REG - Velocity Composites - Half-year Report
23 June 2020
VELOCITY COMPOSITES PLC
("Velocity", the "Company" or the "Group")
UNAUDITED HALF YEAR RESULTS
For the six months ended 30 April 2020
Velocity Composites plc, the leading supplier of advanced composite material kits to the aerospace market, announces its unaudited half-year results for the six months ended 30 April 2020 (the "Period" or "H1 FY20").
Andy Beaden, Non-Executive Chairman, said:
"The effects of the COVID-19 pandemic and resulting lockdowns on the aerospace industry have been dramatic and unprecedented. Whilst we are not where we expected to be right now, our vision and strategy for Velocity's growth are unchanged. The increased challenges facing our industry provide an even more meaningful commercial rationale for Velocity's technology and services, as the industry drives for even greater efficiencies in their production programmes.
"The Company's financial liquidity remains robust and the Board believes it has adequate cash and banking facilities to work through this disruption. With this in mind, the Board is confident that Velocity is well placed to benefit as production levels pick up and that the prospects for the Company in the mid- to long-term remain positive."
Key financials
·
Revenue of £9.5m (H1 FY19: £12.2m)
·
Gross margin of 20.5% (H1 FY19: 20.9%)
·
Operating loss of £0.7m (H1 FY19: loss £0.4m after exceptional administrative expenses of £0.4m)
·
Adjusted EBITDA1 loss of £0.3m (H1 FY19: profit of £0.2m)
·
Loss per ordinary share of 1.7p (H1 FY19: loss 1.2p)
·
Cash at Bank at 30 April 2020 of £2.8m including £1.2m of EIS funds2
1 Adjusted EBITDA defined as earnings before finance charges, tax, amortisation, depreciation, share based payments, exceptional restructuring costs.
2 EIS funds earmarked for EIS/VCT qualifying expenditure and is deemed to be 'employed' for those purposes in accordance with the relevant regulations.
Operating highlights
·
Approval from Boeing in January 2020 to supply structural composite material kits for its single aisle aircraft platform. Whilst production on 737 Max is currently frozen, this remains a strategically important step for the Company when it returns to service.
·
NADCAP Merit approval now achieved for all special processes at all Velocity production facilities.
·
Margaret Amos appointed to the Board as Independent Non-executive Director bringing extensive world class aerospace engineering, strategic finance, and supply chain experience.
·
Business development and customer programmes management team reorganised, strengthened with more senior aerospace expertise and over £30m pipeline of tangible opportunities being developed.
Impact of COVID-19
·
Management acted swiftly to the significant reduction of circa 75% in near-term customer demand, as COVID-19 air travel restrictions negatively impacted aircraft production due to airline confidence.
·
Circa 60% of the workforce were furloughed, with funding secured through the UK Government's employment retention scheme.
·
Production of personal protective equipment ("PPE") for NHS workers commenced in April 2020, providing additional work for staff.
·
Significant raw material inventory reduction programme was implemented, utilising supply chain management systems, which will also benefit customers, through strict alignment of raw material supply and demand schedules.
·
The actions above and other cash conservation measures demonstrate the robustness of the business and management.
Post half year end
·
Appointment of experienced Customer Programmes Director in May 2020 to support identified strategic growth opportunity with global customers.
·
Accelerated Customer Benefits Proposal formulated and deployed swiftly to take advantage of opportunities arising from COVID-19.
·
Coronavirus Business Interruption Loan ("CBIL") secured in May 2020, providing an additional £2.0m facility to support any short-term liquidity requirements.
·
Further update on LTA: Major customer extends existing agreement with Velocity until 31 December 2020, whilst the longer-term demand requirements of its customers are established - purchase order cover is in place until mid-2021.
Current trading and outlook
·
Lower levels of customer demand expected to continue for at least the duration of the lockdown and until the OEMs issue longer-term demand schedules to the Tier 1 manufacturers.
·
Velocity expects that restructuring in the industry as a result of the impact of COVID-19 will present immediate and longer-term opportunities for its cost-reducing service offering.
·
Strong proposition and pipeline of new business opportunities, totalling circa £30m on a full year basis.
·
Robust liquidity position with cash balances of £2.2m at 22 June 2020 (no invoice discounting used) and debt facilities of up to £7m, adequate resources to withstand likely modelled recovery scenarios.
·
Management will continue to take the necessary actions needed to ensure that the wellbeing of the Company's people is prioritised, its business capabilities are preserved, and cost and performance are optimised.
·
The Board remains confident in the long-term prospects of the Company.
·
Financial performance guidance for FY20 and FY21 remains withdrawn, until the Board has greater visibility on market activity.
Enquiries:
Velocity
Jon Bridges, Chief Executive Officer
Andy Beaden, Chairman
+44 (0) 1282 577577
Cenkos (Nominated Adviser and Broker)
Russell Cook
Ben Jeynes
+44 (0)20 7397 8900
+44 (0)20 7397 1977
+44 (0)20 7397 1974
Belvedere Communications (Financial PR)
Cat Valentine
Keeley Clarke
+44 (0) 7715 769 078
+44 (0) 7967 816 525
About Velocity
Velocity Composites is a manufacturer of composite material kits for the aerospace industry, delivering engineered kits for its customers to build component parts. The Company's clients include multi-national manufacturers of composite parts and assemblies, who in turn deliver to the world's leading civil and military aircraft manufacturers. The Airbus A320, A330, A350, A380, Eurofighter Typhoon, F35 Joint Strike Fighter, Boeing 737, and V22 Osprey are all constructed using parts manufactured from Velocity's kits. The Company's business model reduces the operating costs of preparing composite materials ahead of their usage in the construction of an aircraft part and as such, its offering is disposed to being self-financing for aircraft parts' manufacturers. Velocity Composites also exports to Europe and North America.
HALF YEARLY REVIEW TO 30 APRIL 2020
("the Period" or "H1 FY20")
Introduction
The financial year ending 31 October 2020 ("FY20") started well, with the Company making important strategic progress, expanding its portfolio of key aerospace qualifications, including achieving Boeing Approval, and securing new long-term supply agreements. Trading to the end of February 2020 was in line the Board's expectations, with order visibility showing an improving second half-year weighted performance.
In March 2020, the aerospace industry, like many others, was impacted dramatically by the travel restrictions and lockdown measures taken by governments worldwide to combat the spread of COVID-19. Production levels throughout Velocity's customer base were immediately curtailed, as social distancing and lockdown measures were put in place to protect employees and the delivery of new aircraft to airline operators was halted, following the near-total grounding of international passenger flights.
The industry shut down in March led to a cascading reduction in orders throughout the aerospace supply chain. Velocity was no exception, with near-term demand (three to six months) reducing by circa 75%. The management team has implemented a rigorous plan to protect employees, to mitigate the effect of this disruption on sales and to conserve cash, whilst maintaining services to customers and protecting the capabilities of the business and its ability to recover rapidly from this unprecedented situation.
Action was taken to strengthen the Company's financial liquidity position, in May 2020, securing a CBIL from its bankers, National Westminster Bank, which provides Velocity with an additional £2.0 million facility to support any short-term liquidity requirements, which will be drawn down fully in July. The Board believes that the Company's financial liquidity is robust and is confident that the business has adequate cash and banking facilities to withstand the disruption.
H1 FY20 Financial Review
Revenue in the Period was £9.5 million (H1 FY19: £12.2 million), with circa £1.7 million of sales lost through COVID-19 related reductions to customer demand schedules; and delays in the production of structural and consumable products for the 737 Max impacting contracted revenues further. Gross margin was also impacted by a change in product mix, reducing by 0.4% to 20.5% (H1 FY19: 20.9%). Administrative expenses, excluding exceptional items, were in line with the previous year at £2.6 million (H1 FY19: £2.6m). No exceptional costs were incurred in the Period, compared to £0.4m in H1 FY19.
The EBITDA loss in the Period rose by £0.5 million to £0.3 million (H1 FY19: profit of £0.2 million), as a result of the reduction in revenue. Loss before tax from continuing operations was £0.7 million (H1 FY19: loss of £0.4 million), resulting in an increased loss per share of 1.7p (H1 FY19: loss of 1.2p).
Cash at bank at 30 April 2020 was £2.8 million, compared to £3.4 million at 31 October 2019. The level of invoice discounting being used at 30 April 2020 was £0.8m (Oct FY19: nil). Cash at bank includes an amount of £1.2 million of EIS/VCT funds, which are allocated for investment in new production facilities in the US, mainland Europe and the UK. As such, they are deemed to be 'employed' for those purposes in accordance with the relevant regulations. Those funds, while accessible to the business, are maintained in a separate bank facility to facilitate management and tracking of expenditure.
As mentioned above, the Company was successful in obtaining a 24-month CBIL of £2.0 million in May 2020. The CBIL can be drawn down at any point in the next six-months, with an interest-free period for 12-months following drawdown and interest of LIBOR +3% in the 12-months thereafter. The funds are repayable in the second year of drawdown by equal instalments. It remains undrawn at the date of this announcement, but draw-down is planned in July.
Combining the CBIL with existing Invoice Discounting facility of up to £5.0 million, the Company has debt facilities of up to £7.0 million.
COVID-19
As detailed in the last trading update, the Company has taken the following actions to mitigate the impact of the COVID-19 pandemic on production:
·
circa 60% of the workforce has now been furloughed with funding secured through the UK Government's employment retention scheme;
·
certain areas of the Company's manufacturing facilities have been converted to the production of personal protective equipment ("PPE") for NHS workers, providing additional work for staff;
·
the Company has put in place a significant inventory reduction programme, utilising its supply chain management systems, which will also benefit its customers, through strict alignment of supply and demand schedules; and
·
a series of other cash conservation measures have been undertaken, including the postponement of planned capital expenditure programmes until required and the use of UK Government-promoted measures such as VAT payment holidays and PAYE deferrals.
The management is mindful that the Company must maintain full capability and skills through this difficult period and will ensure the business remains ready for the recovery and anticipated growth with the cash resources to fund the ramp-up when activity resumes. Whilst not affecting the support and delivery of new business opportunities, Velocity will need to align its manufacturing and costs and capacity with expected lower demand levels in the short to medium-term or until the landscape becomes clearer.
The market and new business
Prior to the COVID-19 outbreak, the total addressable market for Velocity was estimated to be over £1 billion, with the UK and EU circa £50-60 million and £120-£130 million, respectively. All the Company's revenue is currently generated in the UK (circa 90%) and EU (circa 10%). Larger opportunities, however, exist in the North American and Asia Pacific regions, where markets are estimated to be (£450 million - £475 million) and (£425 million - £450 million) respectively.
Velocity's unique service offer to customers reduces the cost of composite parts, through the supply of just in time material kits, removing the need for its aerospace manufacturing customers to purchase, store and cut the composite material. This saves time, reduces waste and costs. While production in the industry has been hit severely globally, Velocity currently has a small market share. As customers restructure to match lower levels of demand, they will have an even greater focus on cost, outsourcing what they would consider non-value-added activities, which plays to the strength of Velocity's offer. Velocity is adapting and tailoring new business bids to showcase its value-add services as an immediate and necessary requirement, rather than a "nice-to-have" long-term strategic goal and has formulated and deployed a Customer Accelerated Benefits Proposal.
Despite the disruption, and as part of the Company's strategy to pursue a smaller number of larger contracts, work has continued in both mainland Europe and North America with Wesco (now called Incora) on a number of larger new business opportunities.
As part of this growth strategy, James Eastbury has recently been appointed to the new role of Customer Programmes Director. He will lead a team of technically skilled programme managers and new business engineers in developing and executing comprehensive multi-level plans of engagement with identified customers and be responsible for the expansion of Velocity's revenue, with a focus on Europe. James has over 10 years' experience in the aerospace division of Solvay Composite Materials, an advanced materials and specialty chemicals company, where latterly he was Key Account Manager for Airbus.
Material Supplier Partnerships
The management of raw materials, which have a limited shelf life and require freezer storage, from industry enabled materials suppliers ("EMS") is a key part of Velocity's customer offering. The speed and scale of the disruption caused by the COVID-19 pandemic created an unprecedented change in customer demand, which fell outside the usual longer aerospace lead times. Velocity and the EMS are collaborating daily to effectively match supply with demand and Velocity is working quickly and accurately to provide the EMS with clear updates on material delivery schedules, pushing out the demand and preventing the delivery of material which is no longer needed. Velocity has received very positive feedback on this process from the EMS, a further endorsement of how Velocity can reduce risk to both customers and suppliers.
Advanced Technology and Development Centre ("ATDC")
The Company's dedicated ATDC at its Burnley site is near completion, and will support Velocity's growth plans and capitalise on the identified market opportunities. The new facility will focus on next generation products and processes for the industry, including further development of the Company's proprietary VRP System, enabling Velocity to improve its unique cost saving service further and support its aerospace customers, as they seek new ways to reduce costs and improve efficiency.
The VRP System, which manages and semi-automates Velocity's unique processes using Industry 4.0 principles to drive further efficiency through a focus on data analytics, includes real time demand management, automated optical verification, advanced material nesting, 3D rapid prototyping and paperless traceability. This system supports the Company's strategy to locate cost effective pop-up manufacturing hubs either near to or on customers' facilities by allowing Velocity to deploy its services quickly and uniformly from a central HQ without the need for duplication of back office services at each site.
The building will also house new office facilities and the Company's new ambient temperature stores environment, which will maximise materials management and increased material storage and bring economies of scale as the business grows.
The final fitting out of these important new facilities early in the Period and will recommence once the COVID-19 restrictions are lifted.
Update on extension of major customer Long-Term Agreements ("LTA")
The Company had agreed terms with one major customer on a multi-year extension of an LTA, as announced in January 2020. The COVID-19 disruption, however, has resulted in this new agreement being placed on hold, as announced on 30 March 2020. The customer has since extended its existing agreement with Velocity until 31 December 2020, whilst it establishes the longer-term demand requirements of its customers. Purchase order cover is in place until mid-2021. Though the Group prefers to operate through LTAs with all its customers, these do not represent contractually bound orders. Customers place individual contractually-binding orders, the terms of which reference back to their LTA.
Board and People
Along with James Eastbury, the Board was delighted to welcome Margaret Amos, who joined the Company as an Independent Non-Executive Director in April 2020. Margaret has 27 years' experience working for Rolls Royce Holdings plc and held a number of important senior roles in Finance, Strategy Development, Supply Chain and Programme management, including the position of Divisional Finance Director - Engineering, IT and Corporate Sector. She has already made a valuable contribution to the business, providing wise counsel in challenging circumstances. Margaret is chair of the Audit Committee. With Margaret and James, plus the changes made in 2019, the leadership of the Company has been radically strengthened, with a deep focus on the aerospace sector and composite supply-chain technologies.
The Board would like to thank the Group's staff for their continued hard work and commitment to the business, during this extremely challenging period. It is their dedication that has enabled Velocity to remain focused on delivering excellent customer service, which underpins our strategy and will ensure our future success.
Risk
In preparing these interim financial statements, the management is required to make accounting assumptions and estimates. The assumptions and estimation methods are consistent with those applied to the Annual Report and financial statements for the year ended 31 October 2019. With one exception, the principal risks and uncertainties that may have a material impact on activities and results of the Group remain materially unchanged from those described in the Annual Report. The exception is the risk that has arisen from the COVID-19 pandemic which has caused significant disruption to supply chains and a major impact on the aerospace sector.
For many businesses, the ongoing negotiations between the United Kingdom and European Union for its future relationship will give cause for uncertainty and concern in the second half of the year. While the general election in December 2019 resulted in a Government with a clear majority to negotiate a new trade deal, the negotiations through to the end of 2020 could lead to disruptions in supply chains. The aerospace sector is a global market which unlike many other sectors is largely tariff free. The UK is the second largest aerospace market in the world and works in global alliance on long-term projects which last for many years. For Velocity, its strategy remains to be country agnostic and to co-locate in aerospace clusters alongside its customers, which helps to mitigate some of the risk that Brexit may otherwise bring to the Group.
Outlook
The Company is experiencing artificially suppressed demand due to supply side disruption caused by COVID-19, with key customers implementing temporary site closures as they adjust to the new production rates being issued by the OEM's. The aftershock of COVID-19 is currently being forecast to adversely impact build rates of civil aircraft for two or three years. The bulk of this disruption is expected to impact the business in H2 FY20. In response, Velocity is resetting its cost structure, which it can flex and align with these short-term changes in demand. By the end of the current financial year, 31 October 2020, our cost base will have been reset, while still developing our key capabilities ready for the increasing demand which we expect in FY21. These expectations are supported by the work we have secured on the Boeing 737 Max programme, which we expect will start in the new calendar year, as this platform returns to production.
As we look forward, we remain confident there are numerous new programmes for us to onboard our unique, cost reducing kitting services and believe our technology solutions will benefit the customer base, as increasing efficiencies are sought. Our commercial relationships are deepening with customers and suppliers. We are also developing our service offering into the defence sector, a sector which has not experienced the same headwinds as those weathered in civil aviation.
In conclusion, the Company remains well funded, the pipeline of opportunities is significant, when compared to our current market share, and the business continues to widen its sales reach into new territories and new work packages, for all composite aircraft programmes. With this in mind, the Board continues to view the long-term future of the business with confidence.
Andy Beaden
Non-Executive Chairman
23 June 2020
CONDENSED CONSOLIDATED STATEMENT OF TOTAL COMPREHENSIVE INCOME
For the six months ended 30 April 2020
Half year
Half year
Year
ended
ended
ended
30 April
30 April
31 October
2020
2019
2019
(unaudited)
(unaudited)
(audited)
Note
£'000
£'000
£'000
Revenue
3
9,502
12,243
24,316
Cost of sales
(7,558)
(9,679)
(19,047)
Gross profit
1,944
2,564
5,269
Administrative expenses excluding exceptional costs
(2,589)
(2,571)
(5,177)
Exceptional administrative expenses
-
(377)
(692)
Other operating income
-
4
6
Operating loss analysed as:
Adjusted EBITDA
(259)
280
613
Depreciation & Amortisation
(326)
(219)
(449)
Share based payments
(60)
(64)
(66)
Exceptional administrative expenses
-
(377)
(692)
Operating loss
(645)
(380)
(594)
Finance income and expense
(40)
(50)
(58)
Loss before tax from continuing operations
(685)
(430)
(652)
Income tax income
67
-
16
Loss for the period and total comprehensive loss
(618)
(430)
(636)
Loss per share - Basic (pence per share) from continuing operations
5
(1.7)
(1.2)
(1.8)
Loss per share - Diluted (pence per share) from continuing operations
5
(1.6)
(1.2)
(1.7)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 30 April 2020
As at
As at
As at
30 April
30 April
31 October
2020
2019
2019
(unaudited)
(unaudited)
(audited)
Note
£'000
£'000
£'000
Non-current assets
Intangible assets
281
350
318
Property, plant and equipment
1,848
1,130
1,061
Right of use assets
4
1,265
-
-
Total non-current assets
3,394
1,480
1,379
Current assets
Inventories
3,361
3,048
3,177
Trade and other receivables
2,924
4,639
4,149
Corporation tax
-
113
75
Cash and cash equivalents
2,841
4,371
3,424
Total current assets
9,126
12,171
10,825
Total assets
12,520
13,651
12,204
Current liabilities
Trade and other payables
2,699
4,386
3,223
Grant income deferred
-
3
-
Net obligations under lease liabilities
4
436
144
121
Total current liabilities
3,135
4,533
3,344
Non-current liabilities
Deferred tax liabilities
-
-
-
Net obligations under lease liabilities
4
1,252
224
169
Total non-current liabilities
1,252
224
169
Total liabilities
4,387
4,757
3,513
Net assets
8,133
8,894
8,691
Equity attributable to equity holders of the company
Share capital
6
90
90
90
Share premium
9,727
9,727
9,727
Share-based payments reserve
559
534
537
Retained earnings
(2,243)
(1,457)
(1,663)
Total equity
8,133
8,894
8,691
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the six months ended 30 April 2020
Share-based
Share
Share
Retained
Payments
Total
capital
premium
earnings
reserve
Equity
£'000
£'000
£'000
£'000
£'000
As at 31 October 2018
89
9,727
(1,091)
536
9,261
Loss for the period
-
-
(430)
-
(430)
89
9,727
(1,521)
536
8,831
Transactions with shareholders:
Share-based payments
-
-
-
62
62
Vesting of share options
1
-
64
(64)
1
As at 30 April 2019
90
9,727
(1,457)
534
8,894
Loss for the period
-
-
(206)
-
(206)
90
9,727
(1,663)
534
8,688
Transactions with shareholders:
Share-based payments
-
-
-
3
3
As at 31 October 2019
90
9,727
(1,663)
537
8,691
Loss for the period
-
-
(618)
-
(618)
Transactions with shareholders:
Share-based payments
-
-
-
60
60
Vesting of share options
-
-
38
(38)
-
As at 30 April 2020
90
9,727
(2,243)
559
8,133
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended 30 April 2020
Half year
Half year
Year
ended
ended
ended
30 April
30 April
31 October
2020
2019
2019
(unaudited)
(unaudited)
(audited)
£'000
£'000
£'000
Operating activities
Loss for the period
(618)
(430)
(636)
Taxation
(67)
-
(16)
Profit on disposal of assets
-
(1)
(11)
Finance costs
39
50
58
Amortisation of intangible assets
65
64
134
Depreciation of property, plant and equipment
261
155
315
Share-based payments
60
62
65
Grant income amortisation
-
(4)
(6)
(260)
(104)
(97)
Decrease in trade and other receivables
1,225
1,088
1,579
Increase in inventories
(184)
(304)
(433)
Decrease in trade and other payables
(1,331)
(392)
(1,363)
Cash (used)/generated from operations
(550)
288
(314)
Income taxes received
142
-
54
Net cash (outflow)/inflow from operating activities
(408)
288
(260)
Investing activities
Purchase of property, plant and equipment
(730)
(59)
(156)
Development expenditure capitalised
(28)
(52)
(89)
Proceeds from disposal of property, plant and equipment
-
-
15
Net cash used in investing activities
(758)
(111)
(230)
Financing activities
Proceeds from issue of shares
-
-
-
Payment of share issue costs
-
-
-
Finance costs paid
(39)
(50)
(58)
Increase/(Decrease) in invoice discounting
807
(418)
(612)
Repayment of finance lease capital
(185)
(64)
(142)
Net cash generated from/(used in) financing activities
583
(532)
(812)
Net decrease in cash and cash equivalents
(583)
(355)
(1,302)
Cash and cash equivalents at beginning of period
3,424
4,726
4,726
Cash and cash equivalents at end of period
2,841
4,371
3,424
NOTES TO INTERIM REPORT
1. General information
Velocity Composites plc (the 'Company') is a public limited company incorporated and domiciled in England and Wales. The registered office of the company is AMS Technology Park, Billington Road, Burnley, Lancashire, BB11 5UB, United Kingdom. The registered company number is 06389233.
The Company holds shares in a wholly owned subsidiary company, Velocity Composites Sendirian Berhad, which is domiciled in Malaysia. During this financial period, the company has provided engineering services to the Group. The Company also wholly owns Velocity Composites Aerospace Inc. to prepare for future expansion in the United States of America. These subsidiaries together with Velocity Composites plc, now forms the Velocity Composites Group ('the Group').
The Group's principal activity is that of the sale of kits of composite material and related products to the aerospace industry.
The condensed consolidated interim financial statements are unaudited and do not constitute statutory financial statements within the meaning of Section 435 of the Companies Act 2006. The review report on these interim financial statements is set out on page 13. The financial information for the year ended 31 October 2019 has been derived from the published statutory financial statements for the Company. A copy of the full accounts for that period, on which the auditor issued an unmodified report that did not contain statements under Section 498(2) or 498(3) of the Companies Act 2006, has been delivered to the Registrar of Companies.
These interim financial statements will be posted to the Company's shareholders and are available from the Registered Office at AMS Technology Park, Billington Road, Burnley, Lancashire, BB11 5UB or from our website at www.velocity-composites.com.
2. Accounting policies
Basis of preparation
These condensed consolidated interim financial statements are for the six months ended 30 April 2019. This interim financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union, and has been prepared using consistent accounting policies as applied in the Company's full year accounts to 31 October 2018 and as expected to be applied in the full year accounts to 31 October 2019. They have therefore been prepared in compliance with the measurement and recognition criteria of IFRS as adopted by the European Union.
These financial statements have been prepared on a going concern basis and using the historical cost convention, as modified by the revaluation of certain items, as stated in the accounting policies. These policies have been consistently applied to all periods presented, unless otherwise stated.
The financial statements are presented in sterling and have been rounded to the nearest thousand (£'000) except where otherwise indicated.
The following standards have been adopted for the first time in the current financial year.
IFRS 16 Leases
This standard was issued on 13 January 2016 and is effective for accounting periods beginning on or after 1 January 2019 and has been applied to the Group's financial reporting for these interim accounts. The standard requires lessees to recognise assets and liabilities for all leases with lease terms of more than 12 months, unless the underlying asset is of low value.
On the transition date of 1 November 2019, the Group capitalised £492,000 in respect of outstanding lease liabilities that satisfied the criteria under IFRS 16. This was applied using the modified retrospective approach and therefore had no impact on opening retained earnings. These assets are recognised as a 'right of use' asset with a corresponding lease liability. During the financial period, the Group also acquired a new building lease and recognised a right of use asset and liability to the value of £885,000. Further details on transition can be found in note 4.
Going concern
The financial statements are prepared on a going concern basis which the Directors believe is appropriate given robust financial liquidity, with adequate cash and banking facilities to work though this crisis. The Company is financed by its cash, invoice discounting facility of up to £5m and CBIL loan of £2m.
This assessment has been supported by the preparation of forecasts for the 18-month period through to 31 October 2021 based on revenue, margin, cost and working capital assumptions. In any set of forecasts there are inherent risks relating to each of these assumptions. In preparing these forecasts we have undertaken sensitivity analysis and assumed a 70% reduction for H2 FY20 pre-COVID-19 revenue levels based on demand levels from our customers, a 40% reduction in FY21 pre Covis-19 revenue levels, and assumed no new business. In addition, management believe they will be able to take decisive actions to manage the Company's cost base and working capital. The Company has taken action to reduce its stock levels significantly over the forecast period compared to pre-COVID-19 levels, by adjusting material supply with its suppliers. Some of this planning was already in place as a result of Brexit with the need not to maintain the same level of safety stocks. Debtors remain well managed with a low level of overdue debt. After taking these factors into account the forecasts demonstrate that the Company has strong headroom with its current facilities.
With the impact of COVID-19 difficult to predict we have considered a further downside scenario, which we consider severe, and reduces revenue to 25% of pre-COVID-19 levels in FY20 and maintains this low level of revenue through FY21, again with no new business assumed. The latest government information is that the risk of a second spike is reduced, and lockdown continues to be eased on a week by week basis, pointing towards this downside scenario being avoided. This downside scenario shows that the Company still has sufficient liquidity through this period. If the impact of the pandemic should be worse than the assumptions applied in construction of this prudent downside scenario, the Company would undertake more substantive restructuring to mitigate the impact. We have also modelled a scenario which reduces future revenues to only those committed currently. Even in this extreme scenario our forecasts demonstrate sufficient headroom, utilising current facilities, to continue as a going concern.
The Directors believe that the Company it is well placed to manage its business risks, and after reviewing its forecasts and scenarios and undertaking stress testing, consider the existing cash and banking facilities provide the Company with adequate resources to continue in operational existence in the period following the release of these financial statements. Therefore, the Directors continue to adopt a going concern basis of accounting in preparing these financial statements.
We have also discussed with our bankers and other financial advisers the resultant trading performance and they have indicated a strong desire to continue to support the Company.
3. Segmental analysis
The Group supplies a single range of kitted products into a single industry and so has a single segment. Additional information is given below regarding the revenue receivable based on geographical location of the customer.
Half year
Half year
Year
ended
ended
ended
30 April
30 April
31 October
2020
2019
2019
(unaudited)
(unaudited)
(audited)
£'000
£'000
£'000
Revenue
United Kingdom
8,413
11,116
21,850
Rest of Europe
1,066
1,115
2,435
Rest of World
23
12
31
9,502
12,243
24,316
Four customers of the Group are responsible for over 10% of the total revenue in each of the periods presented. The majority of revenue arises from the sale of goods. Where engineering services form a part of revenue it is only in support of the development or sale of the goods.
4. Leases and IFRS 16
At the start of the period, the Group transitioned to IFRS 16 using the modified retrospective approach, whereby assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to those leases recognised on the balance sheet as at 31 October 2019. As a result, there were no prior period adjustment or impact to retained earnings. A significant increase in non-current assets representing right of use assets and a corresponding lease liability was recognised. The impact of IFRS 16 on assets and liabilities from transition and acquired during the period has been summarised below:
Right of use assets
Land and property
Motor vehicles
Total
Cost
£'000
£'000
£'000
Balance as at 1 November 2019
-
-
-
Adjustment on transition to IFRS 16 on 1 November 2019
479
9
488
Additions
885
-
885
Disposals
-
-
-
Balance as at 30 April 2020
1,364
9
1,373
Depreciation
Balance as at 1 November 2019
-
-
-
Adjustment on transition to IFRS 16 on 1 November 2019
-
-
-
Depreciation charge for the year
104
4
108
Disposals
-
-
-
Balance as at 30 April 2020
104
4
108
Net book value at 30 April 2020
1,260
5
1,265
Right of use liabilities
Total
Balance as 1 November 2019
-
Adjustment on transition to IFRS 16 on 1 November 2019
488
Repayments
(137)
Addition to right-of-use assets in exchange for increase in lease liabilities
885
Other lease movements
16
Balance as at 30 April 2020
1,252
There is no impact on deferred tax. The assets will be classified for capital allowances, with interest based on a discount factor being allowable for corporation tax purposes.
In relation to the right of use assets, the following expenses were charged to the income statement:
£'000
Depreciation of Land and buildings
104
Depreciation of Motor vehicles
4
Interest expense (included in Finance costs)
16
Total expense in income statement relating to Right of Use assets
124
The adoption of IFRS 16 for HY2020 has led to the elimination of lease payments of £123k and the introduction of additional depreciation of £108k and finance costs of £16k. The impact of this is an increase in operating profit of £15k and, after taking account of finance costs, a reduction in profit before tax of £1k.
5. Loss per share
Half year
Half year
Year
ended
ended
Ended
30 April
30 April
31 October
2020
2019
2019
(unaudited)
(unaudited)
(audited)
£'000
£'000
£'000
Loss for the period
(618)
(430)
(636)
Weighted average number of shares
Shares
Shares
Shares
Weighted average number of shares in issue
35,943,337
35,803,582
35,860,652
Weighted average number of share options
2,195,402
630,157
587,101
Weighted average number of shares (diluted)
38,138,739
36,433,739
36,447,753
Share options have not been included in the Diluted calculation as they would be anti-dilutive with a loss being recognised.
Half year
Half year
Year
ended
ended
ended
30 April
30 April
31 October
2020
2019
2019
£
£
£
Loss per share
Basic & Diluted
(0.02)
(0.01)
(0.02)
6. Share capital of the Company
Number of shares
Share Capital
Share Premium
£
£
Share capital issued and fully paid
Ordinary shares of £0.0025 each as at 1 November 2018,
35,795,539
89,489
9,727,158
Shares issued to satisfy exercise of share options on 18 April 2019
120,640
302
-
Ordinary shares of £0.0025 each as at 30 April 2019 & 31 October 2019
35,916,179
89,791
9,727,158
Shares issued to satisfy exercise of share options on 20 February 2020
70,000
175
-
Ordinary shares of £0.0025 each as at 30 April 2020
35,986,179
89,966
9,727,158
Ordinary shares carry the right to one vote per share at general meetings of the Company and the rights to share in any distribution of profits or returns of capital and to share in any residual assets available for distribution in the event of a winding up.
7. Capital Commitments
At 30 April 2020 the Group had £NIL of capital commitments relating to the purchase of plant and machinery (30 April 2019 - £21,950).
INDEPENDENT REVIEW REPORT TO VELOCITY COMPOSITES PLC
Introduction
We have reviewed the consolidated, condensed set of financial statements in the half-yearly financial report of Velocity Composites PLC (the 'group') for the six months ended 30 April 2020 which comprises consolidated statement of total comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated statement of cash flows and the related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors.
As disclosed in note 2, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.
Our responsibility
Our responsibility is to express a conclusion to the company on the condensed set of financial statements in the half-yearly financial report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity'. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
The impact of macro-economic uncertainties on our audit
Our review of the condensed set of financial statements in the half-yearly financial report requires us to obtain an understanding of all relevant uncertainties, including those arising as a consequence of the effects of macro-economic uncertainties such as Covid-19 and Brexit. Such reviews assess and challenge the reasonableness of estimates made by the directors and the related disclosures and the appropriateness of the going concern basis of preparation of the financial statements. All of these depend on assessments of the future economic environment and the company's future prospects and performance.
Covid-19 and Brexit are amongst the most significant economic events currently faced by the UK, and at the date of this report their effects are subject to unprecedented levels of uncertainty, with the full range of possible outcomes and their impacts unknown. We applied a standardised firm-wide approach in response to these uncertainties when assessing the company's future prospects and performance. However, no review of interim financial information should be expected to predict the unknowable factors or all possible future implications for a company associated with a course of action such as Brexit.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 April 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.
Use of our report
This report is made solely to the company, as a body, in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information performed by the Independent Auditor of the Entity'. Our review work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company as a body, for our review work, for this report, or for the conclusion we have formed.
Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
Manchester
23 June 2020
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDIR KLLFLBQLZBBD
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