Velocity Comp Regulatory News (VEL)

24 January 2023

VELOCITY COMPOSITES PLC

("Velocity or the "Company")

FINAL RESULTS FOR YEAR ENDED 31 OCTOBER 2022

Velocity Composites plc (AIM: VEL), the leading supplier of composite material kits to aerospace and other high-performance manufacturers, is pleased to announce the Company's audited results for the twelve months to 31 October 2022.

Financial Highlights

· Revenue increased 22% to £12.0m (FY21: £9.8m) as the UK civil aerospace market began to recover.

· Gross margin decreased from 26% to 23% due to significant inflationary pressures. This should prove to be temporary as prices increase and efficiencies catch up in the medium term. 

· Full year adjusted EBITDA[*] loss of £0.5m (FY21: loss of £0.5m) as anticipated, due to prioritising investment and carrying overheads to achieve long term growth objectives.

· Net cash position of £0.2m as at 31 October 2022 (FY21: £0.9m) reflecting investment in new US facility.

Operational Highlights:

· Development of the Velocity Resource Planning (VRP) system for better controls, more efficient operational scenarios and full traceability from long-term demand or order management to the delivery of composite kits to customers.

· Developing the digitisation of the entire demand and forecasting system, alongside the rollout of the digital cell from the development area into the production area, proving invaluable in managing material supply chain issues in the first half of the year.

· Implementation of a new business system for the non-VRP processes to help with the scalability and standardisation needed as the Company expands into the US.

· Continued to improve existing customer partnerships and targeted new business development in key locations and markets (aerospace, high-end automotive, lightweight transport).

Post-Period Highlights:

· Five-year Work Package Agreement ("WPA") signed in December 2022 with GKN Aerospace in the United States worth in excess of US$100 million in revenue over five years as part of US Expansion.

Outlook:

· As a result of the Company's investments, the business is expected to grow very significantly in the next two years. Growth is largely expected to come in the North American region.

· The Company has contracted UK and US business which, when in full production (at current OEM run rates), will significantly increase revenue.

· Strong pipeline of new business which can also potentially increase revenue even further over the next few years

· Composites will play an important role in reducing the use of fossil fuels through greater fuel efficiency.

Andy Beaden, Chairman of Velocity, said: "As a result of our investments, we expect the business to grow very significantly in the next two years. This growth is largely expected to come in the North American region, and we have designed our new facility in Alabama so it can expand to manage this expected expansion.

"To deliver our ambitious targets, we also expect some growth to come from the non-aerospace sector in industries such as high-performance automotive, alternative fuel solutions, and large consumer products. Global defence spending is expected to increase significantly in the next few years, and we believe this will feed further growth and opportunities. With both demand for and the costs of composite materials increasing, there will be greater pressure on manufacturers to save on material wastage, which is at the core of our VRP solution. The Board feel confident in Velocity's ability to achieve strong growth opportunities over 2023." 

Jon Bridges, CEO, Velocity added: "Our actions in FY22 have prepared the business for a return to growth in FY23 in terms of cost management, targeted investment, a forecasted increase in existing programme production rates and significant new business opportunities in the UK and the US. Our scalable and digital business model will open up opportunities in the global industry at a scale much higher than historic programmes. Our business model is more relevant now as customers look to prioritise their core business post Covid-19, and the industry strives to meet its sustainability targets. Composites will play an important role in reducing the use of fossil fuels through greater fuel efficiency."

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the UK version of the EU Market Abuse Regulation (2014/596) which is part of UK law by virtue of the European Union (Withdrawal) Act 2018, as amended and supplemented from time to time. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

Enquiries:

About Velocity Composites

Based in Burnley, UK, Velocity Composites is the leading supplier of composite material kits to aerospace and other high-performance manufacturers, that reduce costs and improve sustainability. Customers include Airbus, Boeing, Safran and GKN.

By using Velocity's proprietary technology, manufacturers can also free up internal resources to focus on their core business. Velocity has significant potential for expansion, both in the UK and abroad, including into new market areas, such as wind energy, urban air mobility and electric vehicles, where the demand for composites is expected to grow.

Chairman's Report

Market Recovery

The global civil aerospace sector has started to recover and combined with a robust defence industry and opportunities outside aerospace, we are selling our services and technology into strong growing markets. Our investment in innovation and extended supply chain services is paying off. As we enter 2023, our contracted business, when fully onboarded, is close to three times the run rate of most of FY22. This is mainly a result of our new US business, but also more work flowing from existing UK contracts. 

The Company's future is underpinned by these long-term contracts with leading blue-chip industry customers and the accelerating need to meet sustainability targets. Composite material technology has a key part to play in light-weighting aircraft, along with enabling new fuel systems to be introduced. Our offering provides customers and suppliers with the ability to achieve far more ambitious sustainability goals.

FY22 Financial results

Revenue increased 22% to £12.0m as the UK civil aerospace market recovered to an extent, although it remains significantly below pre-pandemic levels. It was essential, therefore, that Velocity expanded internationally, particularly into the US, which is the largest aerospace market in the world. 

Over the past year, we have focused on developing our services and technology to further support customers productivity and sustainability goals. The Board decided to re-invest any margin growth and cost efficiencies back into growth opportunities. The EBITDA result of a £0.5m loss, was therefore expected, as we carried overheads to achieve our longer-term growth objectives. These initial objectives are achievable with the current contracted UK and US business for 2023 and 2024.

With inflation in all our major supply inputs, our gross margin came under very significant pressure, decreasing slightly from 26% to 23%. However, this should prove to be temporary as prices increase and efficiencies catch up in the medium term. 

Given the challenges, the Board is pleased to have achieved a positive operating cash flow after tax as a result of effective working capital management. We were also able to recover some of our FY22 innovation costs through UK R&D tax credits.

The strategic progress and financial results are explained further in the Financial Review below.

Board

There were a number of changes to the Board during the year as we looked to strengthen and develop its composition.

Annette Rothwell joined the Board as a Non-executive Director in March 2022, bringing with her experience as a senior executive in global procurement and supply chain management across our core industry partners. Dr David Bailey, CEO of Composites UK, was appointed as a Non-executive Director in June 2022. He has had a long career in aerospace operational management, and has a deep understanding of composite technology, as well as tackling sustainability objectives, across aerospace and other industries. Both Annette and David are highly respected in the industries we serve.

Robert Soen stepped down from the Board as a Non-executive Director at the end of our financial year. He has moved to a more commercial part-time consultancy role at Velocity, working with our CEO, Jonathan Bridges, across various global supply chain projects. His contribution in the last three years has been immense and I want to thank him personally for his support. Annette has taken over as Chair of the Remuneration Committee and David has taken on a new role as Chair of our Sustainability Committee.

On behalf of the Board, I would also like to thank Chris Williams, who stepped down as Group Finance Director in December 2022 and we welcome Adam Holden, as our new Group Finance Director and Company Secretary.

Employees

Our staff have worked under significant pressure in the last few years and we are grateful for their efforts. Velocity's achievements in terms of innovation, new systems, advance manufacturing, and new business, are a lasting legacy to their hard work. We also welcome new employees that have joined us in the USA. We expect the full commissioning of our facility in Alabama in 2023, with progress well advanced in 2022 thanks to the UK team's efforts around design and setup.

Velocity is committed to the development of a diverse and highly skilled workforce as a key asset for delivering our future growth. Retention and development of staff is therefore a critical objective for the business.

Sustainability

The environmental risks to our planet are the main driver for innovation in our industry. At Velocity, we have built a business that supports the efficient use of composite materials and delivers a significant reduction in waste. Over time, we have invested in digital technologies on the manufacturing shop floor and in our engineering services. This has resulted in the development of the Group's advanced Velocity Resource Planning ("VRP") technology and supply chain services, which we believe has a major contribution to make in helping our customers and suppliers achieve their targets. Helping to meet sustainability objectives is a key element of our customer service offering.

Industries outside aerospace, such as specialist automotive and various forms of electric powered transportation, are also looking to achieve similar sustainability objectives. We are active in trials and proof of concept projects in these other industrial sectors. We expect that over time these will become meaningful growth areas and help rebalance our customer portfolio.

Our new Non-executive Director, David Bailey, is chairing a specialist committee to oversee our business initiatives that drive forward sustainability across Velocity and support our customers and suppliers in their own objectives in this area. At Velocity we are proud to work across the supply chain to support those companies and their employees to achieve progressive improvements each year in sustainability objectives.

Outlook

As a result of our investments, we expect the business to grow significantly in the next two years. This growth is largely expected to come in the North American region, and we have designed our new facility in Alabama so it can be expanded to manage this expected expansion.

We have contracted UK and US business which, when in full production (at current OEM run rates), will significantly increase revenue, several times the FY22 level. This is combined with a strong pipeline of new business which can also potentially increase revenue even further over the next few years. To deliver our ambitious targets, we expect some growth to come from non-aerospace sectors, in industries such as high performance automotive, alternative fuel solutions and large consumer products. Global defence spending is also expected to increase significantly in the next few years, and we believe this will generate further growth and opportunities. With both demand for, and the costs of composite materials increasing, there will be greater pressure on manufacturers to save on material wastage, which is at the core of our VRP solution. 

Both Airbus and Boeing produce regular and detailed market forecast documents which are available to download from their websites and key data is sourced from:

www.boeing.com/commercial/market/commercial-market-outlook

and www.airbus.com/en/products-services/commercial-aircraft/market/global-market-forecast

Ultimately, international sustainability targets will underpin the long-term growth opportunities and continued demand for our products and services.

The Board, employees and external investors have all supported the Company's growth aspirations and we expect a significant return on that investment. 

Andrew Beaden

Chairman

23 January 2023

CEO Report

Overview

In FY22, business confidence started to improve in our existing and prospective customer base. We focused our business development on key scale opportunities, including outside the UK. In the last few years, our strategy has switched to targeted investment to grow a smaller number of larger customers, we believed could benefit from utilising our advanced technology to support "total cost of ownership" ("TCO") business cases. TCO business cases focus on increased productivity, reduced inventory and higher levels of quality control. 

Our new approach is to perform a detailed assessment of our customers' current front production operations and then provide them with a clear commercial business case, utilising the latest VRP solution. We have been able to do this due to the investments we have made in our technology in recent years. Being able to clearly detail all the benefits of our services to potential customers has given Velocity a healthy pipeline of opportunities. It was this approach that led to our largest contract agreement to date, announced post year end in December 2022. We have signed a five-year Work Package Agreement with GKN Aerospace in the United States expected to be worth in excess of US$100 million in revenue over five years.

It is testament to the hard work of the Velocity team that we delivered this agreement within our existing resources, under close cost control, with a smaller number of key staff due to the pandemic.

Customers

While existing programme customer rates are still to recover to pre-pandemic levels, our focus has been on the following pillars:

· Technology - to drive efficiencies and optimisation in existing programmes and assist in winning new business.

· Data - use the TCO business case model to clearly identify customer benefits to the point where the document created can be used as an internal business case for the customer, speeding up the pipeline process.

· Customers - focus on enhancing value with existing customers and targeted business development in key locations and markets (aerospace, high end automotive, lightweight transport).

Our customers are advanced manufacturers and innovators in their specialist technology field. We have tailored our services and new business approach to support them in delivering their specific sustainability and efficiency objectives.

The development of the TCO business case process has been instrumental in all our business development activities as we streamline and speed up the onboarding process. Working with global aerostructure manufacturers with complex supply chains, it was time consuming to communicate all the benefits of Velocity's offering through many layers of the organisation.

The TCO model has created a structured new business process. Working with actual customer data, we can identify all the savings available and compare this to the customer's current process in a detailed business case document. We have successfully used this with existing and new customers. Furthermore, by building relationships at the highest level within customer organisations we can ensure that Velocity receives senior leader sponsorship.

Velocity has also progressed opportunities to balance the ratio of civil aerospace and defence programmes in our customer portfolio to protect it from any future disruptions in any one part of the composites industry. The results of this can be seen in the mix of new contracts we have won and this will continue as we increase our presence in the large US defence industry.

Operational and Technology Progress

Our VRP system has created better controls, more efficient operational scenarios, and full traceability from long term demand or order management to the delivery of composite kits into customers' manufacturing areas. This has included the digitisation of the entire demand and forecasting system, plus the roll out of the digital cell from the development area into the production area. This proved invaluable in managing material supply chain issues in the first half of FY22, and the implementation of larger, more complex nesting scenarios for both existing customers and business development.

As the VRP system fully digitises, this will help Velocity as it expands into new geographic locations and means we can implement the standardisation of our processes and aid training of new staff; all with real time links back into central management.

In addition, we have started the implementation of a new business system for the non-VRP processes, which will help with the scalability and standardisation needed as the business expands into the US.

US Expansion

In December 2022, Velocity signed an agreement with GKN Aerospace in the US and has opened an Advanced Manufacturing Facility in Alabama to deliver the project. The Group remains on track for site approvals and first article testing by February 2023, in order for volume production to start in Q1 2023. The processes, equipment and technology used in the US are identical to the UK facilities which assisted the customer decision based on the proven service model, reputation and confidence in our delivery.

The facility itself can be scaled to support multiple customers in the region and work continues with other potential large-scale customers utilising the TCO business case and senior level approach, and we are working towards securing additional agreements in 2023. 

Employees

As with previous years I am pleased to report that staff turnover has remained low. The Company has continued to invest for growth and, as such, has retained staff in critical areas. We have expanded teams in business development, technology development and information systems to support business improvement and bid activities. This has been delivered by external recruitment, internal career development and external contractor support, and as new business moves into full implementation there will be budgeted proportionate growth in direct employees with targeted increases in indirect roles. We have welcomed Andy Caunce as Head of Operations to help as we return to growth in multiple locations.

Outlook

Looking ahead, our actions in FY22 have prepared the business for a return to growth in FY23 in terms of cost management, targeted investment, a forecasted increase in existing programme production rates and significant new business opportunities in the UK and the US.

We believe our TCO business case model and senior level engagement approach to key customers, coupled with an increase in existing production rates as aircraft deliveries recover, will deliver the planned growth. Our scalable and digital business model is expected to open up opportunities in the global industry at a scale much higher than historic programmes.

Our business model is more relevant now as customers look to prioritise their core business post Covid-19, and the industry strives to meet its sustainability targets. Composites will play an important role in reducing the use of fossil fuels through greater fuel efficiency.

Section 172 Statement

In accordance with section 172 of the Companies Act 2006, the Directors, collectively and individually, confirm that during the year ended 31 October 2022, they acted in good faith and have upheld their 'duty to promote the success of the Group' to the benefit of its stakeholder groups.

The Directors acknowledge the importance of forming and retaining a constructive relationship with all stakeholder groups. Effective engagement with stakeholders enables the Board to ensure stakeholder interests are considered when making decisions which is crucial for achieving the long-term success of the Group. The main mechanisms for wider stakeholder engagement and feedback can be found on page 20 onwards in the Statement on Corporate Governance of the 2022 Annual Report and Financial Statements.

Jonathan Bridges

Chief Executive Officer

23 January 2023

Financial Review

Statement of Comprehensive Income

Revenue for FY22 of £12.0m (FY21: £9.8m) represents an increase of 22%, as a result of both recovery in civil aerospace production rates and smaller contract wins in the UK. Though UK sales and production volumes remain significantly below pre-pandemic levels, contracted long term business is now above those levels, with production at the new US operating facility to commence in 2023. When reviewing these historical results, it should be noted that a large element of the overhead cost base has been focused on services innovation and expansion of our business on a global basis.

The increased volume has generated a gross profit of £2.7m, £0.2m ahead of the £2.5m achieved in FY21, resulting in a reported gross margin percentage of 23.0% (FY21: 26.0%). This reduction is expected to be temporary, as it results from a lag in some increased cost pressures, when compared to revising contracted pricing with customers. All things being equal, this timing difference, should correct itself through 2023.

Administrative expenses have increased £0.2m from £3.9m in FY21 to £4.1m in FY22. This small increase is a major achievement, given the significant investment, in and focus on, business development and innovation. Costs have increased in many areas and there was a major effort required to counter these pressures. Though we expect the cost base to increase with the US operations opening in 2023, the central costs will be spread over two to three times the activities, once the new contracted business is onboarded.

The increase in volume has therefore been offset by the investment in overheads to support the future growth, resulting in an Adjusted EBITDA[2] loss of £0.5m (FY21: loss of £0.5m).

The investment in business development, technology and staff development during FY22 means the Group is well placed for the now contracted volume growth in the forthcoming year. US growth will be delivered through the Work Package Agreement with GKN which will commence in early FY23 and is expected to be at full rate production by August 2023. Growth in the UK will be through an increase to existing contract volumes, with new opportunities to pursue in both regions, as aircraft deliveries continue to recover following the pandemic. 

Therefore, Velocity is in an excellent position to deliver this growth, without a linear increase to its overhead base and will also benefit in FY23 from the technological investments that have driven efficiencies in the operational process.

Cashflow and Capital Investment

The decrease in the year end cash and cash equivalents position of £1.2m to £2.3m (FY21: £3.5m) is a reflection of a combination of factors. Firstly, the Adjusted EBITDA loss referred to above has been partially offset by a positive movement in working capital of £0.3m (FY21: £0.9m), resulting in a cash outflow from operations of only £0.2m (FY21: cash inflow from of operations of £0.3m). After adjusting for tax receipts in respect of R&D expenditure of £0.5m (FY21: £Nil), the overall result was a cash inflow from operating activities of £0.3m (FY21: £0.3m).

The tight control on working capital, can be further analysed as follows: A positive working capital movement through a £1.1m increase in trade and other payables from suppliers (FY21: decrease of £0.4m). £0.5m of this funded an increase in inventory (FY21: decrease of £1.0m), partly due to the increase in volume, but also follows a strategic decision to minimise the risk of supply chain disruption. Whilst there has also been an increase in trade and other receivables of £0.4m due from customers (FY21: decrease of £0.3m), this is a product of the increased volume, rather than an increase to terms as the overall trade receivable days have reduced to 68 days, compared to 70 days at the end of FY21. 

A cash outflow from investment activities of £0.4m is reflective of the increase in Non-Current Assets to support the development of the production facility in the US. A further £1.1m has been used in financing activities, driven by repayments of the CBILS loan, the capital element of the Group's lease liabilities and associated financing costs.

Despite the loss in the year, the business remains in a net cash position at the end of the year, with £0.2m net cash (FY21: £1.0m). This includes Cash at Bank, offset by the outstanding CBIL balance and invoice discounting facility.

The Board consider this a significant achievement in cash management, given the investment milestones achieved in the last year and transformation of future business opportunities.

Adam Holden

Group Finance Director

23 January 2023

There is no other comprehensive income in the current or prior year.

The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and not presented its own statement of profit and loss in these financial statements. The loss for the year was £1,338,000. The financial statements were approved and authorised for issue by the Board of Directors on 23 January 2023 and were signed on its behalf by:

Adam Holden

DirectorCo No: 06389233

Notes to the Financial Statements

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.

In order to prepare for future expansion in the Asia region, the Company established a wholly owned subsidiary company, Velocity Composites Sendirian Berhad, which is domiciled in Malaysia. The subsidiary company commenced trading on 18 April 2018. The Company also established a wholly owned subsidiary company, Velocity Composites Aerospace Inc. to prepare for future expansion in the United States of America. These subsidiaries, together with Velocity Composites plc, now form 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.

2. Accounting policies

Basis of preparation

The consolidated financial statements of Velocity Composites plc have been prepared in accordance with UK-adopted international accounting standards and International Financial Reporting Interpretations Committee (IFRIC).

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 years presented, unless otherwise stated. The financial statements are presented in sterling and have been rounded to the nearest thousand (£'000). References to "FY22" refer to the year ended 31 October 2022, whilst references to "FY21" are in respect of the year ended 31 October 2021.

The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and not presented its own statement of profit and loss in these financial statements.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiary undertakings and are made up to 31 October 2022. Subsidiaries are consolidated from the date of acquisition, using the purchase method.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. The Group's subsidiaries have prepared their statutory financial statements in accordance with IFRS standards.

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

The accounting policies set out below have, unless otherwise stated, been applied consistently to all years presented in the consolidated financial statements.

There are no new accounting standards or interpretations that are not yet fully effective that could be expected to have a material impact on the Group.

Going concern

Management continues to undertake a significant level of cash flow forecasting and detailed financial projections for the following 24 month rolling period to 31 October 2024 have been prepared. A number of sensitivities have been performed to understand the cash flow impact of various scenarios and even in the most severe down-side scenario modelled the business had sufficient liquidity to continue trading as a going concern.

The aerospace sector lends itself to long-term planning due to the nature and length of customer programmes, typically a minimum of three years, but often five years or more. This has enabled the business to fully model the period to 31 October 2024 and undertake more strategic, longer-term planning for growth and full recovery emerging from the pandemic.

The cash flow forecasts are, however, reviewed monthly through Management's Integrated Business Planning (IBP) process and the assumptions updated for any new knowledge to ensure there is no change in the Group's liquidity outlook. This is linked in with Management's monthly risk review and should the outlook change significantly with no mitigating actions the Group's liquidity risk rating on the risk register will be adjusted to reflect this and subsequently discussed at Board through the Audit Committee's quarterly risk register review.

In preparing the latest two-year forecasts, Management has included revenue projections based on current demand, the newly signed Work Package Agreement with GKN in the US, plus a weighting of opportunities in the pipeline. The cost base included in the projections is reflective of the significant cost reductions that have already taken place in the Group, but also realistic about the investment required to implement the growth.

It is the investment in growth and technological advancements throughout FY22, and which is anticipated to continue in FY23, that has resulted in the forecasts indicating that the Group's Invoice Discounting Facility, secured against Trade Debtors, will be utilised during certain months within the going concern period. Whilst this facility is designed to be short-term and can be withdrawn with 3 months' notice, the latest discussions have reflected the bank's support for Velocity's growth strategy and as such we expect this facility will remain available for the foreseeable future. Utilisation of the facility is forecast to be temporary as the benefits from the investment in growth become tangible in the second half of FY23. However, should alternative financing be required the Group would preserve cash by delaying certain investment activities until longer-term funding could be implemented, such as asset-based financing against new capital expenditure or equity funding.

Alongside the robust forecasting and governance process, the Group has demonstrated strong cash flow management through the Covid-19 pandemic, successfully reducing inventory levels and navigating through right-sizing efforts to deliver significant reductions to administrative overheads.

Having due regard for these recent deliverables and latest projections, with available cash at 31 October 2022 of £2.3m, an invoice discount facility where the Group can borrow up to £3m dependent on debtor levels, access to an invoice discounting facility with one of our major customers, and continued support from our banks and shareholders, it is the opinion of the Board that the Group has adequate resources to continue to trade as a going concern.

Revenue recognition

Revenue is recognised as performance obligations are satisfied as control of the goods and services is transferred to the customer. Contracts are satisfied over a period of time, with the dispatch of goods at a point in time. Revenue is therefore recognised when control is transferred to the customer, which is usually when legal title passes to the customer and the business has the right to payment, for example, on delivery.

The Group generates revenue from the sale of structural and consumable materials for use within the aerospace industry. This is the sole revenue stream of the Group.

At contract inception (which is upon receipt of a purchase order from a customer), an assessment is completed to identify the performance obligations in each contract. Performance obligations in a contract are the goods that are distinct.

At contract inception, the transaction price is determined, being the amount that the Group expects to receive for transferring the promised goods - this is a fixed price with no variable consideration. The transaction price is allocated to the performance obligations in the contract based on their relative standalone selling prices - this reflects the agreed price as per purchase order for each product. The Group has determined that the contractually stated price represents the standalone selling price for each performance obligation.

Revenue from sale of goods is recognised when a performance obligation has been satisfied by transferring the promised product to the customer at a point in time, usually when legal title passes to the customer and the business has the right to payment, for example, on delivery. Standard payment terms are in place for each customer.

Inventory

Inventory is stated at the lower of costs incurred in bringing each product to its present location and condition compared to net realisable value as follows:

· Raw materials, consumables and goods for resale - purchase cost on a first-in/first-out basis.

· Work in progress and finished goods - costs of direct materials and labour plus attributable overheads based on a normal level of activity

Net realisable value is based on an estimated selling price less any further costs expected to be incurred for completion and disposal.

Expenditure

Expenditure is recognised in respect of goods and services received when supplied in accordance with contractual terms. Goods or services supplied in a foreign currency are recognised at the exchange rate ruling at the time of accounting for this expenditure.

Provisions

A provision is made when an obligation exists for a future liability relating to a past event and where the amount of the obligation can be reliably estimated.

Retirement benefits: defined contribution schemes

Contributions to defined contribution pension schemes are charged to the statement of comprehensive income in the year to which they relate.

Short-term employee benefits

A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and sick leave in the year the related service is rendered at the undiscounted amount of the benefits expected to be paid in exchange for that service.

Research and development expenditure

Research expenditure - expenditure on research activities is recognised as an expense in the year in which it is incurred.

Development expenditure - An internally generated intangible asset arising from the Group's own development activity is recognised only if all of the following conditions are met:

· an asset is created that can be identified and is technically and commercially feasible;

· it is probable that the asset created will generate future economic benefits and the Group has available sufficient resources to complete the development and to subsequently sell and/or use the asset created; and

· the development cost of the asset can be measured reliably.

The amount recognised for development expenditure is the sum of all incurred expenditure from the date when the intangible asset first meets the recognition criteria listed above. This occurs when future sales are expected to flow from the work performed. Incurred expenditure largely relates to internal staff costs incurred by the Group.

Subsequent to initial recognition, internally generated intangible assets are reported at cost less accumulated amortisation and impairment.

Amortisation

Amortisation is calculated to write off the cost of intangible assets less their estimated residual values using the straight-line method over their estimated useful lives and is generally recognised in the statement of total comprehensive income. The estimated useful lives are based on the average life of a project as follows:

Property, plant and equipment

Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs.

Depreciation is provided on all items of property, plant and equipment so as to write off their carrying value over the expected useful economic lives. It is provided at the following methods and rates:

Foreign currency translation

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('its functional currency'). The consolidated financial statements are presented in sterling, which is Velocity Composites plc's functional and presentation currency.

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates the transactions occur. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are recognised in the Consolidated comprehensive statement of income.

The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency, on consolidation, as follows:

· assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of the statement of financial position

· income and expenses for each statement of profit or loss and statement of comprehensive income are translated at average exchange rates; and

· all resulting exchange differences are recognised immediately in the Consolidated comprehensive statement of income.

Impairment of non-financial assets

The carrying values of non-financial assets are reviewed for impairment when there is an indication that assets might be impaired, and at the end of each reporting year. When the carrying value of an asset exceeds its recoverable amount, the asset is written down accordingly.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset's cash generating unit (i.e. the smallest grouping of assets in which the asset belongs for which there are separately identifiable cash flows).

Impairment charges are included in the income statement, except to the extent they reverse previous gains recognised in the statement of comprehensive income.

Financial instruments

All funding requirements and financial risks are managed based on policies and procedures adopted by the Board of Directors encapsulating the normal day to day trading of the Group. The Group does not use derivative financial instruments such as forward currency contracts, or similar instruments. The Group does not issue or use financial instruments of a speculative nature.

Bank borrowings

Interest-bearing loans are recorded initially at their fair value, net of direct transaction costs. Such instruments are subsequently carried at their amortised cost and finance charges are recognised in the statement of comprehensive income over the term of the instrument using an effective rate of interest. Finance charges are accounted for on an accrual's basis to the statement of comprehensive income.

The Group has current borrowings of CBIL loans and can utilise its invoice discounting facility in support of its working capital requirements.

Financial assets

The Group classifies its financial assets into the categories discussed below and based upon the purpose for which the asset was acquired. The Group has not classified any of its financial assets as held to maturity.

Trade and other receivables

These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transactions costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost using the effective interest method, less provision for impairment.

The Group's loans and receivables comprise trade and other receivables included within the statement of financial position.

Cash and cash equivalents

Cash and cash equivalents include cash held at bank, bank overdrafts and marketable securities of very short-term maturity (typically three months or less) which are not expected to deteriorate significantly in value until maturity. Bank overdrafts are shown within loans and borrowings in current liabilities in the statement of financial position.

Impairment of financial assets

Impairment provisions are recognised through the expected credit losses model (ECL). IFRS 9's impairment requirements use forward-looking information to recognise expected credit losses - the 'expected credit loss (ECL) model'.

The Group considers a broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument.

Trade and other payables

The Group classifies its financial liabilities as comprising trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.

Share capital

Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Group's ordinary shares are classified as equity instruments.

Share premium

Share premium represents the excess of the issue price over the par value on shares issued less costs relating to the capital transaction arising on the issue.

Share-based payment

The Group operates an equity-settled share-based compensation plan in which the Group receives services from Directors and certain employees as consideration for share options. The fair value of the services is recognised as an expense over the vesting period, determined by reference to the fair value of the options granted.

Leased assets

Leases

The Group makes the use of leasing arrangements principally for the buildings and motor vehicles. The rental contracts for offices are typically negotiated for terms of 5 and 10 years and some of these have extension terms. The Group does not enter into sale and leaseback arrangements. All the leases are negotiated on an individual basis and contain a wide variety of different terms and conditions.

The Group assesses whether a contract is or contains a lease at inception of the contract. A lease conveys the right to direct the use and obtain substantially all of the economic benefits of an identified asset for a period of time in exchange for consideration.

Measurement and recognition

At lease commencement date, the Group recognises a right-of-use asset and a lease liability in its consolidated statement of financial position. The right-of-use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct costs incurred by the Group, and any lease payments made in advance of the lease commencement date.

The Group depreciates the right-of-use asset on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of-use asset for impairment when such indicators exist.

At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the Group's incremental borrowing rate because as the lease contracts are negotiated with third parties it is not possible to determine the interest rate that is implicit in the lease.

The incremental borrowing rate is the estimated rate that the Group would have to pay to borrow the same amount over a similar term, and with similar security to obtain an asset of equivalent value. This rate is adjusted should the lessee entity have a different risk profile to that of the Group.

Subsequent to initial measurement, the liability will be reduced by lease payments that are allocated between repayments of principal and finance costs. The finance cost is the amount that produces a constant periodic rate of interest on the remaining balance of the lease liability.

The lease liability is reassessed when there is a change in the lease payments. Changes in lease payments arising from a change in the lease term or a change in the assessment of an option to purchase a leased asset. The revised lease payments are discounted using the Group's incremental borrowing rate at the date of reassessment when the rate implicit in the lease cannot be readily determined. The amount of the remeasurement of the lease liability is reflected as an adjustment to the carrying amount of the right-of-use asset. The exception being when the carrying amount of the right-of-use asset has been reduced to zero then any excess is recognised in profit or loss.

Payments under leases can also change when there is either a change in the amounts expected to be paid under residual value guarantees or when future payments change through an index or a rate used to determine those payments, including changes in market rental rates following a market rent review. The lease liability is remeasured only when the adjustment to lease payments takes effect and the revised contractual payments for the remainder of the lease term are discounted using an unchanged discount rate. Except for where the change in lease payments results from a change in floating interest rates, in which case the discount rate is amended to reflect the change in interest rates.

The remeasurement of the lease liability is dealt with by a reduction in the carrying amount of the right-of-use asset to reflect the full or partial termination of the lease for lease modifications that reduce the scope of the lease. Any gain or loss relating to the partial or full termination of the lease is recognised in profit or loss. The right-of-use asset is adjusted for all other lease modifications.

The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. These leases relate to property security. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term.

See the accounting policy on Property plant and equipment for the depreciation methods and useful lives for assets held under lease.

Government grants

Grants from the government are recognised at their fair value where there is reasonable assurance that the grant will be received, and the Group will comply with all attached conditions. Government grants relating to cost are deferred and recognised in the profit or loss by deducting from the related expense over the period necessary to match them with the costs that they are intended to compensate.

Current taxation

The tax currently payable is based on the taxable profit of the year. Taxable profit differs from profit as reported in the Consolidated statement of comprehensive income because it excludes items of income and expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using rates that have been enacted or substantively enacted by the statement of financial position date.

R&D tax credit

R&D tax credits are recognised at the point when claims have been quantified relating to expenditure within current or previous years and recovery of the asset is virtually certain, these tax credits relating to R&D are recognised within the tax on profit line of the income statement.

Deferred taxation

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the statement of financial position differs from its tax base, except for differences arising on:

· the initial recognition of goodwill;

Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised. The amount of the asset or liability is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the deferred tax liabilities or assets are settled or recovered. Deferred tax balances are not discounted.

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either the same taxable Company; or different Company entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets and liabilities are expected to be settled or recovered.

Operating segments

Operating segments are reported in a manner consistent with the internal reporting provided to the executive directors. The Chief Operating Decision Makers have been identified as the Chief Executive Officer and the Chief Financial Officer. The Group supplies a single type of product into a single industry and so has a single operating segment. Additional information is given regarding the revenue receivable based on geographical location of the customer.

No differences exist between the basis of preparation of the performance measures used by management and the figures in the Group financial information.

Critical accounting estimates and judgements

The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including the expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Provisions for inventory

Provisions are made for obsolete, out of life and slow-moving stock items. In estimating the provisions, the group makes use of key management experience, precedents and specific contract and customer issues to assess the likelihood and quantity. Stock is accounted for on a first in, first out basis.

The provision percentage is applied to various aging categories dependent on stock type, this is a key estimate made by management based on judgement and if change is applied to the percentage for the aged stock, then the outcome of the value of the provision would differ.

Sensitivity analysis

A 5% increase in the levels of the current stock provision would lead to and finance impact of an increase in stock provision of £10k.

3. Financial instruments and risk management

The Board has overall responsibility for the determination of the Group's risk management objectives and policies. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. The Group reports in Sterling. All funding requirements and financial risks are managed based on policies and procedures adopted by the Board of Directors. The Group does not use derivative financial instruments such as forward currency contracts, or similar instruments. The Group does not currently issue or use financial instruments of a speculative nature but as described in the strategic report, management may consider the potential utilisation of such instruments in the future. The Group utilises an invoice discounting facility with its bankers to assist in its cash flow management. In accordance with the terms of the current facility (which is available on demand) the risk and management of trade debtors is retained by the Group.

Financial instruments

For non-current liabilities please see notes 17 and 18.

Risk management

The Group's activities expose it to a variety of financial risks: market risk (primarily foreign exchange risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. Risk management is carried out by the Board and their policies are outlined below.

a) Market risk

Foreign exchange risk

The Group is exposed to transaction foreign exchange risk in its operations both within the UK and overseas. Transactions are denominated in Sterling, US Dollars and Euros. The Group has commercial agreements in place which allow it to transact with its customers in the currency of the material purchase, thereby allowing currency risk to pass through the Group.

The carrying value of the Group's foreign currency denominated assets and liabilities comprise the trade receivables in note 15, cash in note 16 and trade payables in note 17.

Whilst the majority of the Group's financial assets are held in Sterling, movements in the exchange rate of the US Dollar or Euro against Sterling do have an impact on both the result for the year and equity. The Group's assets and liabilities that are held in US Dollar or Euros are held in those currencies for normal trading activity in order to recover funds from customers or to pay funds to suppliers. 

The Groups exposure to foreign currency risk is as follows. This is based on the carrying amount of monetary financial instruments.

As at 31 October 2022

As at 31 October 2021

Sensitivity analysis

A 5% strengthening of the following currencies against the pound sterling at the balance sheet date would have reduced the loss by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had to be applied to risk exposures existing at that date.

This analysis assumes that all other variables, in particular other exchange rates and interest rates remain constant. A 5% weakening of the above currencies against pound sterling in any year would have had the equal but opposite effect to the amounts shown above.

Interest rate risk

The Group carries borrowings from leases and CBIL loans. Lease borrowings are at a fixed rate of interest whilst the interest on the CBIL loans is a combination of fixed rate and Bank of England base rate plus 3.96%. The Directors do not consider there to be a significant interest rate risk on the element of loans linked to movements in the Bank of England base rate. The Group also has access to an invoicing discounting facility that carries a fixed monthly charge plus interest at a fixed rate of 2.25%.

a) Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. In order to minimise this risk, the Group endeavours only to deal with companies which are demonstrably creditworthy and this, together with the aggregate financial exposure, is continuously monitored. The maximum exposure to credit risk is the value of the outstanding amount.

Supply of products by the Group results in trade receivables which the management consider to be of low risk, other receivables are likewise considered to be low risk. However, four of the customers comprise in excess of 10% of the revenue earned by the Group (see note 4). Credit risk on cash and cash equivalents is considered to be small as the counterparties are all substantial banks with high credit ratings. The maximum exposure is the amount of the deposit.

b) Liquidity risk

The Group currently holds cash balances in Sterling, US Dollars and Euros to provide funding for normal trading activity. Trade and other payables are monitored as part of normal management routine. The Group also has access to banking facilities including invoice finance which it utilises when needed in order to manage its liquidity risk.

As at 31 October 2022

As at 31 October 2021

The lease liability is shown exclusive of interest payments (the comparative information for FY21 has been updated to correctly exclude interest payments).

c) Capital risk management

For the purpose of the Group's capital management, capital includes issued capital, and all other equity reserves attributable to the equity holders of the Group. The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other members. The Group will also seek to minimise the cost of capital and attempt to optimise the capital structure.

4. Segmental analysis

The Group supplies a single type of product into a single industry and so has a single reportable segment. Additional information is given regarding the revenue receivable based on geographical location of the customer. An analysis of revenue by geographical market is given below:

During the year four customers accounted for 92.7% (2021: 95.06%) of the Group's total revenue for the year ended 31 October 2022. This was split as follows; Customer A - 43.10% (2021: 44.7%), Customer B - 33.4% (2021: 28.5%), Customer C - 11.44% (2021: 13.4%) and Customer D - 4.70% (2021: 8.51%).

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.

During the current and previous year, the Group operated in Asia. No revenue was generated in Asia during the year ended 31 October 2022 and year ended 31 October 2021 as the site operates as an Engineering Support Office for the Group. The US subsidiary is currently dormant, and no revenue has been generated since the US subsidiary was incorporated.

5. Operating loss

The operating loss is stated after charging / (crediting):

6. Staff costs

During the previous year the company took advantage of the government furlough scheme. In the year to 31 October 2021, £152k was claimed in relation to this scheme and this benefit is not included in the above totals. Staff costs net of furlough claims as at 31 October 2021 amounted to £2.7m during the financial year. The government ended the furlough scheme ended in September 2021 therefore £nil has been claimed in this financial year.

The average monthly number of employees including directors, during the year was as follows:

7. Directors' costs

8. Finance income and expenses

9. Income tax

The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to the loss for the year are as follows:

On 3 March 2021, the Chancellor of the Exchequer announced that the corporation tax rate would increase to a maximum of 25% from 1 April 2023. It was substantively enacted on 24 May 2021. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset is realised, based on tax law and the corporation tax rates that have been enacted, or substantively enacted, at the Statement of Financial Position date. As such, the deferred tax rate applicable at 31 October 2022 is 25% and deferred tax had been re-measured at this date.

10. Loss per share

Share options have not been included in the diluted calculation as they would be anti-dilutive with a loss being recognised.

11. Intangible assets

Impairment

The Group reviews the Development costs at each reporting year for indicators of impairment. An indication of impairment can be generated from the loss of a customer, or contracted sales. No impairment was judged to be required for either year.

12. Property, plant and equipment