intelligent thermostats by consumers. However, we believe that our technology platform has the potential to put us in a stronger position than those companies simply offering more accurate control of heating systems. By embedding such a fundamental product as a boiler in a customers home, and one with the capability to generate electricity and play an important part in powering that customers life, Flow becomes, even in an energy industry that is in flux, something entirely new. Both heating and powering a customers home creates a strong bond of trust which, we believe, has the potential to deliver a close and enduring customer relationship. We therefore believe that our technology will allow us to take maximum advantage of change in the energy industry, both in the UK and internationally, delivering the clever alternative to customers and significant benefits for our shareholders.

Clare Spottiswoode Executive Chairman

We believe that our technology will allow us to take maximum advantage of change in the energy industry, both in the UK and internationally.

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Flowgroup plc

08 09

Business overviewWhile initiating both manufacturing and sales of the Flow boiler were undoubtedly our biggest achievements, we also expanded our manufacturing agreement with Jabil. Exclusivity with Jabil has been increased from 390,000 to 500,000 units. Both parties also formalised a plan to collaborate on future product development. The relationship between our two companies was further strengthened when during the recent fundraising Jabil invested 7.4m to take an 8.14% shareholding.

In addition, we signed testing agreements for the US market with NRG Energy Inc. and for the European market with one of the worlds biggest utilities. A successful conclusion of these trials has the potential to deliver ongoing commercial relationships.

Flow Energy re-entered the energy market in April 2014. Growing organically rather than paying commission for acquisitions we increased our customer base by around 32%, taking revenues for the year to 33.3m. We maintained our all-important reputation for customer service, regularly delivering one of the lowest levels of complaints across the UK energy industry.

Flow Battery built its infrastructure base in anticipation of increased business and installed two units in Canada for a large telecommunications client through Trane Canada, further growing its position in the high power and North American markets. Battery also completed its first installations under its National Grid framework agreement.

Board and management changesDuring the year I became Non Executive Chairman reflecting the increased executive resource now available to the Group. Nigel Canham joined the Group as Chief Financial Officer in December 2014 from Danaher Corporation where he was Finance Director of several of Danahers businesses. He has brought leadership experience from across a broad range of businesses in both developed and emerging global markets and has the skills and experience to help us grow our business both in the UK and abroad.

FundingOn 18 May 2015 shareholders approved the firm placing and open offer raising 21.3m (net of expenses). The funds raised are to be used to: accelerate product development of the combination boiler to increase the addressable market in the UK from the current 400,000 to 1.7m units per year and provide early entry into European markets; reduce supply chain costs and upgrade systems to reduce production costs; expand the existing sales team to turn installers into resellers; upgrade systems and processes to enable management of a wide range of UK boiler installers; develop integrated smart home connectivity, to be included in the combination boiler from the outset; and exploit intellectual property through licensing.

Business prospectsFollowing the launch of our electricity-generating Flow boiler we believe we are now in a position to take advantage of the commercial possibilities that this game-changing product presents. We believe we are well set for a year of good progress in 2015.

Clare Spottiswoode 26 May 2015

500,000

US & EUROPE

Manufacturing exclusivity to Jabil increased from 390,000 to 500,000 Flow boilers

The markets in which we have initiated technology testing agreements

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Our Performance

OurGovernance

OurFinancials



Marketplace

Flowgroup sees significant changes in the global energy market, with a move towards local, small-scale electricity generation and mass market adoption of a new generation of in-home energy-efficient devices. The Group believes its experience and position in the UK home energy market, its patented microgeneration technology platform and its relationship with its manufacturing partner, Jabil, who can provide access to a broad suite of additional products, puts it in a strong position to take advantage of these changes.

UK ENERGY MARKET

GLOBAL BOILER MARKET

Represents significant opportunities for standalone growth as the market recalibrates towards smaller suppliers

Traditionally a market with low levels of innovation, the Flow boiler represents a new generation of home heating technology

Targeting potentially significant growth of

energy business

8m European boiler sales per annum

1.7m UK boiler sales per annum

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Flowgroup plc

10 11

Strategy

The Group has a three-pronged strategy.

Strategic aim Performance Future priorities

Leverage the Groups patented technology platform in the UK and international markets

Launched in the UK and signed testing agreements in the US and European markets. Produced a clear product roadmap

Accelerate cost reduction and product development programmes in conjunction with Jabil

Offer a broad energy-efficient product suite to our customers

Agreement with Jabil on a closer product relationship and work begun on first additional product

Deliver a product plan and innovative customer offers to encourage adoption

Potentially grow the UK home energy supply business with favourable wholesale arrangements in place

Added 32% more customers in 2014, relaunched with a competitive tariff post year-end in April 2015

Accelerate growth while continuing to invest in customer service provision

Firstly, to leverage its patented technology platform wherever a market for home heating exists. The Group will continue to target the UK market and will deliver bespoke versions of its technology for other key markets and also create a Flow inside model, where its technology can be incorporated into its partners existing products. Combining the creation of additional products with an aggressive cost reduction programme will allow the Groups technology the opportunity to flourish as a mass market product globally.

Leverage its patented

technology platform

Thirdly, to grow its energy business in the UK. Some estimates suggest that small suppliers could capture nearly a third of the UK home energy market by 2020. This represents an opportunity to create a domestic supply business of significant size, creating both strong revenue and a large database of customers to whom to market the Flow boiler and additional products.

Grow its energy business in

the UK

Secondly, to offer a wider energy-efficient product suite to existing home energy and boiler customers. As a utility and an existent provider of energy-efficient technology, the Group believes it is well placed to curate additonal products for its customer base. The Groups relationship with Jabil, one of the worlds leading manufacturing solutions partners, gives it access to existing products and allows the potential to design and build new ones, with a clear route to market.

Offer a wider energy-efficient

product suite

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Our Performance

OurGovernance

OurFinancials



Strategic Report CEO Q&A

Q: What is your assessment of 2014 for Flowgroup?

A: I believe we have hit our major milestones. We started the year with a central goal of creating a production model of the Flow boiler which can be manufactured and sold. We have done that. We wanted to launch the boiler to the market and we achieved that in early 2015. We built our installation and servicing infrastructure and opened our principal installer training school in the North West of the UK. We have a clear product road map for future expansion that allows us to grow both in the UK and abroad. We grew Flow Energy and Flow Battery. All in all, it was a good year.

Q: Have you delivered your pays for itself boiler proposition?

A: The provision of a boiler that pays for itself has always been a key part of our strategic plan and with our launch packages customers can now effectively receive a Flow boiler at no cost and with no risk. Under our finance proposition, customers effectively wont pay a penny for their Flow boiler. Alternatively, if a customer wants to buy a Flow boiler and opts for our Freedom package, theyll receive back more than its cost in fixed reductions in their home energy bills over

five years. These are attractive packages to encourage adoption of our ground-breaking technology. They are explained in detail on our website www.flowenergy.uk.com

Q: Is this product a genuine worlds first?A: We believe it is. There is no other microCHP product available anywhere in the world at a price anywhere near ours. Many fuel cells retail in excess of 15,000. Stirling engine technology has its traditional issues of large size with noise and vibration and is priced at around 7,000. We plan to continue to develop and expand our product offering with the launch of our combination boiler in 2016. This will allow our microCHP technology Flow boiler to become a genuinely mass market product.

Q: What routes to market do you have for your ground-breaking boiler?

A: The majority of customers rely on their local installer when looking for a new boiler. Thats why we dedicated significant time and resource to building our installer infrastructure and opening our training school in July 2014. We expect the majority of our sales to come from our Flow trained installer network where we will have hundreds of installers going out on a daily basis and recommending

the Flow boiler to their customers. We are also in negotiations with several leading brands around partnership opportunities. While direct sales are not traditional in this industry, our in-house boiler sales team continue to secure orders from the significant levels of traffic our contact centre and website now receive.

Q: Why have there been delays?A: When creating and developing ground-breaking technology you will always be faced with unique challenges and we have broken new ground probably hundreds of times. Every time you do that, every time you push the boundaries of what has been done before, you are essentially stepping into the relative unknown and that can regularly throw up new challenges. So there have been delays, as there are in the development of any revolutionary technology. But this is not a short term proposition and the size of the opportunity is immense. Our technology will change the heating and energy markets in the UK, and around the world. Therefore, while short term delays can be frustrating, they should be seen in the light of what we are achieving, and our ability to deliver our strategy remains unchanged.

Tony Stiff Group Chief Executive Officer

There is no other microCHP product available anywhere in the world at a price near ours.

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Flowgroup plc

12 13 Our Performance

Q: Some might say youre taking a cautious approach. Do you think thats fair?

A: I do. The temptation is to get this ground-breaking technology into the market as quickly as possible and go for huge sales volumes from the outset. But the sensible thing to do is ensure that everything is absolutely right before we start to install, and to gradually build towards volume installs that will occur in the latter part of 2015, with the winter period being the demand peak in what is a relatively cyclical demand curve. This gives us the opportunity to bed in our installation and sales processes and build capability so that were running as efficiently and effectively as possible in preparation for winter 2015.

Q: How is your relationship with Jabil developing?

A: Our relationship with Jabil is very strong as we work together on the current boiler model, and drive together to our volume sales targets. At the same time, we are leveraging Jabils advanced technology teams, utilising

their experience and skills as we work on developing various product platforms and maximising efficiencies in production costs. Jabil has also invested 7.4m in the recent fundraising and now owns 8.14% of Flow. Jabil is a valued manufacturing partner and a key investor in the Group as we move forward.

Q: How many boilers do you plan on installing in 2015?

A: Our plan is to expand our sales network during this year, so we will be in a strong position for the winter months when customers look again to replacement of their boilers. 2015 is a critical year for us as we establish the Flow boiler in the market place. Although the installation programme has been held back as the initial production boilers were subject to rigorous testing the business has challenging internal targets particularly during Q4 2015. This is why we have placed so much emphasis on establishing our training centre and signing up installers, getting them accredited as both surveyors and installers to support our installation plans.

Q: What is your product strategy?A: We are developing additional product types to address more of the UK market and the larger European boiler market. We are working on several combination boiler models and also an additional condensing boiler. These new products will enable us to target a larger market share and bring in new smart technologies at the same time. We are also exploring the Flow inside concept, where other heating manufacturers could use our technology under licence in their products.

We are not looking to have a large number of varying products; instead we are managing our product range to allow us to address the largest market share with a limited number of Flow boiler variants. We are also investigating smart thermostats, wireless control, optimised room heating, integration with Solar Thermal systems and other complementary energy saving products.

Flow Finance success story

Case study

Flow Energy customer service case study

Flow Finance success story

The energy industry has always been infamous for the overall level of customer service it provides. Flow always set out to buck that trend and we have delivered on that goal. Despite rapid growth in our first year and continuing growth since we have consistently delivered one of the most impressive customer service records in the industry. In every quarter in 2014 we recorded one of the lowest levels of customer complaints, receiving up to 90% less complaints per 100,000 customers compared to other suppliers. We intend on continuing to supply this level of service as we grow our energy business and ensure it remains a strong differentiator in this competitive marketplace.

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Our Performance

OurGovernance

OurFinancials


Strategic Report continued

Group performance2014 saw us build towards our ultimate goal of the launch of the game-changing Flow boiler, which we achieved just after year end in January 2015. This was a significant achievement for the Group although our success was not confined to the Products side of our business Flow Energy performed well and Flow Battery made progress.

Flow ProductsManufacture of the Flow boiler began in Jabils Livingston facility in November 2014. Receiving product CE Certification earlier in the year, along with BSI G83/2 compliance for the boilers in-house power electronics control system, allowed us to move forward with plans for production with Jabil. We completed a detailed planning phase in which we sourced several new European suppliers to improve component quality and secure volume capacity. We then moved into the manufacturing phase.

Initiating manufacturing with Jabil was a major achievement. The first production boiler came off the assembly line in November, thus proving the end to end manufacturing process. As a late addition to this process we took the long-term view that Jabil should also build the scroll assembly, requiring additional work at this stage, but strategically the right decision.

It was necessary to initiate a limited initial build to gain CE Type Approval for the production line and the boilers, which we duly obtained in April 2015. However, this did not delay the launch of the Flow boiler to consumers in January 2015. This was a soft launch where we published full details of our boiler packages, including prices, on our website and started to take reservations for the Flow boiler in advance of receiving CE Type Approval.

Following CE Type Approval, 50 pre-production models were produced on the line and were subject to verification and

validation testing. This is, appropriately, an extremely rigorous process which is taking longer than expected but must be satisfactorily completed before Flow boilers are released for customer installations.The testing is now approaching completion and the first customer installations will take place during June 2015.

We are now building towards peak period capability in the later months of this year. Our sales forecast remains heavily loaded towards the end of the current year in the peak boiler sales period of September onwards, allowing us to build further capacity on the sales and installation side, refine processes following our first installs and continue to grow, develop and strengthen our teams.

Earlier in the year, we had further cemented our relationship with Jabil by expanding our exclusive manufacturing agreement from 390,000 to 500,000 Flow boilers and agreeing to collaborate closely on both future product development and our cost reduction programmes. We believe this will continue to be our most important strategic relationship as we look to create new products and expand into additional markets.

The development teams have concentrated on production readiness of the current boiler over the last few months. The additional equity fundraising allows us to accelerate the development of the combination boiler and bring forward its launch from H2 2017 to H2 2016.

International expansionOur goal of international expansion was brought closer as we signed testing agreements in the US and Europe. Signing an agreement with NRG Energy represents the first step into the US retail energy market, linking up with one of the leading players in US energy, a company with considerable vision for the energy businesses of the future and one which

Initiating manufacturing with Jabil was a major achievement. The first production boiler came off the assembly line in November.

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Flowgroup plc


has already demonstrated leadership in this sector. Following the successful conclusion of NRGs testing of our technology, we would expect to move to commercial discussions.

We also signed a similar agreement with one of the worlds biggest utilities with a focus on the European market. The European market is a key target for the Group and conducting this initial test and evaluation of a Flow boiler with a major energy player, at their facility, supports the objective of launching the Groups unique electricity-generating products across Europe. The market for gas fired heating products in Europe is around 8 million units per year, with many key markets such as Germany, Italy, France and the Netherlands providing incentives and regulations for low carbon heating. This results in attractive market conditions for microCHP in these geographies.

Discussions with other interested parties are ongoing. Our goal is to create partnerships with a range of providers in international markets, both by providing bespoke versions of our boiler to organisations to retail to their customer base and by providing our technology to augment existing heating products a Flow inside approach.

UK installer networkWhile we are pleased to be making progress internationally, the focus of the business remained on the UK. One of the key routes to market for any boiler is via installers, who the majority of customers go to for advice on home heating. In July 2014 we opened our state of the art training facility in Cheshire where Gas Safe registered engineers now undertake surveying, installation and aftercare training programmes to become accredited installers of the Flow boiler. The 9,000 square foot centre is strategically placed just off the M56, close to the junction with the M6 at Preston Brook, Runcorn. The training facility has the capacity to train up to 64 installers

a week, allowing in excess of 3,000 installers to be accredited on an annual basis.

In order to attract installers to work with Flow, we put together a dedicated installer sales team who visit installers across the country, generating significant interest in our product and brand and creating an engaged network of installers who will both install the Flow boiler and act as sales agents. It is these brand ambassadors who under the leadership of our industry experienced Sales Director will help drive Flow boiler sales and we are investing significant time and resource in ensuring they are of the highest quality.

Partnership developmentThe creation of a strong surveying, installation and service / aftercare infrastructure is important to the future growth of the business. We are working with a number of installer networks across the UK in order to broaden our capability. We have a memorandum of understanding with both Mears Group and Entu but also took the decision to go direct to the larger installer groups in the UK which will further facilitate the infrastructure and fulfilment capability once completed.

We have contracted with Zopa Limited, Europes largest peer-to-peer lending platform, to provide finance to our Flow boiler customers. It is a key part of our strategy to enable customers to finance the cost of a Flow boiler with a personal loan and to have a fixed reduction in their home energy bill, thus the agreement with Zopa was an important one. Both Flow and Zopa share a belief in the necessity of innovating and providing an enhanced customer offering in order to drive growth so we believe this is a natural partnership. In order to allow this partnership to function most effectively, we also applied for and were granted FCA authorisation for limited scope credit broking.

Boiler that pays for itself modelThe plan for the Flow boiler was always to launch it under a model which entirely removed the financial risk of adopting a new technology. We achieved that with our Flow Finance and Flow Freedom packages. Flow Finance allows the customer to avoid the upfront cost of the Flow boiler completely by taking a personal loan through Zopa and then receiving every month a fixed reduction in their home energy bill that exceeds the monthly finance payment. Flow Freedom requires the customer to pay for their boiler, they then receive the same monthly discount on their home energy which, in total after five years, exceeds the amount they paid for their boiler. We believe that no other boiler package returns as much to a customer as ours and these packages achieve our aim of removing any financial risk for our customer in installing a Flow boiler. These packages perfectly complement our innovative technology and we believe were the right way to enter the market.

Launch of the Flow boilerWe started to take actionable sales enquiries at the end of January 2015, when we published our prices and full details of our packages on our website. We significantly expanded our customer services operation, creating a dedicated Flow boiler sales team, who initially targeted the database of customers who had previously expressed interest in our boiler. We then began to drive new enquiries via regional marketing campaigns initially focused on the North West. We have taken customer confirmed reservations for Flow boilers in line with our sales plan for April and May and our first installs will occur in June. We will move to volume sales through our installer network as we move through summer 2015 in preparation for the winter sales period.

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The creation of a strong surveying, installation and service / aftercare infrastructure is important to the future growth of the business.

TechnologyIn order to maximise the potential of our technology platform, we will now move forward with a structured cost reduction and product development programme. This will allow us to reduce the cost of the Flow boiler and to create different versions, both for the UK and for international markets.

Flow EnergyAfter the significant success we enjoyed in 2013 with the launch of our home energy business, we entered the market again in April 2014. However, we took a different approach. In 2013 we grew quickly by paying commissions to price comparison sites for new customers (the traditional route to growth for energy businesses). In 2014 we did not pay commissions and instead attracted customers organically through general visibility for our competitive tariff thus growing the customer base without any acquisition costs. We grew our energy business to over 66,000 customer fuel accounts and generated revenues for the year of 33.3m.

While delivering growth we retained our excellent reputation for customer service. The energy industry releases quarterly complaint statistics which show the number of complaints per 100,000 customers. We consistently reported amongst the lowest levels of complaints in the entire industry, receiving 90% fewer complaints than some of our competitors.

This is important. As the truly competitive domestic energy market continues to mature, and prices begin to converge, factors such as service begin to play a key role in attracting customers. Our reputation for good service, as well as our ability to deliver keen prices and the brand benefits that come from association with our low carbon microgeneration technology, puts us in a strong position to win customers in a market that looks attractive. We therefore believe that opportunities may exist to grow the

business from the current level to over 800,000 customer fuel accounts in the next three years. In order to achieve this, Flow Energy would need to enter into a contractual relationship with an energy trading party where the current high level of trading collateral lodged per customer would be reduced significantly.We are exploring options for a new energy purchasing contract whereby security is provided by a charge taken over our energy customers. Growing our energy customer base would increase revenue and create a large pool of customers to whom to market both the Flow boiler and other energy efficient products.

Flow BatteryFlow Battery continued to develop its customer base and established the infrastructure to service its anticipated growth as relationships, in particular with National Grid, mature through 2015.

In March 2014, Flow Battery received an initial order for two compressed air battery units from Trane Canada. Trane, a world leader in air conditioning systems, is part of Ingersoll Rand, a global company with revenues of $14 billion. The units were procured by Trane for a major Canadian telecommunications company. The units were installed in a telephone exchange outside Toronto, part of the companys extensive national network. This order further strengthened Flow Batterys position within the high power market and within the North American market, where we believe excellent sales potential exists. Developing a relationship with Trane, a large company that embraces new technology solutions, should also, we believe, open up many more opportunities.

2014 also saw the first installs under the National Grid UK framework agreement, announced in late 2013. The brief is to replace lead-acid backup power units as they reach the end of their service life in National Grids network of 303

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substations in England and Wales. Flow Battery has now replaced time expired equipment in 29 National Grid installations with a mixture of compressed air battery units and some conventional systems. With a number of sites already being surveyed for replacement systems, we expect to receive additional work under this agreement as we move through 2015 and beyond.

People Headcount across the Group increased significantly as we strengthened many of our teams, taking headcount at the end of the year to just below 200. We invested heavily in our people on both the product and energy sides of the business, ensuring we have the people in place who share and can deliver our vision.

We firmly believe in people and their potential, and as well as recruiting experienced specialists we also ensure that career progression is a genuine possibility within our organisation. We have many examples of team members moving across departments to develop their skills and we will continue to develop the most important part of our business our people.

2014 has been a year of progress which would not have been achieved without the commitment of all who work within the Group. The Directors appreciate all the efforts of our employees and look forward to working with them as the business strengthens and grows through 2015.

FundraisingOn 18 May 2015 shareholders approved the firm placing and open offer raising 21.3m after share issue costs. This share issue was supported by our manufacturing partner Jabil who subscribed for 25.8m ordinary shares giving them an 8.14% interest in the Company.

The funds raised are to be used to: accelerate product development of the combination boiler to increase the addressable market in the UK from the current 400,000 to 1.7m units per year and provide early entry into European markets; reduce supply chain costs and upgrade systems to reduce production costs; expand the existing sales team to turn installers into resellers; upgrade systems and processes to enable management of a wide range of UK boiler installers; develop integrated smart home connectivity, to be included in the combination boiler from the outset; and exploit intellectual property through licensing.

The Directors have produced business forecasts, which indicate that the Group has sufficient resources to operate for the foreseeable future continuing the development of the energy services and backup power businesses and taking the boiler through from initial installations during Summer 2015 to volume sales with cash generation in Q4 2015 and profitability during Q1 2016. Accordingly, the Directors have adopted the going concern basis in the preparation of the Financial Statements.

Financial ReviewSet out below is an extract of the Group Financial Statements for the years ended 31 December 2014 and 2013 together with an analysis of the Groups key performance indicators

2014000

2013000

Revenue 33,359 13,790Gross profit 2,222 1,808Gross profit % 6.7% 13.1%Operating loss (9,963) (7,675)Loss before income tax (10,096) (10,240)Loss attributable to equity shareholders (9,439) (10,032)Intangible fixed assets 17,268 14,665Tangible fixed assets 624 536Cash at 31 December 8,357 17,361

ResultsRevenue during the year ended 31 December 2014 of 33,359,000 arose primarily from the energy business and compares to 13,790,000 during 2013.

Gross margin during the year was 6.7% (2013: 13.1%) with a reduction in margins arising from weather variations and energy market conditions during the year.

Operating losses continued to increase due to increased staffing levels within all business areas as they geared up for the forecast growth in 2015 and the launch of the Flow boiler during January 2015.

TaxThe Group accounts for the receipt of tax relief on research and development expenditure when the amount to be received can be assessed with reasonable certainty. During 2014 amounts received in respect of 2011 and receivable in respect of 2012 have been recognised. Further claims are in preparation, and in accordance with the Groups accounting policy will be recognised when receipt can be assessed with reasonable certainty.

Trading losses of 45,492,000 (2013: 32,522,000) are being carried within the Group and are available for offset against future taxable trading profits.

Loss for the year and loss attributable to equity shareholdersThe loss attributable to equity holders of Flowgroup plc amounts to 9,439,000 (2013: 10,032,000) giving a loss per share of 3.94p (2013: 7.43p).

Investment in intangible fixed assetsInvestment in intangible assets being the continued development costs of the microCHP boiler, amounted to 3,162,000 (2013: 3,232,000). These comprise capitalised internally generated development costs and the production and installation costs of the initial production standard Flow boilers.

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An additional 254,000 was spent on the development of computer software, mainly within the energy business.

Investment in property, plant and equipmentDuring the year 400,000 (2013: 437,000) was invested in property, plant and equipment.

The outsourcing arrangement with Jabil will enable the Group to minimise capital expenditure going forward.

Working capitalGrowth of the energy services business has seen the level of trade and other receivables increase to 7,315,000 (2013: 4,341,000). The level of trade receivables is closely monitored within the Group as it seeks to ensure a tight control of working capital requirement.

Cash and cash equivalentsThe Group manages its capital to ensure that all entities are able to continue as going concerns while minimising risk and cost.

At 31 December 2014 the Group had cash and cash equivalents of 8,357,000 (2013: 17,361,000).

Business risksA summary of the key business risks is set out in the Directors Report on page 22.

Business outlookFlow Energy took advantage of market conditions within the retail energy market and launched a market leading tariff during April 2015. This has been well received securing a significant number of customers without the need to pay commissions. As well as being price competitive the customer growth within the energy business will be supported by the sourcing of innovative smart technologies which will further differentiate the retail product offer.

The Flow boiler is the first affordable microCHP domestic heating boiler and gives the Group a unique opportunity to change domestic energy markets and achieve significant growth particularly with a combination version. The initial production boilers are now completing the rigorous internal validation and verification checks with a number of minor modifications. Accordingly a number of the initial production units will be released for installation in customer homes during June 2015. Available production will

increase over the coming months with a corresponding increase in the marketing of the Flow boiler to support projected sales for the late 2015 peak period and beyond. These increased volumes will see the boiler business move to cash generation during Q4 2015 and profitability during Q1 2016. The current international agreements provide the initial platform for medium term growth into the key European and North American markets.

During 2015 the Group has the clear opportunity to begin to revolutionise the home heating and home energy markets. All Group businesses will be taking advantage of the commercial opportunities available in their respective market places.

Tony Stiff Group Chief Executive Officer 26 May 2015


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Corporate Social ResponsibilityOverviewWe want to change the way that people think about energy via the application of our game-changing technology. In doing so, we want to be seen to provide a clever alternative to conventional products and services, and this idea permeates the business to do things differently and to do things intelligently.

As we go about turning this vision into reality, we are committed to conducting ourselves in a way that reinforces our customers perception of us as clever, trustworthy and innovative. While we create products and services that will make a genuinely positive difference to consumers, society and the environment, we will apply the highest ethical and professional standards to everything we do, from the way we treat our people to the way we build our supply chain. Every member of the team understands our vision and values and works every day to make sure we never deviate from them.

EmployeesMore than ever, we rely on our people to deliver success within our business. We have instituted a new recruitment process that concentrates on a combination of skills, experience and a match with our values as a business. Recruiting candidates who share our belief in our ability to do things differently ensures that our team are entirely able to play an important role in maintaining and enhancing our reputation. We attract those candidates with a strong employer brand, the inspiring opportunity Flow represents and a flexible benefits package. Of course, we promote equality in all areas of our operations.

The Group is committed to the highest standards of Health and Safety in all areas of our business, to minimise the risks to our employees, our customers and the general public.

To both provide an ever-increasing skills base to the Group, and to aid personal development, we encourage our staff to continuously develop their relevant skills and knowledge, as well as allowing them the space and time to grow in new directions. We support staff in achieving both formal qualifications and vocational training goals.

EnvironmentOur technology platform has at its core the production of low carbon electricity, which benefits consumers in terms of lower bills and the environment and society in the form of lower carbon emissions. It is therefore important to us that our business operations are designed to make as low an impact on the environment as possible and that our suppliers share our approach.

We recognise that we do use significant amounts of energy within our operations, including supply chain, manufacture and distribution. We aim to reduce the amount of energy we use by improving the efficiency of existing buildings and processes and by adopting less environmentally harmful alternatives where available.

SuppliersAs our supply chain has grown, we have ensured that we are doing business with recognised and reputable suppliers, primarily within the EU, who share our values. Our manufacturing partner

Jabil has an extensive track record of manufacturing green technology products and has a keen focus on the environment. We will work together as we move forward to ensure that our manufacturing process, supply chain and product are as respectful to the environment as possible.

We encourage our installation and distribution suppliers to adopt best practice in all relevant business areas. Their performance will be subject to ongoing assessment.

CommunitiesWith our technical facility in Capenhurst, Preston Brook training centre and our energy business in Ipswich, we are rooted in three communities and have the opportunity to positively affect them. Our staff participate actively in charitable events and as our business matures we will look to create strong community links from all our sites.

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Board of Directors

Clare Spottiswoode CBE Non-Executive Chairman

Tony Stiff Group Chief Executive Officer

Nigel Canham Chief Financial Officer

Clare has considerable experience in the public sector, the energy markets and the financial services sector, as well as through setting up and managing her own businesses.

A mathematician and economist by training, Clare worked for the UK Treasury; Director General of Ofgas, the UK gas regulator; she was a policyholder advocate for Norwich Unions with-profits policyholders at Aviva; a Non-Executive Director of Tullow Oil plc; and a member of the Independent Commission on Banking and the Future of Banking Commission. Her current roles include being a Non-Executive Director at G4S, Enquest, Energy Solutions Corp and Chairman of Magnox.

Tony was Commercial Director of Bglobal plc (Bglobal), the AIM-listed smart-metering company. At Bglobal Tony helped prove the concept of their smart-metering products and was responsible for securing commercial contracts with leading energy suppliers. In 2000, Tony founded Atlantic Electric and Gas Limited, a business backed by US-based Sempra Energy, Inc. The business quickly became one of the UKs leading independent energy suppliers, with over 300,000 customers. In 1994, Tony founded Webbins Limited (Webbins), in order to exploit the gap in the market for a software product that customers could use to evaluate energy contracts. Having grown Webbins into a company with over 100 staff and 10m turnover, Tony negotiated the sale of the company to MMT Computing plc, and continued to manage the business for three years afterwards.

From 2002 to 2014 Nigel held senior leadership positions within Danaher Corporation, the $19B revenue NYSE listed global science and technology company. Before joining Flow he was Finance Director of Fluke Corporations emerging markets group, helping drive revenue growth, increased profitability and improved working capital. Previous to that Nigel was Finance Director and EU Accounting Director for Gilbarco Veeder-Root, the manufacturer of fuel dispensers and fuelling solutions.

From 2007 to 2009, Nigel was based in California as Finance Director for Kerr Corporation, Danahers leading dental consumables business. From 2002 to 2007 he was Financial Controller of Linx Printing Technologies, a Danaher business in the coding, marking and industrial printing market.

Before joining Danaher Nigel held positions with Vinten Broadcast and two businesses supported by investment from Permira private equity, Dialight Plc and Strand Lighting. Nigel is an Associate member of the Chartered Institute of Management Accountants.

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20 21 Our Governance

David Grundy Non-Executive Director

Dr Henry J Cialone Non-Executive Director

John Johnston Non-Executive Director

Dr Henry Cialone is President and CEO of EWI, North Americas leading independent materials joining technology organisation.

Prior to joining EWI in 2005, Henry was an Executive at Battelle Memorial Institute, where he led the commercial energy business and served on the governing board of the National Renewable Energy Laboratory. While at Battelle, Henrys team developed the scroll-based Organic Rankine Cycle technology that underpins the Flow boiler.

Henry is a member of the Ohio State University College of Engineering Advisory Council and the Miami University Research Advisory Council; Trustee of the Manufacturing Institute in Washington, DC; Trustee of the Midwest Research Institute in Kansas City; a Non-Executive Director of Algaeventure Systems in Ohio; and a former Non-Executive Director of the NanoSteel Company, a venture-backed spinout from Idaho National Laboratory.

Henry received his BS degree in Materials Engineering from Brown University, and his MS and PhD degrees in Materials Science, also from Brown, where his area of specialisation was hydrogen-enhanced fracture.

David joined Grant Thornton in 1989 and qualified as a Chartered Accountant in 1992. In 2000 David was appointed a Partner, one of the youngest partners in the firm, at the age of 31. David worked primarily in the Corporate Finance team but also acquired secondary audit responsibilities. David was integral to the flotation of Energetix in 2006 as Lead Partner and Reporting Accountant for the IPO.

In 2006, David was appointed National Head of Transaction Services, including oversight of the development of the Transaction Services offering across Grant Thornton International. David was then appointed in 2009 as Managing Partner for the North West practice of Grant Thornton, encompassing offices in Liverpool and Manchester which employ in excess of 300 staff. David brings with him a wealth of experience and knowledge to the Board.

David established his own consultancy business in 2012 supporting growing and dynamic businesses in the achievement of their objectives.

John was most recently Managing Director of Institutional Sales at Nomura Code from 2011 to 2013. He was previously Director of Sales and Trading at Seymour Pierce from 2008 to 2011. In 2003, he founded Revera Asset Management, where he oversaw an investment trust, a unit trust and a hedge fund, which he ran until 2007. He joined Legg Mason Investors for three years, from 2000 to 2003, as Director of Small Companies Technology and Venture Capital Trusts, having previously spent two years as Head of Small Companies with Murray Johnstone. From 1992 to 1997, John was Head of Small Companies at Scottish Amicable, before spending a year at Ivory and Sime, again as Head of Small Companies from 1997 to 1998.

He began his investment career at the Royal Bank of Scotland in 1981, working in the Trustee and Investment department, before moving to General Accident in 1985, holding the position of Head of Retail Funds before his move to Scottish Amicable.

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Directors ReportThe Directors present their report and the audited Financial Statements for the year ended 31 December 2014.

Basis of preparation of the Financial Statements The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. In accordance with IFRS, the Financial Statements reflect the results of Flowgroup plc and its subsidiaries for the year ended 31 December 2014 and for the corresponding period in 2013. Further details on the basis of preparation are provided in note 2 to the Financial Statements.

Principal activitiesFlowgroup plc and its subsidiaries are focused on the creation of shareholder value through the provision of home energy and the supply of clean energy products for energy supply and reliable backup power.

Results and dividendsThe loss for the year amounted to 9,439,000 (2013: 10,032,000). The Directors do not recommend the payment of a dividend.

A detailed appraisal of business developments is given in the Chairmans Statement and the Strategic Report on pages 8 to 18.

Risk reviewThe principal business risks and uncertainties affecting the Group are set out below:

Funding requirementsIn January 2015 the Group launched the Flow boiler. Subsequently there has been significant market interest in both the Flow boiler and the initial sales proposition with there now being a number of confirmed sales orders. The Flow boiler is in production and both the boiler and

the production line have received CE approval. Initial installation of the Flow boiler will commence during June 2015.The issue of additional share capital which was approved by the shareholders on 18 May 2015 raised further funding of 21.3m . This has secured the Groups cash requirements for the acceleration of the development of a combination boiler, production efficiency programmes and the investment in staff and processes to support the anticipated expansion of the business.

In December 2014 the Manufacturing Services Agreement with Jabil Circuit Inc was extended to cover the production of up to 500,000 units. Subsequently Jabil participated in the May 2015 fundraising investing 7.4m and now have a shareholding of 8.14%.

The Directors have produced business forecasts which indicate that the Group has sufficient resources to operate for the foreseeable future continuing the development of the energy services and backup power businesses and taking the boiler through from initial installations during Summer 2015 to cash generation during Q4 2015 and profitability during Q1 2016.

Strength of the Groups bankersIn accordance with the Groups treasury policy, funds are only lodged with UK-based financial institutions with an A rating or better.

Failure of suppliers of essential goods and services The Group has an established manufacturing partner in Jabil Circuit Inc and wherever practical the Group seeks to dual source its key components and services. Each supplier is assessed and, where necessary, strategies to manage and protect supply to the Group are put in place.

Attraction and retention of key employeesThe Group depends on its Directors and other key employees and, whilst it has entered into contractual arrangements with these individuals with the aim of securing the services of each of them, retention of these services cannot be guaranteed.

The Group has attempted to reduce this risk by offering competitive remuneration packages including the opportunity to participate in a share option scheme and investment in training, development and succession planning.

The Group has established a Save As You Earn share scheme in which all employees are invited to participate.

Intellectual propertyA significant part of the Groups future development and growth depends on its intellectual property. If intellectual property is inadequately protected, the Groups future success could become adversely affected.

The Group continues to invest in the protection and expansion of its intellectual property portfolio. In addition, the Group has established internal procedures and controls to capture new intellectual property, to prevent unauthorised disclosure to third parties and protect the Groups rights when dealing with supply chain partners.

Market acceptanceThe Groups technologies are either incorporated into the products or processes of third parties, sold via distribution channels to the end consumer, provided on long-term energy contracts or supplied directly to industrial users. There can be no assurance that such products or processes will achieve commercial success or be an attractive alternative to conventional products or

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processes. If a mass market for any product or process fails to develop or develops more slowly than anticipated, the Group may fail to achieve profitability in respect of the technology associated with such products or processes.

The Groups strategy of developing and producing products from existing components, enabling lower costs for early products, plus seeking specific channel partnerships which cover defined market applications and geographical focus, is designed to facilitate adoption of the products and to drive mass market uptake.

Research and developmentThe Group undertakes a significant amount of research and development to address opportunities in the alternative energy market. In 2014, the Group incurred research and development costs of 3,299,000 (2013: 3,288,000), of which 3,162,000 (2013: 3,232,000) has been capitalised in accordance with IAS 38 Intangible Assets. See note 12 for an analysis of capitalised development costs.

DirectorsThe Directors who held office in the year and up to the date of this report are shown below:

C Spottiswoode, Non-Executive Chairman

AD Stiff, Group Chief Executive Officer

NP Canham, Chief Financial Officer (appointed 10 December 2014)

Dr HJ Cialone, Non-Executive Director

DK Grundy, Non-Executive Director

JJ Johnston, Non-Executive Director

EmployeesThroughout the year, Directors of the Group provide relevant information to employees and engage in consultation with them to ensure that their views are considered.

Applications for employment by disabled persons are given full and fair consideration for all vacancies in accordance with their particular aptitudes and abilities. In the event of employees becoming disabled, every effort is given to retrain them in order that their employment with the Group may continue.

It is the policy of the Group that training, career development and promotion opportunities should be available to all employees.

Financial risk management objectives and policies Other than the proceeds from the issue of shares, the Group uses various financial instruments that include loans, cash and other items, including trade receivables and trade payables and forward energy purchase contracts arising directly from its operations. The main purpose of these financial instruments is to finance the Groups operations.

The existence of these financial instruments exposes the Group to a number of financial risks, which are described in more detail below.

The main risks arising from the Groups financial instruments are credit risk, currency risk, liquidity risk and commodity risk. The Directors review and agree policies for managing risk and these risk management policies have remained unchanged from previous years.

Liquidity riskThe Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. The Group had cash balances of 8,357,000 as at 31 December 2014 (2013: 17,361,000).

On 18 May 2015 shareholders approved a firm placing and open offer raising 21.3m (net of expenses). The Directors have produced business forecasts which indicate that the Group has sufficient resources to operate for the foreseeable future.

The maturity of borrowings is set out in note 18 to the Group Financial Statements.

Currency riskThe Group purchases a number of components in foreign currencies. Presently, the Directors do not believe that the Groups currency risk requires hedging; however, this situation will be monitored and amended if appropriate.

Credit riskThe Groups principal financial asset is cash. Although the credit risk associated with cash is limited, the Groups treasury policy remains the same as in 2013 and is explained in more detail in note 21.

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Directors Report continuedCommodity riskAs an energy supplier the Group has risk both in terms of the customer volumes and energy pricing. Volumes are taken from industry data with expected customer demand being derived from models taking account of seasonal variations. The resultant energy demand is then secured by forward fixed price energy purchase contracts. The Group does not take speculative positions on either price or volume, with all energy being purchased for anticipated customer requirements.

Supplier payment policyIt is the Groups policy, in respect of all suppliers, to agree payment terms in advance of the supply of goods and services and to adhere to those payment terms. Trade payables of the Group at the year end as a proportion of amounts invoiced by suppliers during the year represent 57 days (2013: 54 days) and for the Company, represent 26 days (2013: 42 days).

Going concernHaving made reasonable enquiries, the Directors are of the opinion that the Group has sufficient resources to continue in operational existence for the foreseeable future and hence these Financial Statements have been prepared on a going concern basis. Further details are disclosed within note 2.2 to the Financial Statements.

Major shareholdingsAs at 19 May 2015 the Directors were aware of the following interests in 3% or more of the Companys issued share capital:

%Aviva Plc 19.69%Jabil Circuit Nederland BV 8.14%Hargreave Hale 6.02%Standard Life Investments 3.46%Octopus Investments 3.21%

Corporate Governance StatementThe Directors are committed to maintaining high standards of corporate governance. Under the rules of the London Stock Exchange AIM Market, the Group is not required to comply with the UK Corporate Governance Code. Nevertheless, the Group has taken steps to apply the principles insofar as the Directors consider appropriate given the current size and nature of the Group. This statement sets out how the Board has applied the principles of good corporate governance in its management of the business in the year ended 31 December 2014, relevant to the Groups size and complexity.

Board of DirectorsDuring the period under review the Board comprised two Executive and four Non-Executive Directors. Biographies of the Directors are provided on pages 20 and 21 and set out the broad range

of commercial, technical and financial expertise possessed by Board members. The combination of skills and talents ensures that strategic focus and sound commercial stewardship is available to the Group. The Non-Executive Directors are highly experienced, exercise independent judgement on issues arising and are able to challenge constructively the decisions of the Executive Directors.

The roles of Chairman and Chief Executive are separated ensuring an appropriate division of responsibilities at the head of the Group.

All Directors are subject to election by shareholders, and re-election thereafter is by rotation at intervals of not more than three years.

All Directors are offered an opportunity to request information and training relevant to their legal and other duties as Directors. They are also given written rules and guidelines setting out their responsibilities within an AIM-listed Company. All Directors are able to take independent legal and professional advice, if required, at the expense of the Company. Directors have access at all times to the services of the Company Secretary, who is responsible to the Board for ensuring that all agreed policies and procedures are followed and all relevant rules and guidelines are complied with.

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Meetings of the BoardThe Board, which meets at least ten times per year, has overall responsibility for the strategic direction and management of the business. All key decisions affecting the Group are considered by the Board as a whole. The annual Group budget and business plan, trading and cash flow forecasts, major items of capital expenditure and any other significant strategic actions all require Board approval.

Board meetings are subject to a formal agenda and reports are tabled on the performance of each of the Groups businesses. Monthly management accounts that compare actual results with budget are subject to detailed review. Other strategic and commercial issues are considered as required. Board decisions are communicated on a timely basis to management to ensure that operational implementation occurs without delay.

Audit CommitteeThe members of the Audit Committee as at 31 December 2014 were DK Grundy (Chairman), Dr HJ Cialone and JJ Johnston. Executive Directors are permitted to attend meetings at the discretion of the Chairman of the Committee. The Committee meets at least twice a year and there is an opportunity for any meeting to be in private between the Non-Executive Directors and the Companys auditor to consider any matter they wish to bring to the attention of the Committee.

The terms of reference and areas of delegated responsibility of the Audit Committee are in the consideration and approval of the following matters:

monitoring the quality and effectiveness of the internal control environment, including the risk management procedures followed by the Group;

reviewing the Groups accounting policies and ensuring compliance with relevant accounting standards;

reviewing the Groups reporting and accounting procedures;

ensuring that the financial performance of the business is properly measured and reported on;

recommending the reappointment of the auditor and the level of their remuneration;

considering reports from the auditor on the outcome of the audit process and ensuring that any recommendations arising are communicated to the Board and implemented on a timely basis;

reviewing the Boards statement on internal control in the Annual Report; and

ensuring compliance with the relevant requirements of the AIM Rules.

Remuneration CommitteeThe members of the Remuneration Committee as at 31 December 2014 were Dr HJ Cialone (Chairman), DK Grundy and JJ Johnston. The Committee meets at least once a year and at such other

times as its Chairman shall require. Its terms of reference and areas of delegated responsibility are:

determining the terms and conditions of service of all Directors including their remuneration and the granting of share options;

seeking professional advice, as required, in order to ensure that the Groups remuneration arrangements are both competitive and appropriate to its scale and complexity by reference to other similar businesses; and

ensuring that the Group complies with the relevant requirements of the AIM Rules for Companies.

Members of the Committee are not involved in any decisions relating to their own remuneration.

Communication with shareholdersThe Board is committed to constructive dialogue with its shareholders. The Company uses the AGM as an opportunity to communicate with its shareholders. The AGM will be held at 10 am on 30 June 2015 at the Companys registered office: Castlefield House, Liverpool Road, Castlefield, Manchester M3 4SB.

The Groups website (www.flowgroup.uk.com) is the primary source of information on the Group. This includes an overview of the activities of the Group, information on the Groups subsidiaries and details of all recent Group announcements.

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Our Performance

OurGovernance

OurFinancials


Directors Report continuedInternal controlThe Board has overall responsibility for ensuring that the Group maintains a system of internal control to provide it with reasonable assurance regarding the reliability of financial information used within the business and for publication. The Board is also responsible for ensuring that assets are safeguarded and risk is identified as early as practicably possible. As noted, the Audit Committee has a significant role in this area. The internal control systems established are designed to manage rather than completely eliminate risk and can only provide reasonable but not absolute assurance against misstatement or loss.

The Group does not currently have an internal audit function and this will be kept under review as the Group progresses from technology development to commercial supply.

The Board reviews the effectiveness of the systems of internal control and its reporting procedures and augments and develops these procedures as required to ensure that an appropriate control framework is maintained at all times.

The principal control mechanisms deployed by the Group are:

Board approval for all strategic and commercially significant transactions;

detailed scrutiny of the monthly management accounts with all material variances investigated;

executive review and monitoring of key decision-making processes at subsidiary board level;

Board reports on business performance and commercial developments;

periodic risk assessments at each business involving senior executive management;

standard accounting controls and reporting procedures; and

regularly liaising with the Groups auditor and other professionals as required.

Statement of Directors responsibilitiesThe Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law, the Directors have prepared Financial Statements for the Group in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs) and for the Parent Company Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under Company Law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these Financial Statements, the Directors are required to:

select suitable accounting policies and then apply them consistently;

make judgements and estimates that are reasonable and prudent;

state whether IFRSs as adopted by the European Union and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Group and Parent Company Financial Statements respectively; and

prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Group and Parent Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Companys transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In so far as each of the Directors are aware:

there i

flowgroup annual report 2014.compressed

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