Final Results

Revenue increased 37% with operating profit expected in H2 FY24

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 2023 ("FY23").

Financial Highlights:

• Total revenue increased 37% to £16.4m (FY22: £12.0m), in line with market expectations.
• Maiden revenue of £2.0m during the period was derived from the Company's new US facility built to support the five-year Work Package Agreement ("the Agreement") announced in December 2022 with a global Tier 1 launch customer.
• Agreement term commenced on planned start date of 1 January 2024, with the full-term revenue of US$100m remaining unchanged at the underlying base of US$20m per annum based on current programme production rates.
• Gross margin decreased from 23.0% to 18.8% reflecting the significant startup costs associated with the new US site.
• Full year adjusted EBITDA* loss of £1.6m (FY22: loss of £0.5m) due primarily to lower margins and additional costs associated with onboarding key roles to support the US operation.
• Net cash position (cash less debt) of £1.6m at 31 October 2023 (FY22: £0.2m). The net proceeds of £6.1m from the successful fundraise in August 2023 have been used to fund the investment in the new US facility, including plant and equipment, and for working capital support.
• The Group also repaid debt of £1.0m (FY22: £0.9m), being CBILs Loan and lease liabilities.

Operational Highlights:

• Successful site opening and production ramp up in Alabama to serve the Agreement.
• Agreement is expected to rollover to a much longer period, with the opportunity to add more contracts from other US manufacturers - currently there is one live bid with a large Tier 1 customer under a Memorandum of Understanding, and a third business development plan with another large Tier 1 customer.
• UK production has scaled to meet increased customer demand.
• In July 2023, the Company appointed Kevin Hickey as Group Chief Operating Officer. Kevin previously worked at Velocity between 2017 and 2020, where he was responsible for the establishment, ramp up and management of the Company's production facility in Fareham, UK.

Outlook

• Guidance given by the Company on 26 July 2023, stated that the Board expected revenues for FY23 of between £15.0m and £17.0m and an EBITDA loss of between £1.2m and £1.6m. The Company has today reported FY23 revenues in line with that guidance at £16.4m with an EBITDA loss of £1.6m.
• At the same time the Company announced that revenues for FY24 were expected to be between £30m and £36m, with an EBITDA profit of between £1.7m to £2.5m. With a more detailed understanding of the progress of the transfer of business in the US, the Board remains confident that, based solely on the existing contracted revenues, FY24 EBITDA guidance remains in line with previous guidance, with additional engineering income and lower costs offsetting a revenue shift into FY25. .
• While existing contracts will show significant growth on FY23, the Board now expects revenues for FY24 will be between £27m and £30m.
• This guidance assumes no revenue is recognised in FY24 from the current pipeline of new business opportunities, with the main risk variances relating to FX and OEM regulatory sign off on individual US programmes now being onboarded
• Current contracted business, without any new customer wins, is expected to double in size once all contracts reach full production to at least £33m.
• Expected near-term growth supports the Board's objective of a 25% plus gross margin, 10% EBITDA margin and a 25% return on capital.

Change of Nominated Adviser and Broker

Following the completion of the all share merger between Cavendish Securities plc (previously named Cenkos Securities plc) and Cavendish Financial plc (previously named finnCap Group plc), as a consequence of internal reorganisation within the Cavendish Group, the Company has changed its Nominated Adviser and Broker from Cavendish Securities plc to Cavendish Capital Markets Limited.

Andy Beaden, Chairman, Velocity Composites, said: "There is now a clear drive to deliver more sustainable air travel through the greater use of carbon fibre in aerospace manufacture. This means that the global industry needs what we do. Greater lightweighting of aircraft is required to achieve aerospace industry sustainability targets. In FY23 we achieved 37% organic growth, based solely on our current business, revenues are expected to increase another 100%. This will propel us into a solid level of profitability, and well positioned for significant future growth."

Jon Bridges, CEO. Velocity Composites added: "2023 was the year when customers started to plan for aircraft production rate increases. Across the global industry, aircraft order books are strengthening as air travel recovers from lockdowns. For the first time, we are expecting simultaneous production rate increases across most aircraft platforms over the next three years albeit from the historically low numbers caused by the pandemic. Manufacturers are now approaching us for our solutions, leading to a current transformational pipeline of opportunities of £200m per annum.

"Looking forward into FY24, the business is fully committed and resourced to deliver on its existing projects, both in Europe and the US, whilst developing the next opportunities within a sustainable capital and profitability structure for the benefit of all customers and stakeholders."

Chairman's Report

Overview

In the financial year ended 31 October 2023, Velocity Composites has grown significantly, with revenue up 37% to £16.4m (FY22: £12.0m) of which £2.0m was derived from the Group's maiden revenues from the US (FY22: nil). We provide critical carbon fibre kitting and supply chain management services to large Tier One aerospace part manufacturers. Our technology, which has been developed over many years, is proven to improve material efficiency and speed up production times. This technology is in increasing demand as the aerospace manufacturing sector recovers from the pandemic.

GKN Aerospace

At the start of the financial year, we were excited to announce our first US-contract with GKN Aerospace. The US is the global centre for aircraft manufacturing. To support the contract, which is worth $20m per annum in revenue over at least the next five years starting from 1 January 2024, we established a facility in Tallassee, Alabama.

Much of the management team's focus over the last year has been on commissioning the new facility in the US and starting to on-board the new business. As expected in the aerospace industry, this is a complex and lengthy process, including a detailed qualification procedure known as First Article Inspection ("FAI"). The new facility has been a significant financial investment however it will provide solid long-term contracted revenues for the Group. We expect the initial five-year GKN contract to rollover to a much longer period, with the opportunity to add more contracts from other US manufacturers. The costs associated with such an expansion are the primary driver, the operating loss was £2.8m during the year as this included the hiring and training of a completely new team in the US, as well as the FAI work and the additional central resources required to support this expansion in services. Once the US facility is fully operational, with the key programmes transferred over from GKN, then it is expected to be profitable and to have justified these upfront costs. In doing so it will provide a solid return on investment even prior to securing additional contracts for which the facility has capacity.

The complexity of the onboarding and qualification processes required provide a high barrier to entry for any potential competitors, protecting our long-term revenues. We have learnt a lot from the onboarding process, which we will be able to utilise when we win future US business to drive greater efficiencies and returns. The new team we have built and trained in the US will be an important resource and revenue driver for the Group in the future.

Industry Developments

It is pleasing to report that the prior headwinds of Covid-19 have been replaced with the structural tailwind of a drive to deliver more sustainable air travel through the greater use of carbon fibre in aerospace manufacture. This means that the global industry needs what we do. They can either try and reinvent our solutions for themselves or simply utilise our Velocity Resource Planning services, and we firmly believe that many will choose the latter.

Greater lightweighting of aircraft is required to achieve aerospace industry sustainability targets and the need for improved fuel performance. This need is driving the increased usage of high-end carbon fibre materials in critical structural aircraft parts. Leading manufacturers like Boeing and Airbus are planning for a huge upturn in composite rich aircraft production. They will need to increase the capability of their supply chains to deliver this. This means that our main contracts in the UK and USA should grow organically, and any new business beyond this could have a significant financial upside. Airbus and Boeing global market forecasts that there will be ten times as many carbon fibre intensive new generation civil aircraft in service by the early 2040s.

Fundraising and Balance Sheet

Given the scale of the opportunities available to us, we sought new investment from shareholders in August 2023, raising £6.1m net of costs. To effectively grow the Company, and take on new contracts like GKN, requires upfront investment in new people, engineering skills training, as well as advanced technology and machinery. These funds will support our growth and have strengthened our balance sheet. As at 31 October 2023, our Cash at Bank was £3.2m, after paying down the Invoice Discounting Facility in the UK which is still available to use.

As reported above, the investment needed to deliver the GKN contract means our results show an operating loss of £2.8m. This year, however, we have established significant commercial assets, through a new US site, with trained staff, advanced the FAI processes, developed and rolled-out new digital manufacturing technologies now being used to deliver the contract, and ensured that we have the engineering resources that can support a much larger business than we are currently. While we will continue to invest as needed, we have enough contracted business that, at full production rates, will mean in 2024 we should move from operating losses to profitability. The Board expects that the second half of FY24 will report an operating profit and is expected to roll into a more significant full year profit in 2025. The Board and Executive Management of Velocity Composites understand that only a profitable business can grow and be successful in the long-term. Our expected near-term growth supports the corporate objectives of a 25% plus gross margin, 10% EBITDA margin and a 25% return on capital. It should be noted that FY23 gross margin was heavily impacted by charges for staff and some materials in relation to the US facility. Whilst it is not at an optimal level of production, along with a lag in pass-through of non-material costs in the UK, we should start to see these dynamics change in 2024, enabling a higher gross margin to be achieved.

Management Changes

In preparation for this exciting future, we have ensured that the Board and management team have the required aerospace and composite manufacturing expertise to accommodate the planned growth in the US and the UK. In July 2023, we appointed Kevin Hickey as Group Chief Operating Officer (a non-Board position). Kevin previously worked at Velocity between early 2017 and late 2020, where he was responsible for the establishment, ramp up and ongoing management of the Company's production facility in Fareham, UK. Prior to this, Kevin held a range of senior operational management roles both in the UK and internationally at GE Aviation and brings a wealth of experience in the industry and the Company's processes as Velocity's existing facilities grow, and new facilities are established.

In August 2023, we also welcomed back Andrew Hebb as non-Board Interim Chief Financial Officer and Company Secretary to replace Adam Holden while we recruit a full time CFO. Andrew was Velocity's non-Board Interim Chief Financial Officer and Company Secretary between November 2018, and August 2020 so has a detailed understanding of the business.

Outlook

Looking ahead, we have engaged key customers in the US and Europe that will enable us to grow Velocity Composites into a very sizeable, profitable business, from 2024. Our current contracted business is worth at least £30m ($36m - $43m) annually. Our existing facilities could support up to £70m annually, with a current qualified pipeline of approximately £200m ($250m) annually.

As the first movers in the industry, we are the only company proven to provide a complete outsourced solution to composite aerostructure manufacturers, meaning we are well placed for the future. We have a strong industry reputation and all the global approvals to deliver the service which provide strong barriers to entry for others.

I would like to thank colleagues for their continued dedication and customers, suppliers and investors for their support. We look forward to a successful 2024.

Andrew Beaden

Chairman

CEO Report

Overview

2023 was the year when our customers started to plan for aircraft production rate increases. Across the global industry, aircraft order books are strengthening as air travel recovers from lockdowns. For the first time, we are expecting simultaneous production rate increases across most aircraft platforms over the next three years albeit from the historically low numbers caused by the pandemic.

This welcome increase in production is happening after customers have seen their manufacturing base, internal know-how and capacity reduced since 2020 and creates challenges for which Velocity's services provide a proven solution. Working with us allows them to focus their resources on aerostructure part manufacture and expanding their internal operational capacity. Velocity's customers need to do more-for-less to meet the production rate increases of aircraft and outsourcing is easier when aircraft production rates are increasing.

US expansion

In this financial year, a significant portion of our resources were focused on the successful site opening and production ramp up in Alabama to serve our new GKN contract. This included not only the local site team being recruited and trained, but also support from the central UK teams, specifically New Business Engineering, Operations, Supply Chain, Quality, Information Systems, Finance and Human Resources. Everyone within the Company has had a part to play in the critical expansion of the business and myself and the wider executive team are immensely proud and grateful for their hard work. It is especially pleasing to see a whole new team develop in Alabama and they have quickly grasped Velocity's processes and values in order to support the GKN contract. We operate in a highly regulated industry, and it was important that the new site in Alabama mirrored the proven way of the working of the two UK sites. It has been inspiring to see how the UK teams have trained their new colleagues, and how the US team has adopted the Velocity culture.

As we have documented in our investor communications throughout the year, the GKN contract award in December 2022 was the culmination of more than 12 months of detailed business development, bid creation and contract negotiation with the customer. This required not only a detailed understanding of the customer's "current state", but also the onboarding into the Velocity system of around 1,300 individual kits to allow for the detailed costing and creation of the Velocity "future state" so we could complete the business case submission. At the same time the team was also busy setting up the production facility in Alabama under a separate Authority to Proceed agreement which underwrote the costs and meant that that the transfer project could begin immediately rather than having to wait until the full contract was signed.

After the contract award, our focus shifted to the project delivery stage, particularly the detailed and highly regulated FAI process which is a key enabler on the route to volume production and sales. The total project was split into individual aircraft programme blocks and a 12-month plan agreed on a sequential basis and involved close co-operation between us and GKN to verify that the kit engineering data for each block had been transferred accurately, and that the first kit produced by Velocity was identical to the kits that had been produced by the customer. To verify this, Velocity produced a detailed report per kit which was subject to a desktop verification, followed by one of each kit which was manufactured and then assessed and used by the customer against the current standard.

The scale, complexity and resource-intense nature of this process for both parties means that the actual sequence and timing of each block can change during the transfer, hence the trading update that was issued in July 2023. Once transferred however, Velocity becomes the sole approved supplier of the kits and an integral long-term partner to our customer, hence the extension of the contract with the customer to ensure the initial term did not commence until the FAI process was completed. Only once each block completes the FAI process does Velocity then begin to ramp it up into volume production, which in itself can take weeks or months depending on the size and number of kits in the block.

As we worked through the total project with our first customer in Alabama, we ended FY23 with the first two blocks fully completed and ramped up, which accounts for over 50% of the total project, and the third block in FAI and the fourth block ready to begin FAI. The period also saw the focus change from site stand up to volume production.

Future Contracts

We have continued our business development activities in the US to utilise the capacity in our new business engineering and operations created as the GKN contract moves to sustained production. We have a live bid with a large Tier 1 customer under a Memorandum of Understanding, and a third business development plan with another large tier one customer.

In Europe, our stated focus is around managing the rate increases with our existing customers, along with targeted business development with existing customers at other sites they have within mainland Europe. This is expected to accelerate in FY24 as rate recovery drives make/buy decisions as customer plants become more capacity constrained.

As our contractual agreements with customers are typically repeatedly extended we will also refine the contract terms to account for material and labour cost inflation, interest rates and energy inflation so as to protect both parties from any global economic factors.

With the completion of the equity fundraise we were able to resource our plans around people and technology to support the continued expansion of our services at our three sites. We recognise that continued investment in our key technology areas (real time digitisation of supply chain management, material efficiency and operational performance) along with our new business engineering teams gives us both a clear differentiator from our customers (who are also our competitors when it comes to make/buy decisions) along with the continued refinement of our bid development, business case creation and new business implementation through FAI, to support and deliver the continued flow of new business opportunity as our customers look to build back better.

This also further strengthens the barriers to entry for any competition as our global approvals, industry reputation, digital toolbox, new business engineering capacity, proven cost saving delivery and geographic footprint allow us to create and deliver business cases which support both our own and our customers growth plans. Our entry into the US market also presents an opportunity for the business to further position our orderbook across both civil aerospace and defence projects, both of which are equally applicable to Velocity's services but have different global growth drivers for risk mitigation.

Outlook

Velocity Composites has put into effect a clear strategy to capitalise on the significant growth in the use of composites within aerospace. Manufacturers need to outsource non-core processes and reduce costs to meet demand. Manufacturers are now approaching us for our solutions, leading to a current qualified pipeline of opportunities of £200m ($250m) annually.

Looking forward into FY24, the business is fully committed and resourced to deliver on its existing projects, both in Europe and the US, whilst developing the next opportunities within a sustainable capital and profitability structure for the benefit of all customers and stakeholders.

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 2023, 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 19 onwards in the Statement on Corporate Governance.

Jonathan Bridges

Chief Executive Officer

Financial Review

Statement of Comprehensive Income

Revenue for FY23 of £16.4m (FY22: £12.0m) represents an increase of 37% and is driven by a combination of a 20% increase in UK sales as the market continues to recover to pre-pandemic levels, and also first-year sales from the new US site which contributed £2.0m.

The increased volume has generated a gross profit of £3.1m, £0.4m ahead of FY22. There was a reduction in the reported gross margin percentage to 18.8% (FY22: 23.0%), however this is expected to be temporary as the reduction results from the start-up of the US site where volumes were lower than needed to recover labour costs at normal margins and a lag in some increased cost pressures, when compared to revising contracted pricing with customers.

Administrative expenses (excluding exceptional) have increased £1.7m from £4.1m in FY22 to £5.8m in FY23.The US costs were £1.2m (FY22: £0.0m) with the onboarding of key roles to directly support operations in the US. The remaining support is directly provided by the UK. The increase in volume has therefore been offset by the investment in overheads to support the future growth, resulting in an adjusted EBITDA[1] loss of £1.6m (FY22: loss of £0.5m).

The continued investment in a new US facility, business development, technology and staff during FY23 means the Group is well placed for contracted volume growth in the forthcoming year. US growth will be delivered through the Work Package Agreement with GKN with the remaining projects completing First Article Inspection (FAI) during the first half of FY24 and full volumes being achieved in the second half. In addition, we expect to start onboarding a second customer once contracts are signed. Growth in the UK will be through a small increase to existing contract volumes and also new opportunities with existing customers.

Therefore, Velocity is in an excellent position to deliver this growth, without a linear increase to its overhead base and will also benefit in FY24 from the technological investments that have driven efficiencies in the operational process as volumes grow.

Fundraise and Capital Reduction

The Group completed a fundraise in October 2023 raising £6.1m net of transaction costs. The funds are being used to support capital expenditure in particular for the US facility, technology development, recruiting additional personnel in the US, and working capital. In the short term we will reduce usage of the UK Invoice Financing facility.

As part of the fundraise to enable participation of EIS/VCT funds, the Group took the opportunity with Shareholder support and Court approval to undertake a capital reduction, reducing the share premium by £10,920k and adjusting retained earnings creating positive retained earnings which at the year-end for the Group were £1,087k. This will help support the Group to pay dividends at the appropriate time.

Cashflow and Capital Investment

The increase in the year-end cash and cash equivalents position of £0.9m to £3.2m (FY22: £2.3m) reflects the Company receiving net proceeds of £6.1m following completion of a fundraise by way of a firm placing, EIS/VCT placing and retail offer. This has been partially offset by the investment from Velocity Composites PLC to the US subsidiary of £3.1m to help finance US operations in order to win and start fulfilling the contract won in the US.

Losses after tax for the year for the Group amounted to £3.1m (FY22: £1.3m). Of these losses, £1.6m related to the US subsidiary.

There was an operating cash outflow before working capital movements of £1.7m (FY22: £0.5m outflow), this being attributable to the US start-up costs. The movements in working capital netted to a £0.1m outflow in FY23 (FY22: £0.3m inflow), and after other adjustments for taxation, the final cash outflow from operations was £1.8m (FY22: £0.3m inflow, including tax credits of £0.5m).

Working capital movements can be further analysed as follows: There was a positive working capital movement through a £2.4m increase in trade and other payables from suppliers (FY22: increase of £1.1m). However, this has been offset by a £1.3m increase in inventory (FY22: increase of £0.5m), largely due to the inventory required to meet demand in the US and a £1.1m increase in trade and other receivables due from customers (FY22: increase of £0.4m), £1m of the increase relates to the US outstanding trade debtors at the year end. Overall trade receivable days were 71 days, compared to 68 days at the end of FY22.

A cash outflow from investment activities of £2.1m is a combination of the purchase of property, plant and equipment mainly in the US of £1.3m (FY22: £0.3m) and an increase in intangible assets to support the development of the production facility in the US of £0.8m (FY22: £0.1m).

In financing facilities £1.3m (2022: £1.1m) represents the repayment of the CBILS loan, the capital element of the Group's lease liabilities and associated financing costs. The remaining amount represents the fundraise net of the transaction costs in issuing the ordinary shares.

The Company was in a Net Cash position at the end of the year, of £1.6m (FY22: £0.2m). This includes Cash at Bank, offset by the outstanding CBILS balance and invoice discounting facility.

Going Concern

Management continues to undertake a significant level of cash flow forecasting and detailed financial projections for the following 24-month period to 31 October 2025 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 2025 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 level through the Audit Committee's quarterly risk register review.

In preparing the latest two-year forecasts, Management has included revenue projections based on current contracted demand, the Work Package Agreement with GKN in the US,. The cost base included in the projections is reflective of the significant cost reductions that took place during Covid to right size the Group, but also realistic about the investment required to implement the growth.

It is the investment in growth and technological advancements throughout FY23, which is anticipated to continue in FY24, 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. 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.

Having due regard for these recent deliverables and latest projections, with available cash at 31 October 2023 of £3.2m, 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.

Andrew Hebb

Interim Chief Financial Officer

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 £1,647,000. The financial statements were approved and authorised for issue by the Board of Directors on 22 January 2024 and were signed on its behalf by:

Jonathan Bridges

Director

Co No: 06389233

Consolidated statement of changes in equity

Notes to Financial Statements

• General information
• Accounting policies

Basis of preparation

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 "FY23" refer to the year ended 31 October 2023, whilst references to "FY22" are in respect of the year ended 31 October 2022.

Basis of consolidation

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 2025 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 2025 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 contracted demand, the newly signed Work Package Agreement with GKN in the US. 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 FY23, and which is anticipated to continue in FY24, 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 during periods of FY24.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 2023 of £3.2m, 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

Inventory

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

Expenditure

Provisions

Retirement benefits: defined contribution schemes

Short-term employee benefits

Research and development expenditure

• an asset is created that can be identified and is technically and commercially feasible;
• the development cost of the asset can be measured reliably.

Amortisation

Foreign currency translation

Foreign currency translation (continued)

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.

Impairment of non-financial assets

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

Bank borrowings

Financial assets

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.

Financial assets (continued)

Cash and cash equivalents

Impairment of financial assets

Trade and other payables

Share capital

Share premium

Share-based payment

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

Leased assets (continued)

Measurement and recognition (continued)

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

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

the initial recognition of goodwill;

Operating segments

Critical accounting estimates and judgements

Provisions for inventory

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.

Financial instruments and risk management

For non-current liabilities please see notes 18 and 19.

Risk management

Market risk

Foreign exchange risk

Foreign exchange risk (continued)

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. Included in the US dollar value is £78k relating to the US Subsidiary (2022: £Nil).

Interest rate risk

The Group carries borrowings from leases and CBILS loans. Lease borrowings are at a fixed rate of interest whilst the interest on the CBILS 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 5.25%.

• Credit risk
• Liquidity risk

As at 31 October 2023

During the year four customers accounted for 91.9% (2022: 92.7%) of the Group's total revenue for the year ended 31 October 2023. This was split as follows; Customer A - 34.5% (2022: 43.10%), Customer B - 34.9% (2022: 33.4%), Customer C - 10.49% (2022: 11.44%) and the fourth customer a customer of Velocity Composite Aerospace Inc 11.99%, previously Customer D - 3.58% (2022: 4.70%).

During the current and previous year, the Group operated in Asia. No revenue was generated in Asia during the year ended 31 October 2023 and year ended 31 October 2022 as the site operates as an Engineering Support Office for the Group. The US subsidiary started to trade in April 2023, revenue of £1,967k has been generated since the US subsidiary was incorporated.

Operating loss

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

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

Exceptional expenses incurred during the year are in relation to the costs associated with the cash fundraise through the placing and subscription of the New Ordinary Shares. Total costs incurred were £120,000 and £485,000 charged to the share premium as being directly related to newly issued shares.

No exceptional costs were recognised in the previous year.

Finance income and expenses

On 3 March 2021, the Chancellor of the Exchequer announced that the corporation tax rate would increase to 25% from 1 April 2023. It was substantively enacted on 24 May 2021.

Loss per share

A list of all the investment in subsidiaries is as follows:

Directly owned

Inventories

Inventories totalling £2,743,000 (2022: £1,407,000) are valued at the lower of cost and net realisable value. The Directors consider that this value represents the best estimate of the fair value of those inventories net of costs to sell. The increase of inventories provision during the previous year amounted to £53,000 Velocity Composites PLC and £113,000 for Velocity Composites Aerospace Inc, in 2022 the release was £56,000 for Velocity Composites PLC.

The inventory at 31 October 2023 is after a stock provision of £374,000 (2022: £208,000). The provision reflects the aged stock profile consistent with FY22, as well as specific provisions related to slow moving stock as a result of reduced demand.

Inventories recognised as an expense during the year ended 31 October 2023 amounted to £11,687,000 (2022: £8,079,000), and these were included in cost of sales.

Trade and other receivables

Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. They are generally due for settlement within an average of 71 days (2022: 68 days) and therefore are all classified as current. Trade receivables are recognised initially at the amount of consideration that is unconditional unless they contain significant financing components, when they are recognised at fair value. The Group holds the trade receivables with the objective to collect the contractual cash flows and therefore measures them subsequently at amortised cost. Details about the Group's impairment policies and credit risk are provided in note 3. No Trade receivables (Group and Company) were overdue over three months at the year end (2022: £Nil).

Trade receivables (Group and Company) held in currencies other than sterling are as follows:

Book values approximate to fair values.

Bank loans

In FY20 the Company took out a Coronavirus Business Interruption Loan for £2.0m and on 19 January 2021 the term of this loan was extended to 6 years. Repayment by instalment commenced in August 2021, with the final instalment due in August 2026. The loan was interest free for the initial 12 months, followed by an interest rate of 3.96% above the Bank of England base rate which was 5.25% as at 31 October 2023. Therefore the rate payable at 22 January 2024 is 9.21%.

During FY21, the Company took out a further Coronavirus Business Interruption Loan for £0.45m secured against owned non-current assets. This is being repaid over 5 years with the first payment made in July 2021 and the final instalment due in June 2026. The loan was interest free for the initial 12 months, followed by an interest rate of 7.75% per annum.

Leases

Right-of-use-assets

Low value leases

Low value leases not classed as right-of-use assets due to the minimal value of the lease, relate to a building security contract, all other prior year operating leases have been classed as right-to-use asset on transition to IFRS 16. Payments made under such leases are expensed on a straight-line basis.

Deferred tax

The movement on the deferred tax (asset)/liability is shown below:

The Group has unused tax losses which were incurred by the holding company. A deferred tax asset of £1,774,000 (2022: £1,401,000) is not recognised in these accounts. Corporation tax losses can be carried forward indefinitely and can be offset against future profits which are subject to UK corporation tax.

• Reconciliation of liabilities arising from financing activities

• Reconciliation of liabilities arising from financing activities (continued)

On 17 March 2023, the Company issued 305,856 new ordinary shares of £0.0025 each to satisfy the exercise of options granted under the Group's 2022 Share Option Scheme.

On 27 March 2023, the company issued a further 155,932 new ordinary shares of £0.0025 each to satisfy the exercise of options granted under the Group's 2022 Share Option Scheme.

During the year ended 31 October 2023, 16,472,583 new ordinary shares were issued. The shares issued had a nominal value of £0.0025 each and were issued at £0.40 each.

Options

Share premium

Share-based payments

The Group's employees are granted option awards under the Velocity Composites Limited Enterprise Management Incentive and Unapproved Scheme.

The share options dated 13 March & 17 October 2017 have no attached performance conditions and have vested as a resulted of continued employment. The options may be exercised at any point up to the tenth anniversary of the grant date.

The 225,000 share options dated 29 October 2019 have no attached performance conditions and vest subject only to continued employment. They vest after 3 years, or earlier if a vesting event occurs as defined in the rules of the Scheme. They were awarded in relation to joining senior management, providing an equity incentive around the performance of the business. 125,000 of these share options had lapsed due to people leaving the business.

Share options dated 29 October 2019 in the year have lapsed, the options have attached performance conditions linked to adjusted EBITDA. They vest after two years, or earlier if a vesting event occurs in the rules of the Scheme. The options may be exercised at any point up to the tenth anniversary grant date. There were 1,480,000 originally issued and as of the year ended 31 October 2022, 1,480,000 of these share options had lapsed due to people leaving the business.

The 155,932 remaining shares options dated 30 October 2020 have no attached performance conditions and have been issued in exchange for qualifying staff agreeing to accept 20% of their basic salary in equity alternatives.

The 28,805 shares options dated 1 April 2021 have no attached performance conditions and have been issued in exchange for qualifying staff agreeing to accept 20% of their basic salary in equity alternatives.

The 250,000 shares options dated 1 April 2021 have no attached performance conditions and vest subject only to continued employment. They vest after 3 years, or earlier if a vesting event occurs as defined in the rules of the Scheme. They were awarded in relation to joining senior management, providing an equity incentive around the performance of the business.

The 479,999 shares options dated 26 January 2022 have no attached performance conditions and have been issued in exchange for qualifying staff agreeing to accept 20% of their basic salary in equity alternatives.

The 20,940 shares options dated 29 March 2022 have no attached performance conditions and have been issued in exchange for qualifying staff agreeing to accept 20% of their basic salary in equity alternatives.

During the year ended 31 October 2023, further share options were granted as follows:

807,200 shares options dated 28 March 2023. These options have no attached performance conditions and have been issued in exchange for qualifying staff agreeing to accept 20% of their basic salary in equity alternatives.

Vesting events are defined within the rules of the Scheme as a reorganisation, takeover, sale, listing (except on AIM), asset sale or death of the Option holder.

There were no cancellations or modifications to the awards in the year.

The following options were outstanding as at 31 October 2023:

Related party transactions

Balances and transactions between the Company and its subsidiary, which are related parties, have been eliminated on consolidation. However, the key transactions with the Company are disclosed as follows:

The Group has previously engaged IN4.0 Access Limited, which provides consulting services. One of the directors of IN4.0 Talent Recruitment Limited is a director of Velocity Composites plc. The Group paid £Nil (2022: £37,270) to IN4.0 Talent Recruitment Limited during the year and had £Nil outstanding at the year end (2022: £Nil). The services related to a specialist software engineer and were at arm's length market rates for such expertise, with the fees being passed directly on to the consultant, less an administration fee.

During the year the Group engaged Northwest Aerospace Alliance, which provides membership and subscription services for the Aerospace Industry. One of the directors of Northwest Aerospace Alliance Limited is a director of Velocity Composites plc. The Group paid £2,009 (2022: £5,775) to Northwest Aerospace Alliance during the year and had £Nil outstanding at the year end (2022: £1,000).

The following balances existed at year end with related parties (payable)/receivable:

• Ultimate controlling party
• Capital commitments

At 31 October 2023 the Group had £Nil (2022: £582,000) of capital commitments relating to the purchase of leasehold improvements, plant and machinery and fixture and fittings.

Pension commitments

The Group makes contributions to defined contribution stakeholder pension schemes. The contributions for the year of £97,191 (2022: £84,488) were charged to the Consolidated Income statement. Contributions outstanding as at 31 October 2023 were £13,595 (2022: £14,107).

Contingent liabilities

As at 31 October 2023 the Group had in place bank guarantees of £Nil (2022: £Nil) in respect of supplier trade accounts.

As at 31 October 2023, National Westminster Bank plc hold a debenture that provides a fixed and floating charge on the assets of the Company.

Adjusted EBITDA

[1] Earnings before interest, tax, depreciation, amortisation, exceptional and adjusted for share-based payments. The business uses this Alternative Performance Measure to appropriately measure the underlying business performance, as such it excludes costs associated with non-core activity. Share-based payments are added back to make the share-based payment charge clear to stakeholders.