Public Service Enterprise Group Annual Report 2020

Plain-text annual report

Annual report and financial statements 31 December 2020 Petards Group plc Registered number 2990100 Petards Group plc 0 2 0 2 r e b m e c e D 1 3 s t n e m e t a t s l i a c n a n i f d n a t r o p e r l a u n n A c l p p u o r G s d r a t e P Petards Group plc Parallel House, 32 London Road, Guildford, GU1 2AB, United Kingdom Tel: +44 (0) 1483 230345 www.petards.com Introduction Petards’ operations continue to be focused upon the development, supply and maintenance of technologies used in advanced security, surveillance and ruggedized electronic applications, the main markets for which are: Rail – software driven video and other sensing systems for on-train applications sold under the eyeTrain brand to global train builders, integrators and rail operators, and web-based real-time safety critical integrated software applications supporting the UK rail network infrastructure sold under the RTS brand; Traﬃc –Automatic Number Plate Recognition (“ANPR”) systems for lane and speed enforcement and other applications, and UK Home Oﬃce approved mobile speed enforcement systems, sold under the QRO and ProVida brands to UK and overseas law enforcement agencies and commercial customers; and Defence – electronic countermeasure protection systems, mobile radio systems and related engineering services sold predominantly to the UK Ministry of Defence (“MOD”). Contents Financial and operational highlights 1 2 Chairman’s statement Strategic report 4 12 Chairman’s corporate governance statement 19 Directors’ remuneration report 21 Directors’ report 24 Statement of directors’ responsibilities in respect of the Annual Report and the financial statements 25 Independent auditor’s report to the members of Petards Group plc 31 Consolidated income statement 32 Statements of changes in equity 33 Balance sheets 34 Statements of cash flows 35 Notes 69 Alternative performance measures glossary 70 Directors, officers and advisors 71 Notice of Annual General Meeting Perivan 261330 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 1 Petards Group plc Annual report and ﬁnancial statements 2020 | 1 Overview Financial and operational highlights Revenue Adjusted EBITDA* Net funds/(debt) £13.0m –17% £0.3m +£0.6m 20.0 15.3 15.6 15.7 13.0 1.6 1.6 1.5 £1.2m +1.7m 1.3 1.0 0.8 1.2 0.3 (0.3) (0.5) 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2020 £000 Revenue 13,001 Adjusted EBITDA* 320 Operating loss (1,145) Loss before taxation (1,238) Net cash from operating activities 2,398 Net funds/(debt) (cash less debt) 1,179 Current net funds/(debt)* 1,947 Net assets 6,928 *See Alternative Performance Measures Glossary on page 69. 2019 £000 15,706 (281) (1,287) (1,462) 142 (525) (70) 7,478 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 2 2 | Petards Group plc Annual report and ﬁnancial statements 2020 Chairman’s statement As reported in my interim statement of 24 September 2020, trading was proving extremely challenging, in particular for the Group’s eyeTrain operations, which continued to be the case for the remainder of the year. However, after a diﬃcult couple of years, the Board entered 2021 with a high degree of optimism given the strength of the Group’s order book and the expected beneﬁts from the cost alignment programme commenced in 2019. Revenues for 2020 were £13.0 million (2019: £15.7 million), on which the Group made an adjusted EBITDA* proﬁt of £320,000 (2019: £281,000 loss), a loss before tax of £1,238,000 (2019: £1,462,000 loss) and a loss after tax of £583,000 (2019: £193,000 loss). Net cash generated from operating activities in the year totalled £2,398,000 (2019: £142,000) leading to closing cash balances at 31 December 2020 of £2,204,000 (31 Dec 2019: £827,000) and net funds* of £1,179,000 (31 Dec 2019: £525,000 net debt). Like so many businesses, customers and suppliers alike, it took a while for the implications of the impact of Covid-19 to be fully appreciated with customers temporarily closing operational units and re-scheduling previously committed delivery dates, both often at very short notice. For Petards, it meant the Board accelerating its cost alignment programme, but doing so judiciously mindful of the importance of maintaining the core and essential skill base of its operations to remain in a position to beneﬁt from a recovery in customer activity levels. This was particularly relevant for eyeTrain operations where the workforce reduced by 40% during the year. New order opportunities for the Group’s eyeTrain products have been increasingly weighted towards those for the modernisation of existing rolling stock rather than new build trains. This is providing the opportunity for the Group to expand the installed base of its recently developed technically advanced on-train sensing systems. It also meets management’s objective to achieve a better balance between larger longer term, new build train contracts and shorter term retroﬁt projects requiring little new product development expenditure. QRO Solutions (QRO) and RTS Solutions (RTS) each had a good year with QRO producing its best ﬁnancial performance in its history and RTS securing a 4-year renewal of a signiﬁcant support contract and with the potential for renewing others in the current year, in turn providing visibility for future revenues. These acquired businesses have become signiﬁcant proﬁt and cash ﬂow contributors to the Group, and the Board believes that both have signiﬁcant potential for organic growth. The Board remains open to further expanding the Group through quality acquisitions and the acquisition of rights to product, such as those of NASBox acquired by QRO in April 2020, with meaningful returns on investment and strong cash generation coupled with growth potential being the key determinates. Petards defence services business continued to have diﬃculty in securing larger equipment contracts for which it tendered, any of which would have been transformational for the business. This led to the Board taking the decision early this year that, in the absence of compelling reasons for doing so, it would not pursue such contracts, but would instead focus on smaller engineering support projects, primarily for the MOD, in areas for which it is already well known and regarded. Personnel Covid-19, lockdown, outworking and furlough led to considerable uncertainty in the workplace and in this Petards was no diﬀerent. Necessary cuts in the number of employees have been made and sadly, people have left the business under the reorganisation. Against this background what can be said is that the performance of the businesses throughout 2020 and into 2021 is a reﬂection of the professionalism and the support provided by personnel at all levels, including those who knew they would be leaving as a consequence. The Board would like to thank all personnel for their eﬀorts and wishes those that have left, every success with their careers, and to those who remain it looks forward to their continued support and contribution in developing and building Petards into a successful growth company. Environmental, Social and Corporate Governance (ESG) The Board recognises the importance and the value of ESG and seeks wherever possible to comply with its requirements and in instances where it is not able to do so fully, then it seeks to observe compliance appropriate to its available resources and to the best of its ability. The Future Petards Virtual Technology Centre A signiﬁcant development since the year-end has been the establishment of Petards Virtual Technology Centre (PVTC) to capitalise upon the wider Group’s technical and development expertise. Included in its initial brief is the enhancement of eyeTrain on-train sensing systems 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 3 Petards Group plc Annual report and ﬁnancial statements 2020 | 3 Overview through use of “best of breed” third party applications, particularly those related to data capture, transmission and analytics. The ﬁrst of these developments is progressing to plan and is expected to enter preliminary trials in the near future. The Board envisages the PVTC becoming an increasingly important element of the Group’s development through a combination of new product development, the evolution and improvement of existing products and the evaluation of third-party products that might in some cases prove to be acquisition opportunities. Acquisitions The Board believes its operations in the sectors of Rail, Traﬃc and Defence possess the springboard from which to broaden its activities and grow its businesses whether organically, by acquisition or by a combination of both, with Rail and Traﬃc having the best growth potential. It is expected that organic growth will be achieved through developing the business where appropriate to do so, into new markets both home and export and product development; hence the importance of the establishment of the PVTC. Where the Board feels that growth can be accelerated through acquisition, it will look to do so. Any acquisition will be judged on its quality and what it does for the Group and its existing business, or in special circumstances if it gives the Group a strategic position in a ﬁeld within the Group’s current area of expertise. While the Group’s business may best be described as electronic engineering and software, by their very nature and the sectors to which they are allied, this opens the potential for development into the areas of artiﬁcial intelligence (AI), data gathering and Big Data, and cyber security. The Board also believes that at this stage of the Group’s development, an acquisition may well open doors for collaboration with larger companies. Negotiating acquisitions is a long process with many, for a variety of reasons, never coming to fruition. Currently discussions are taking place with potential vendors of their businesses, any of which, if terms can be agreed and the businesses satisfy the due diligence process, would positively beneﬁt the Group. Outlook The Group entered 2021 in good shape with a reduced cost base and a strong, cash positive balance sheet. This was recently supplemented by the replacement of its existing £0.75 million revolving credit facility with an undrawn £2.5 million CBILS 3-year overdraft facility, which provides ample capacity to ﬁnance any increased working capital requirements arising from a recovery in customer new business activity. To reﬂect uncertainty as to how Government’s near term rail investment plans would aﬀect the Group’s order intake, the Board adopted a cautious approach to the revenue budget for this activity, basing it on already secured systems orders with a de minimis contribution from new business other than on-going orders for spares and repairs. While the outlook for 2021 order intake is now looking more promising, it remains too early to say whether such prospective orders might make a meaningful contribution to 2021 revenues. The ﬁrst four months of 2021 have started well with all businesses broadly in line or slightly ahead of management expectations in terms of proﬁtability, and revenues are anticipated to be weighted towards the ﬁrst half of the year. On 31 December 2020 the Group’s order book stood at over £12 million, of which £10 million is forecast to be delivered this year giving the Board conﬁdence that 2021 will prove to be a better year for the Group. Raschid Abdullah Chairman 27 May 2021 *See Alternative Performance Measures Glossary on page 69. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 4 4 | Petards Group plc Annual report and ﬁnancial statements 2020 Strategic report Business review Petards’ operations continue to be focused upon the development, supply and maintenance of technologies used in advanced security, surveillance and ruggedised electronic applications, the main markets for which are: l Rail – software driven video and other sensing systems for on-train applications sold under the eyeTrain brand to global train builders, integrators and rail operators, and web-based real-time safety critical integrated software applications supporting the UK rail network infrastructure sold under the RTS brand; l Traﬃc – Automatic Number Plate Recognition (“ANPR”) systems for lane and speed enforcement and other applications, and UK Home Oﬃce approved mobile speed enforcement systems, sold under the QRO and ProVida brands to UK and overseas law enforcement agencies and commercial customers; and l Defence – electronic countermeasure protection systems, mobile radio systems and related engineering services sold predominantly to the UK Ministry of Defence (“MOD”). Operating review Despite the adverse impact of Covid-19 in some areas of its business, the Group made solid progress during the year, returning an adjusted EBITDA proﬁt, strong cash generation and accelerating its restructuring plans, putting it in a much stronger position to beneﬁt proﬁtably from any recovery in business levels in 2021 and beyond. Progress was also made in the growth and development of the Group’s Traﬃc solutions and a breakthrough was achieved in respect of the sale of maintenance support contracts for some of the Group’s rail customers. The main concerns identiﬁed in the early days of the pandemic were that train building customers’ production levels would be adversely aﬀected, orders for new train programmes delayed, and orders for defence engineering services reduced in the short term, with MOD project managers being redeployed to Covid support activities. In the event all three proved to be the case although the expected recovery in train production programmes later in the year did not transpire. Additionally, with UK rail services being drastically reduced, revenues from spares and repairs in the year were lower than expected, although with the subsequent increase in train services these appear to be recovering towards pre-pandemic levels. The Group’s eyeTrain operations coped with the customer driven changes to delivery schedules and the margin percentage generated increased from that achieved in 2019. While the 2020 margin included the eﬀect of two contracts with lower proﬁtability brought forward from 2019, this eﬀect diminished as one was completed in the ﬁrst half of the year and as the other drew to a close. However, the majority of 2020 eyeTrain system deliveries were supply only and were repeats of previously supplied equipment, so margins on these were not diluted by the non-recurring costs that can often aﬀect new projects. We were pleased that a long-standing objective to persuade eyeTrain customers and end-users of the beneﬁts of long-term support contracts bore fruit with Siemens Mobility UK placing an initial two-year maintenance contract for the provision of technical and software support, servicing and repairs for systems ﬁtted to Siemens Desiro City trains used on Thameslink and Moorgate services. This was followed later in the year by a similar contract for one of the Group’s train operating customers and we are hopeful that further such contracts will be secured. Increased focus was placed on developing eyeTrain service and support activities and in the latter part of the year a senior appointment was made to drive this area of our business. While orders for new eyeTrain systems were delayed, it was encouraging that in October two supply only orders that had been expected earlier in the year were awarded to Petards. The ﬁrst worth £1.3 million from Porterbrook Maintenance was for systems to be retro-ﬁtted to the UK's ﬁrst tri-mode trains (overhead electric, third rail electric and diesel) all of which have been delivered in 2021. The second smaller order, from Bombardier Transportation, was to enhance the video and data collection capability of Porterbrook owned Electrostar trains by retroﬁtting eyeTrain Track Debris/Third Rail cameras with deliveries starting in 2021 and expected to be complete by early 2023. The prospects for new systems orders are presently better than had been anticipated at year end but it is too early to judge the timing both of order awards and their related deliveries. Nevertheless, we are hopeful that customers and Government will continue to progress their plans for new and refurbished rolling stock projects. While RTS’s planned growth was aﬀected by customers delaying capital-based expenditure to both develop and expand their systems, its strong base of recurring software maintenance and support revenues enabled it to continue to generate a valuable contribution to the Group’s results, albeit slightly behind that achieved in 2019. In the ﬁrst half year it secured the renewal of one of its larger software support services contracts for a further four years to June 2024. Since year end other existing licensing and support agreements for its WMS software have been renewed for a further three years and we expect a key customer to take up the option of extending another large support contract in the near future. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 5 Petards Group plc Annual report and ﬁnancial statements 2020 | 5 Strategic report The Board is supportive of proposals presented by RTS management to grow its business and it recently approved incremental investment plans to develop new functionality for RTS’s software solutions, the beneﬁts of which are expected to be seen in 2022. Defence services achieved higher revenues than in 2019, most of the increase being driven by the delivery of approximately 60% of the hardware relating to a £1.1 million contract for electronic countermeasures equipment for an MOD programme. The balance of that equipment is scheduled to be delivered during 2021. Core MOD engineering service contracts continued to provide most of the Group’s other defence related revenues. In recent times the Group has been seeking to grow its presence in defence through two main channels. The ﬁrst has been to secure larger projects for which the Group has the heritage and capability to successfully execute, and the second to develop its own products. While the Group has submitted several tenders for larger projects, these have involved competing with major prime contractors to the MOD. While it has come close, the Group has missed out on each one of these opportunities to such primes. Consequently, we have decided to focus on smaller, defence related support opportunities, rather than larger equipment supply projects, unless speciﬁc opportunities arise for which the Group’s niche expertise would give it a compelling competitive edge. In terms of developing its own product, in the second half of 2020 the MOD conﬁrmed that the eyeCraft360 spherical video systems developed by Petards had successfully completed trials in partnership with the British Army's Armoured Trials and Development Unit. This was clearly a step forward in eyeCraft360 being potentially speciﬁed for ﬁtment to one or more MOD vehicle types. Commercialisation activities with potential overseas customers were signiﬁcantly curtailed by Covid-19 international travel restrictions which are presently delayed into the second half of 2021. An interesting development since year end has been an order from a large international prime contractor for a trial unit to integrate eyeCraft360 onto one of its own mobile platforms. While the Group’s operations suﬀered from the impact that Covid-19 had on its customers in the rail and defence markets, in the Traﬃc sector QRO’s strong performance in the ﬁrst half year continued and it posted record revenues and results for the year. Since its acquisition in 2016 QRO has developed into a larger, more broadly based business and having relocated to new premises in 2019, it further increased capacity in July by leasing an adjacent unit. Following the decision in 2019 to increase the value-added content of QRO’s revenues by developing its own hardware as well as software solutions, in April 2020 it acquired the software and hardware intellectual property rights to Nexus ANPR Smart Box ("NASBox") for £150,000 cash plus an on-going royalty. The NASBox solution creates a fully compliant and cost eﬀective roadside ANPR system when interfaced with commercial oﬀ-the-shelf cameras, such as QRO’s competitively priced ANPR camera oﬀering. Orders and sales in 2020 met management’s expectations and the indications are that it is a valuable addition and will provide opportunities for further growth. QRO ended the year strongly when in December, Northamptonshire Police awarded it a £0.8 million order to provide an enhanced and extended ﬁxed ANPR camera infrastructure on many strategic arterial and rural roads within its region. This was the largest single order ever awarded to QRO, and 2021 has also started well. Brexit The Board continues to monitor the ongoing impact of Brexit on its customer and supplier base, and its current assessment remains that the speciﬁc sectors in which the Group operates are not signiﬁcantly exposed to particular Brexit risk. The Group’s EU export revenues comprised only 6% of total revenues in 2020 and mainly relates to trains destined for UK rail projects. While the Group does source components from EU based suppliers, both directly and indirectly, it has not seen any signiﬁcant Brexit-related impact in its supply chain. Therefore, the Group believes that any impact of Brexit on its activities to be minimal. Considering the much wider impact of the Covid-19 pandemic on the global economy and supply chains, any Brexit impact on the Group that might arise would be increasingly diﬃcult to speciﬁcally identify. Financial review Operating performance 2020 deliveries were aﬀected by the impact of customer order placement delays and production re-scheduling, which were in large part Covid-19 related and revenues for the year were lower at £13.0 million (2019: £15.7 million). While the Group’s Traﬃc and Defence operations saw large percentage increases in revenue over the prior year, these were only able to mitigate the impact of a signiﬁcant reduction in eyeTrain equipment deliveries, and lower associated spares and repairs volumes with fewer train services running post lock down following the dramatic reduction in passenger numbers. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 6 6 | Petards Group plc Annual report and ﬁnancial statements 2020 Strategic report (continued) Business review (continued) The gross margin for the year increased to 36.4% from 30.8% in 2019, which together with that for 2018, had been aﬀected by two lower margin projects. While these also had some impact on 2020, the Group showed improved margins across most activities. Before exceptional restructuring costs of £425,000, administrative expenses fell by 11% to £5,454,000 (2019: £6,130,000), reﬂecting the beneﬁts of the cost realignment programme undertaken in respect of the Group’s eyeTrain, and to a lesser extent, its Defence activities. Administrative expenses included amortisation and depreciation charges of £1,014,000, slightly up on the £976,000 charged in 2019, and are stated net of Job Retention Scheme grants received of £141,000. Earnings before interest, tax, depreciation, amortisation, exceptional items, acquisition costs and share based payment charges (“adjusted EBITDA”) improved to a proﬁt of £320,000 compared with a 2019 loss of £281,000. Net ﬁnancial expenses reduced to £93,000 (2019: £176,000) mainly due to a lower foreign exchange charge, but also due to lower interest on the Group’s term loan, that ﬁnanced its acquisition of RTS, as the loan reduces. The tax credit of £655,000 for the year (2019: £1,269,000 credit) includes R&D tax credits totalling £748,000, relating to prior years’ R&D activities. The cash refunds received in the year were £1,660,000 of which £733,000 relates to tax credits recognised in 2020 and a further £927,000 to those recognised in 2019. The balance of the 2020 tax credit was a net charge of £93,000 comprising a deferred tax charge arising from the surrender of previously recognised losses for R&D tax credits oﬀset by deferred tax credits from the recognition of 2020 losses and the change in tax rate from 17% to 19%. The overall result for the Group for the year was a loss after tax of £583,000 (2019: £193,000 loss) and a basic and diluted loss per share of 1.01p (2019: 0.34p loss). Research and development The Group continues to invest in its software and hardware solutions developed both internally and externally. Overall investment totalled £1,434,000 (2019: £1,386,000) with £150,000 related to the acquisition of the intellectual property rights of NASBox and £1,284,000 to the Group’s own development activities, of which £371,000 was capitalised (2019: £696,000). The capitalised development costs related predominantly to the Group’s eyeTrain advanced on-train sensing software and systems. In addition to eyeTrain, the Group continued to invest in the development roadmaps of QRO, RTS and eyeCraft360. Cash, cash ﬂow and net debt Net cash inﬂows from operating activities for the year, after restructuring costs, were £2,398,000 (2019: £142,000), of which £1,660,000 related to R&D tax credits arising from the substantial investment in product development over the period 2017 to 2019. Net cash outﬂows from investing activities were £543,000 (2019: £963,000) and arose from the investment in capitalised product development and the acquisition of NASBox intellectual property rights. As was the case in 2019, the main net ﬁnancing outﬂows of £478,000 (2019: £469,000) related to repayments of the 5-year term loan and the principal paid on lease liabilities. At 31 December 2020 the Group’s cash and cash equivalents were £2,204,000 (2019: £827,000). While the Group incurred a signiﬁcant loss before tax in the year, the receipt of substantial R&D tax credits and reductions in working capital resulted in the net increase in cash and cash equivalents of £1,377,000. Net funds at 31 December 2020 were £1,179,000 (2019: £525,000 net debt) after deducting IFRS 16 lease liabilities of £398,000 (2019: £471,000). During the year the Group had available to it a £0.75 million revolving credit facility although this has never been drawn. Post year-end the Group’s bankers agreed that this be replaced with a 3-year £2.5 million CBILS overdraft facility to provide the Group with the capacity to ﬁnance additional working capital should that be required. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 7 Petards Group plc Annual report and ﬁnancial statements 2020 | 7 Strategic report Our businesses, business model and strategy Petards Group plc was listed on AIM in 1997 and the Group supplies advanced security and surveillance systems to three markets: Rail – Software driven on-board digital video and sensor systems for ﬁtment to new build or retroﬁtted to existing rolling stock. Applications include Driver Controlled Operation (DCO), condition monitoring, saloon car CCTV, drivers view cameras and automatic passenger counting systems, as well as software solutions and services that support the UK rail network including incident and fault management, work site management, resource management, machine plant and asset/inventory management. Traﬃc – ANPR systems for lane and speed enforcement and other applications, and UK Home Oﬃce approved mobile speed enforcement systems, sold under the QRO and ProVida brands to UK and overseas law enforcement agencies and commercial customers. Defence – Electronic defensive countermeasure systems for ﬁtment to rotary and ﬁxed wing aircraft, threat simulation systems and mobile radios predominantly for the UK Ministry of Defence. The Group’s customer base mainly comprises international ‘blue chip’ and government agencies and their strength, often global, gives rise to the opportunity to develop Petards’ business through the provision of good quality professional service in support of its existing and future product ranges. The Group develops its own products and services for sale to the Rail and Traﬃc markets whereas within the Defence market, in which it has a heritage of nearly 70 years, it is a specialist “value added” re-seller and supplier of related engineering services. The Board believes that the Group operates in growth areas and that it has the products and services plus available technical and technological skills to develop new products as well as the sales and marketing abilities to become a larger and more successful operator in each of the sectors in which it operates. The Group’s overriding objective is to achieve attractive and sustainable rates of growth and returns for shareholders and its strategy to achieve this objective is: l to focus upon the Group’s core products which are used in the rail, defence and traﬃc industries; l to continue to invest in developing technologies to enhance its product portfolio; l to increase revenues both organically by exploiting the synergies within the Group and by acquisition; l to expand revenues globally into the Group’s target markets; and l to improve operating margins through cost management. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 8 8 | Petards Group plc Annual report and ﬁnancial statements 2020 Strategic report (continued) Key performance indicators The Group uses a number of key performance indicators (KPI’s) to monitor its progress against its objectives. These KPI’s, have been identiﬁed as measures that key stakeholders ﬁnd useful, and which have a focus on those that provide a measure of business growth, cash generation, total indebtedness and that requiring servicing within one year and comparability with similar businesses. In addition to on time delivery and quality standards, the main KPI’s, which have been reported on in the Financial Review, are: Revenue Adjusted EBITDA1 Net cash from operating activities Net funds/(debt)2 Current net funds/(debt)3 2020 £000 2019 £000 13,001 15,706 320 2,398 1,179 1,947 (281) 142 (525) (70) 1 Adjusted EBITDA comprises operating proﬁt adjusted to remove the impact of depreciation, amortisation, exceptional items, acquisition costs and share based payments. A reconciliation of Adjusted EBITDA to operating proﬁt is included on the face of the consolidated income statement. An Adjusted EBITDA KPI is considered useful to the Board since by removing exceptional items, acquisition costs and share based payments, the year on year operational performance comparison is more transparent. 2 Net (debt)/funds comprises cash and cash equivalents (note 16) less interest bearing loans and borrowings (note 17). 3 Current net funds comprises cash and cash equivalents (note 16) less current liabilities in respect of interest bearing loans and borrowings, (note 17) excluding liabilities on the adoption of IFRS 16 ‘Leases’. See Alternative Performance Measures Glossary on page 69 for a full list of Alternative Performance Measures. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 9 Petards Group plc Annual report and ﬁnancial statements 2020 | 9 Strategic report Principal risks and uncertainties The management of the business and the execution of the Group’s strategy is subject to a number of risks. The main business risks aﬀecting the Group are outlined below. Potential risks relating to Covid-19 and Brexit and the assessment of the impact of these have been addressed separately above. The Group may face increased competition – the Group may face greater competition including that from competitors with greater capital resources than those of the Group. The Group may need future access to capital – the Group’s capital requirements depend on numerous factors. In order to make future acquisitions and to fund growth, the Group may require further ﬁnancing. This may not be able to take place if ﬁnancing is not available. The ﬁnancial results of the Group can be materially aﬀected by the timing of large contracts – the Group’s revenue is generated from a mix of longer and shorter lead time orders. The timing of order placement and delivery of the larger orders is inherently diﬃcult to predict potentially causing material ﬂuctuations in actual results compared with expectations or plans. Government expenditure – many of the industries that utilise the Group’s products receive funding from central and local governments. The levels of funding for those industries may impact on demand for the Group’s products. The Group has sought to mitigate this potential exposure by increasing its geographic customer base and by supplying a range of products and services. Dependence on key personnel – the Group’s performance depends to a signiﬁcant extent upon a limited number of key employees. The loss of one or more of these key employees and the inability to recruit people with the appropriate experience and skills could have a material adverse eﬀect on the Group. The Group has endeavoured to ensure that these key employees are incentivised, but their retention cannot be guaranteed. Technological changes – the Group’s product oﬀerings may be under threat should technologies be developed by competitors that render those products either redundant or uncompetitive. This could potentially result in a reduction in revenues generated by the products aﬀected. The Group also incurs expenditure in developing new products and services. Should such development projects not be successfully completed or result in oﬀerings that are not attractive to customers, the costs incurred may not be fully recoverable. Currency risk – the Group buys from suppliers and sells to customers based outside of the UK and consequently these dealings may be in foreign currencies that are subject to exchange rate ﬂuctuations. The Group actively manages these exposures with foreign currency instruments, unless there is a natural hedge between purchases and sales. The principal currencies involved are US dollars and Euros. Further details regarding the key accounting estimates and judgements are included in note 1. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 10 10 | Petards Group plc Annual report and ﬁnancial statements 2020 Strategic report (continued) Directors’ statement under section 172 (1) of the Companies Act 2006 This section serves as our section 172 statement and should be read in conjunction with the rest of the Strategic Report set out on pages 5 to 11 (inclusive). The Board is collectively responsible for the decisions made towards the long-term success of the Company and the directors are fully aware of their duty to promote the success of the Company in accordance with section 172 of the Companies Act 2006. Section 172 requires directors to take into consideration the interests of various stakeholders in their decision making, have regard, amongst other things, to: a. b. c. d. e. f. the likely consequences of any decision in the long term; the interests of the Company’s employees; the need to foster the Company’s business relationship with suppliers, customers and others; the impact of the Company’s operations on the community and environment; the desirability of the Company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the Company. Employees Our employees are one of the primary assets of our business and the Board recognises that our employees are the key resource which enables delivery of the Company’s vision and goals. Pay reviews are carried out to determine whether all levels of employees are beneﬁtted equally and to retain and encourage skills vital for the business. Given the challenges and risks posed by the Covid-19 pandemic, employee welfare was at the forefront of directors’ minds during 2020. Employee interests were fully taken into consideration by the Board and the executive directors when implementing cost savings in response to changing market conditions and reduced revenues. Where possible, the Group sought to preserve jobs for example, by utilising furlough schemes and re-deploying staﬀ to other duties. Suppliers, Customers and Regulatory Authorities The Board acknowledges that a strong business relationship with suppliers and customers is a vital part of its growth. Whilst day to day business operations considering suppliers and customers are delegated to local executive management, the Board sets directions and evaluates policies with regard to new business ventures and investing in research and development. The Board upholds ethical business behaviour and encourages management to seek comparable business practices from all suppliers and customers doing business with the Company. We value the feedback we receive from our stakeholders and we take every opportunity to ensure that where possible, their wishes are duly considered. Community and Environment The Board seeks to uphold high standards of care towards the community and environment and is conscious of the fact that the nature of the Company’s business may require measures to help protect the environment. The Group has various recycling and waste reduction programmes and when developing new electronic products seeks to reduce their power consumption. Community engagement has included the support of apprenticeships. Maintaining High Standards of Business Conduct The Company is incorporated in the UK and governed by the Companies Act 2006. The Company has adopted the Quoted Companies Alliance Corporate Governance Code 2018 (the ‘QCA Code’) and the Board recognises the importance of maintaining a high level of corporate governance, which together with the requirements to comply with the AIM Rules ensures that the interests of the Company’s stakeholders are safeguarded. The Company’s expectation of honest, fair and professional behaviour is reﬂected by this and there is zero tolerance for bribery and unethical behaviour by anyone relating to the Company. The importance of making all staﬀ feel safe in their environment is maintained and a Whistleblowing policy is in place to enable staﬀ to conﬁdentially raise any concerns freely and to discuss any issues that arise. Strong ﬁnancial controls are in place and are well documented. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 11 Petards Group plc Annual report and ﬁnancial statements 2020 | 11 Strategic report Shareholders The Board places equal importance on all shareholders and recognises the signiﬁcance of transparent and eﬀective communications with its investors. As an AIM listed company there is a need to provide fair and balanced information in a way that is understandable to all stakeholders and particularly our shareholders. The primary communication tool with our shareholders is through the Regulatory News Service, (“RNS”) on regulatory matters and matters of material substance. The Company’s website provides details of the business, details of the Board and Board Committees, changes to major shareholder information, QCA Code disclosure and updates under AIM Rule 26. Changes are promptly published on the website to enable the shareholders to be kept abreast of Company’s aﬀairs. The Company’s Annual Report and Notice of Annual General Meetings (AGM) are available to all shareholders. The Interim Report and other investor presentations are also available for the last six years and can be downloaded from our website. The Board acknowledges that encouraging eﬀective two-way communication with shareholders encourages mutual understanding and better connection with them. The beneﬁts include improved information on the business and its performance, appropriate consideration of all shareholders views, as well as instilling trust and conﬁdence to allow informed investment decisions to be made. Strategic activity during the year. While dealing with and mitigating the eﬀects of the Covid-19 pandemic was a major unplanned activity, in the year to 31 December 2020 the main strategic activities of the Board were. Significant events/decisions Key Section 172 matters affected Actions and impact Realignment of cost base in line with the changing nature of the UK rail market with government led investment in new rolling stock re- projects being focussed on the refurbishment of existing rolling stock, coupled with impact of Covid-19 of reduced revenues and delays in placement of customer orders. increasingly ProVida product line transferred to QRO consolidating all Traﬃc Technology activities under QRO management. Strategy to broaden in-house ‘best of breed’ solutions enhanced by acquisition of NASBox intellectual property rights. Signed on behalf of the Board Osman Abdullah Group Chief Executive Shareholders and employees Employee engagement during the process sought to preserve jobs for example, by utilising furlough schemes and re-deploying staﬀ where possible. The realignment of the cost base has been structured to ensure the retention of the Group’s core skills base and remaining capable of taking advantage of new contract award opportunities as they arise. Shareholder value expected to increase. Shareholders, employees, customers, suppliers and the environment Shareholder value expected to increase. Improved employee opportunities. Improved customer and supplier engagement. Parallel House 32 London Road Guildford Surrey GU1 2AB 27 May 2021 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 12 12 | Petards Group plc Annual report and ﬁnancial statements 2020 Chairman’s corporate governance statement The Board is collectively responsible for Corporate Governance and I, as Chairman of the Board, am ultimately responsible for ensuring that a high level of Corporate Governance is embedded in the Company’s culture. As a company whose shares are traded on the Alternative Investment Market (‘AIM’) of the London Stock Exchange, Petards Group plc recognises its responsibility for the proper management of the Company and the importance of sound corporate governance, commensurate with the size and nature of the Company and the interests of its shareholders. In accordance with AIM Rule 26, which requires AIM companies to comply with a recognised code of Corporate Governance, the Board believes that the Quoted Companies Alliance Corporate Governance Code 2018 (the “QCA Code”) provides a suitable framework by which it is able to continue to commit to maintaining high standards of corporate governance. Accordingly, the Company complies with the 10 principles of the QCA Code where considered relevant and appropriate, having regard to the size, current stage of development and resources of the Company. The QCA Code is applied by the Company primarily through its Board process, which includes regular meetings covering ﬁnancial as well as non-ﬁnancial matters which aﬀect not only the Company’s shareholders but other signiﬁcant stakeholders, including employees. The Board process and corporate governance is enhanced by the establishment of Audit, Remuneration and Nominations Committees. The Board believes that, having regard to the size of the Group, its stage of development and the resources it has available, its governance structures and practices are in compliance with the expectations of the QCA Code. Set out below are the 10 principles of the QCA Code, together with a summary under each heading explaining how the Company has applied these. In fulﬁlling their responsibilities, the directors believe that they govern the Company in the best interests of its shareholders, whilst having due regard to the interests of other stakeholders in the Group including, in particular, customers, employees and creditors. 1. Establish a strategy and business model which promotes long-term value for shareholders Application The Board must be able to express a shared view of the Company’s purpose, business model and strategy. It should go beyond the simple description of products and corporate structures and set out how the Company intends to deliver shareholder value in the medium to long- term. It should demonstrate that the delivery of long-term growth is underpinned by a clear set of values aimed at protecting the Company from unnecessary risk and securing its long-term future. Compliance The Company's vision is to invest in and develop its business to deliver long term, sustainable growth in shareholder value. This may come from organic growth, acquisitions or divestments. The strategy for achieving this focuses on maintaining acceptable gross proﬁt margins, underpinned with sensible cost and cash management, having regard to perceived risks within the industry market and sector parameters, as well as the macro economic environment. The Chairman’s Statement and Strategic Report include detailed analysis of the Group’s strategy, ﬁnancial performance, principal risks and uncertainties and future expectations. 2. Seek to understand and meet shareholder needs and expectations Application Directors must develop a good understanding of the needs and expectations of all elements of the Company’s shareholder base. The Board must manage shareholders’ expectations and should seek to understand the motivations behind shareholder voting decisions. Compliance The Board recognises and understands that it has a ﬁduciary responsibility to the shareholders. The Board is aware of the need to protect the interests of minority shareholders and balancing these interests with those of any more substantial shareholders. The Chairman is responsible for ongoing dialogue and relationships with shareholders supported by the other executive directors. As such, members of the Board meet with the Company’s larger shareholders during the course of the year. The Annual General Meeting is always an opportunity for the Board to communicate with shareholders and the Board welcomes the attendance and participation of all shareholders. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 13 Petards Group plc Annual report and ﬁnancial statements 2020 | 13 Corporate governance This communication allows the Board to understand the shareholders’ views, and to ensure that the strategies and objectives of the Group are aligned with shareholders. In its decision-making, the Board will have regard to the ascertained expectations and needs of its shareholders (as appropriate in accordance with its statutory and ﬁduciary duties). The Group’s website (www.petards.com) allows shareholders access to information including; contact details, major shareholders and the current share price. In addition, all announcements issued since 2014 via RNS are available, together with an archive of recent ﬁnancial reports and accounts and interim statements. The resolutions to be put to a vote at each AGM can be found at the back of the relevant Annual Financial Report and the Financial Reports and Circulars section of the Company's website for any forthcoming AGM. Past AGM resolutions can be found at the back of each Annual Financial Report with the results now published in the RNS section. 3. Take into account wider stakeholder and social responsibilities and their implications for long-term success Application Long-term success relies upon good relations with a range of diﬀerent stakeholder groups both internal (workforce) and external (suppliers, customers, regulators and others). The Board needs to identify the Company’s stakeholders and understand their needs, interests and expectations. Where matters that relate to the Company’s impact on society, the communities within which it operates or the environment have the potential to aﬀect the Company’s ability to deliver shareholder value over the medium to long-term, then those matters must be integrated into the Company’s strategy and business model. Feedback is an essential part of all control mechanisms. Systems need to be in place to solicit, consider and act on feedback from all stakeholder groups. Compliance The Group’s responsibilities to stakeholders including staﬀ, suppliers and customers and the wider society are also recognised as important to the delivery of the Company’s business objectives. The Company is committed to a series of Corporate Social Responsibility principles that provide a reference point for all stakeholders on the elements that deﬁne the conduct of the Company’s business and relationships in the geographical markets in which it operates. These principles are subject to periodic review and cover the following areas; ethics and business conduct, employees (including our supply chain), health and safety, environment and community. The environmental impact of the Group’s activities is carefully considered, and the maintenance of high environmental standards is a priority. The Group is committed to reducing that impact as far as reasonably possible through full regulatory compliance, recycling programmes and other initiatives. The Board has regard to the feedback of relevant stakeholders in its decision-making and the formulation of strategy. 4. Embed effective risk management, considering both opportunities and threats, throughout the organisation Application The Board needs to ensure that the Company’s risk management framework identiﬁes and addresses all relevant risks in order to execute and deliver strategy; companies need to consider their extended business, including their supply chains, from key suppliers to end-customer. Setting strategy includes determining the extent of exposure to the identiﬁed risks that the Company is able to bear and willing to take (risk tolerance and risk appetite). 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 14 14 | Petards Group plc Annual report and ﬁnancial statements 2020 Chairman’s corporate governance statement (continued) Compliance The Board has established Audit and Remuneration Committees full details of which are contained in principle 9, below. The Company also receives feedback from its external auditors on the eﬀectiveness of its internal control structure. The Audit Committee believes that there should be no internal audit function for the Group at this time considering the size of the Group and the close involvement of senior management over the Group’s accounting systems. However, the Committee will keep this matter under review in the event that circumstances warrant an internal function in the future. In addition to the activities of the Board’s sub-committees, the Board approves the annual budget each year. This process allows the Board to identify key performance targets and risks expected during the upcoming year. The Board also considers the agreed budget when reviewing trading updates and considering expenditures throughout the year. Progress is monitored via monthly reporting of actual ﬁnancial performance against budget. Where appropriate, forecasts are prepared to further appraise any risks arising during the year. The Group has clear authority limits deriving from the list of matters reserved for decision by the Board, including capital expenditure approval procedures. The Board regularly reviews and monitors Key Performance Indicators, including those related to banking covenants. The Board plans to develop a risk register to assist in addressing and monitoring the risks critical to executing and delivering its strategy. 5. Maintain the Board as a well-functioning, balanced team led by the Chair Application The Board members have a collective responsibility and legal obligation to promote the interests of the Company and are collectively responsible for deﬁning corporate governance arrangements. Ultimate responsibility for the quality of, and approach to, corporate governance lies with the Chair of the Board. The Board (and any committees) should be provided with high quality information in a timely manner to facilitate proper assessment of the matters requiring a decision or insight. The Board should have an appropriate balance between executive and non-executive directors and should have at least two independent non-executive directors. Independence is a Board judgement and takes into account length of time directors have been involved with the Company and any interests in shares held. The Board should be supported by committees (e.g. audit, remuneration, nomination) that have the necessary skills and knowledge to discharge their duties and responsibilities eﬀectively. Directors must commit the time necessary to fulﬁl their roles. Compliance The principal risks faced by the Group are addressed by the appointment of an experienced executive Board supported by an experienced independent non-executive director and a team of appropriately qualiﬁed professional advisers. The executive directors are closely involved in the day to day operations of the Group and report to the Board in detail, typically on a monthly basis. Their reports include the status and trends of agreed Key Performance Indicators that are noted in the Group's Annual Financial Report in the Strategic Report and Financial and Operational Highlights. Ten main Board meetings were held during 2020. The Board records attendance at all Board meetings and the table below shows attendance by each director. Raschid Abdullah Osman Abdullah Paul Negus Terry Connolly 10/10 10/10 10/10 10/10 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 15 Petards Group plc Annual report and ﬁnancial statements 2020 | 15 Corporate governance The Board currently comprises three executive directors and one independent non-executive director. Biographical details of the directors are provided in the Directors’ Report. The role of the independent non-executive director is to bring independent judgement to Board deliberations and decisions. The independent non-executive director has no personal ﬁnancial interest, other than as a shareholder, in the matters to be decided and although he has served for 13 years the Board is satisﬁed that he is independent in terms of character and judgement. The Board believes that based on the size of the Company, its current stage of development and its internal resources, having only one independent non-executive director represents a suﬃcient balance and level of independence. The Board reviews these factors regularly and considers whether, or at what stage of the Company’s development, a second independent non-executive director will be required to further enhance this balance. The Board has sub-committees appointed to review the speciﬁc matters of Audit, Remuneration and Nominations. The Audit and Remuneration Committees are chaired by the independent non-executive director and the whole Board undertakes the responsibilities of the Nominations Committee. Further details are provided under principle 9, below. The Board is conﬁdent that each current member has the necessary skills, experience and knowledge to discharge his duties and responsibilities eﬀectively and that each commits the time necessary to fulﬁl his role. 6. Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities Application The Board must have an appropriate balance of sector, ﬁnancial and public markets skills and experience, as well as an appropriate balance of personal qualities and capabilities. The Board should understand and challenge its own diversity, including gender balance, as part of its composition. The Board should not be dominated by one person or a group of people. Strong personal bonds can be important but can also divide a Board. As companies evolve, the mix of skills and experience required on the Board will change, and Board composition will need to evolve to reﬂect this change. Compliance Each Board director has a wealth of knowledge and experience of the Group’s business operations and ﬁnancial management, and of the market the sector in which it operates. The Board is collectively aware of its need to consider and review its composition, in terms of individual personalities, diversity and gender. Having regard to the size and stage of development of the Group and of its internal resources and management support structure beneath it, the Board believes that it currently has an appropriate mix of personal qualities, experience and capability. 7. Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement Application The Board should regularly review the eﬀectiveness of its performance as a unit, as well as that of its committees and the individual directors. The Board performance review may be carried out internally or, ideally, externally facilitated from time to time. The review should identify development or mentoring needs of individual directors or the wider senior management team. It is healthy for membership of the Board to be periodically refreshed. Succession planning is a vital task for Boards. No member of the Board should become indispensable. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 16 16 | Petards Group plc Annual report and ﬁnancial statements 2020 Chairman’s corporate governance statement (continued) Compliance The Board undertakes regular monitoring of personal and corporate performance using agreed key performance indicators and detailed ﬁnancial reports. Key performance indicators include; revenues, Adjusted EBITDA, pre-tax proﬁt, cash generation, net cash, net assets and earnings per share. The Board considers the need for refreshing its membership and is also responsible for succession planning. Having regard to the size and stage of development of the Group and of its internal resources and management support structure beneath it, the Board believes that it currently has an appropriate mix of personal qualities, experience and capability and that it undertakes suﬃcient procedures to review its own eﬀectiveness and performance as a unit, as well as that of its committees and individual members. 8. Promote a corporate culture that is based on ethical values and behaviours Application The Board should embody and promote a corporate culture that is based on sound ethical values and behaviours and use it as an asset and a source of competitive advantage. The policy set by the Board should be visible in the actions and decisions of the Chief Executive and the rest of the management team. Corporate values should guide the objectives and strategy of the Company. The culture should be visible in every aspect of the business, including recruitment, nominations, training and engagement. The performance and reward system should endorse the desired ethical behaviours across all levels of the Company. The corporate culture should be recognisable throughout the disclosures in the Annual Report, website and any other statements issued by the Company. Compliance The Board is committed to embodying and promoting a sound corporate culture and has endorsed various policies which require ethical behaviour of staﬀ and relevant counterparties (such as those mandating anti-corruption, anti-counterfeiting, fair treatment and equality of opportunity). The Board and management conduct themselves ethically at all times. The Group values its reputation for ethical behaviour and has a set of values that are at the core of its business philosophy. 9. Maintain governance structures and processes that are fit for purpose and support good decision- making by the Board Application The Company should maintain governance structures and processes in line with its corporate culture and appropriate to its: – size and complexity; and – capacity, appetite and tolerance for risk. The governance structures should evolve over time in parallel with its objectives, strategy and business model to reﬂect the development of the Company. Compliance Whilst the Company recognises the importance of high standards of Corporate Governance, the Board has sought to address the matter in a proportionate way having regard to the size and resources of the Group. The principal risks faced by the Group are addressed by the appointment of an experienced executive Board, supported by an experienced independent non-executive director, an experienced, capable and diverse operational management support structure and a team of appropriately qualiﬁed external professional advisers. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 17 Petards Group plc Annual report and ﬁnancial statements 2020 | 17 Corporate governance The Board aims to hold twelve formally constituted meetings per annum at which it typically reviews the Group’s ﬁnancial performance and risk proﬁle and considers strategies for future growth. The Board is supported by the Company Secretary who records and distributes minutes of the meetings on a timely basis. In support of its aim of maintaining governance structures and processes, the Board has sub-committees appointed to review the speciﬁc matters of Audit, Remuneration and Nominations. Audit Committee The Audit Committee is responsible for ensuring that the ﬁnancial performance of the Group is properly reported on and monitored and for meeting the auditors and reviewing their reports in relation to the accounts and the audit. It holds a formal meeting with the external auditors at least twice a year. The Audit Committee evaluates the independence and objectivity of the external auditor and takes into consideration all United Kingdom professional and regulatory requirements. Consideration is given to all relationships between the Group and the audit ﬁrm including in respect of the provision of non-audit services. The Audit Committee considers whether those relationships appear to impair the auditor’s judgement or independence. The Audit Committee believes they do not. The Audit Committee believes that there should be no internal audit function for the Group at this time considering the size of the Group and the close involvement of senior management over the Group’s accounting systems. However, the Committee will keep this matter under review in the event that circumstances warrant an internal function for the Group in the future. Remuneration Committee The Remuneration Committee is responsible for setting the scale and structure of the executive directors' remuneration. It also recommends the allocation of share options to directors and other employees. The responsibilities of both the Audit and Remuneration Committees are undertaken by the Company’s independent non-executive director, who seeks independent advice from external advisors as he feels is appropriate and necessary. Nomination Committee The whole Board undertakes the Nomination Committee responsibilities. The remit comprises all new appointments of directors and senior management throughout the Group; nominations, interviewing, taking up references and considering related matters. 10. Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders Application A healthy dialogue should exist between the Board and all of its stakeholders, including shareholders, to enable all interested parties to come to informed decisions about the Company. In particular, appropriate communication and reporting structures should exist between the Board and all constituent parts of its shareholder base. This will assist: – the communication of shareholders’ views to the Board; and – the shareholders’ understanding of the unique circumstances and constraints faced by the Company. It should be clear where these communication practices are described. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 18 18 | Petards Group plc Annual report and ﬁnancial statements 2020 Chairman’s corporate governance statement (continued) Compliance The Board is conscious of the need to engage with shareholders and other stakeholders so that interested parties have suﬃcient information on which to make informed decisions about the Company. The Company’s Annual Financial Report provides information on a number of key areas, including the following: – corporate governance, including reference to the QCA Code; – operational and ﬁnancial review – a summary of the business, the business model and strategy; – signiﬁcant risks and uncertainties; – signiﬁcant accounting policies and particularly areas which are subject to judgements, estimates and assumptions; and – a Remuneration Committee Report. No separate Audit Committee Report is provided as its Chairman considers that its activities are adequately set out within Principle 9 above. The Company’s website provides further information on a number of key areas, including the following: – material on the Company’s Corporate Governance Framework; – the AGM Statement and results of voting at the AGM; – Regulatory News; and – historical Annual Financial Reports. Both this Annual Financial Report and the Company’s website provide information on forthcoming AGMs and a list of external advisers. Further details regarding the communication between the Company and its shareholders is explained in the disclosure above against principle 2. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 19 Petards Group plc Annual report and ﬁnancial statements 2020 | 19 Corporate governance Directors’ remuneration report Remuneration Committee The Remuneration Committee is presently comprised of Mr T Connolly. Remuneration policy The Remuneration Committee reviews the performance of executive directors and sets the scale and structure of their remuneration and other beneﬁts. Individual rewards and incentives are aligned with the performance of the Group and the interests of the shareholders and are set at an appropriate level in order to attract, retain and motivate executives who are expected to meet challenging performance criteria. The committee also recommends the allocation of share options to directors and other employees. Service contracts No directors have contracts of service with notice periods that exceed 12 months. Directors’ emoluments Details of individual director’s emoluments are set out in note 4 to the ﬁnancial statements. Directors’ share interests The directors’ beneﬁcial interests in the shares of the Company at the year-end were as follows: Ordinary Shares of 1p each at Ordinary Shares of 1p each at 31 December 31 December 2019 2020 R Abdullah O Abdullah T Connolly P Negus 3,476,909 3,476,909 2,139,948 2,139,948 30,000 30,000 575,000 575,000 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 20 20 | Petards Group plc Annual report and ﬁnancial statements 2020 Directors’ remuneration report (continued) Directors’ interests in share options At 31 December 2020 the number of options to subscribe for ordinary shares of 1p held by directors was as follows: Number of options at Exercised 1 January during 2020 the year R Abdullah 850,000 – 575,000 – O Abdullah 1,312,500 – 850,000 – 575,000 – P Negus 300,000 – Granted Number of options at during 31 December 2020 the year 850,000 575,000 Exercise price (pence) 12.25p 21.50p Date first exercisable Expiry date 06.01.19 05.01.26 31.10.21 30.10.28 1,312,500 8.00p 25.11.13 24.11.23 850,000 575,000 300,000 12.25p 21.50p 21.50p 06.01.19 05.01.26 31.10.21 30.10.28 31.10.21 30.10.28 – – – – – – The share price at 31 December 2020 was 13.00p and the share price ranged during the year from 4.15p to 14.50p. There have been no changes to directors’ interests since the year end. Non-executive director Fees for the non-executive director are determined by the Board as a whole having regard to the time devoted to the Company’s aﬀairs. The non-executive director is not part of any pension, share option or bonus schemes of the Group. Terry Connolly Director 27 May 2021 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 21 Directors’ report Petards Group plc Annual report and ﬁnancial statements 2020 | 21 Corporate governance The directors present their report and ﬁnancial statements for the year ended 31 December 2020. Board of directors and directors’ interests The Board currently comprises an executive Chairman, two executive directors and one non-executive director as follows: Raschid Abdullah – Executive Chairman Raschid was appointed executive Chairman in January 2013 and until its purchase by Petards was also executive Chairman of Water Hall Group plc, which was listed on AIM. He was previously executive Chairman of Evered Holding plc, a fully listed public company specialising in industrial and quarry related products, from 1982 to 1989. Raschid started his commercial life within the construction industry in the areas of building product supplies and the provision of specialist subcontracting services starting his ﬁrst business in 1971 which he sold to a competitor in 1976. He then joined the family business providing a range of services to clients in the Middle East. These included owning and operating family and procurement oﬃces for prominent families and their businesses, and co-investing in the UK stock market with a number of Middle Eastern families. He is a Life Fellow of the Royal Society of Arts. Osman Abdullah – Group Chief Executive Osman Abdullah was appointed to the Board in September 2010 as a non-executive director, becoming executive Chairman of the Group's principal trading subsidiary in 2013 to lead its restructure. He was appointed as Group Chief Executive from January 2016. He was formerly Group Chief Executive of Evered Holdings plc, a fully listed public company specialising in industrial manufacturing, distribution and quarry mining related products from 1981 to 1989. He subsequently served from 1993 to 2005 as a non-executive director of Umeco plc, a fully listed company specialising in component distribution and the manufacture of composite material based products principally to the aerospace industry. Paul Negus – Director Paul Negus joined the Board in September 2014 and is responsible for business development for Petards’ rail products. He has considerable commercial experience having spent eight years as Managing Director of PIPS Technology Limited, a developer of automatic number plate recognition and CCTV systems ﬁrst under private ownership and latterly under the ownership of Federal Signal Inc. Terry Connolly FCA – Non-Executive Director Terry Connolly was appointed in August 2007. He is a chartered accountant and had a career in advertising and the entertainment sector where as Group Managing Director of Chrysalis he was responsible for taking that company to a public listing. Since 1989 he has been a self-employed consultant specialising in strategic and corporate aﬀairs. He is Chairman of the Audit and Remuneration Committees. Directors’ interests in the share capital of the Company are set out in the Remuneration Report. Research and development The Group is committed to research and development activities in order to secure competitive advantage in the markets in which it operates. An amount of £371,000 (2019: £696,000) has been capitalised during the year which relates to the ongoing development of the Group’s rail products. In addition, the Group expensed other development expenditure totalling £913,000 (2019: £690,000) directly to the Income Statement. 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 22 22 | Petards Group plc Annual report and ﬁnancial statements 2020 Directors’ report (continued) Financial instruments and financial risk management The Group presently ﬁnances its operations through a mixture of cash resources, bank borrowings, retained earnings and share capital. Its principal ﬁnancial instruments comprise cash and bank borrowings together with trade receivables and trade payables. The Group’s other ﬁnancial instruments arise from its day to day operations and comprise primarily of short term debtors and creditors and, where deemed appropriate, forward currency contracts. Further details of the Group’s ﬁnancial instruments are given in note 22 to the ﬁnancial statements and the directors consider the principal risks associated with the Group’s ﬁnancial instruments to be liquidity risk and currency risk. Employment policies The Group has established policies to comply with the relevant legislation and codes of practice regarding employment and equal opportunities. It keeps its employees informed of matters aﬀecting them as employees through regular team brieﬁngs throughout the year and has a policy that training, career development and promotion opportunities should be available to all employees. It is the Group’s policy to give full and fair consideration to applications for employment by people who are disabled, to continue wherever possible the employment of staﬀ who become disabled and to provide equal opportunities for the career development of disabled employees. Fostering relationships with stakeholders The Board is committed to fostering good relationships with stakeholders and its approach is outlined in the Section 172 Statement on page 10. Disclosure of information to auditor The directors who held oﬃce at the date of approval of this Directors’ Report conﬁrm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware; and each director has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. Substantial shareholdings At 24 May 2021 the Company was aware of the following interests in three percent or more of its issued share capital. Name of holder El-Khereiji Financial Company WLL Charwell Investments Limited R M Abdullah A Perloﬀ O Abdullah Miton UK Microcap Trust PLC Chelverton Growth Trust plc M T Zahid Y T Zahid T W G Charlton Number of shares Percentage held 8,615,269 5,083,767 3,476,909 2,500,000 2,139,948 2,123,063 2,000,000 1,875,000 1,875,000 1,725,000 15.0% 8.8% 6.0% 4.4% 3.7% 3.7% 3.5% 3.3% 3.3% 3.0% 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 23 Petards Group plc Annual report and ﬁnancial statements 2020 | 23 Corporate governance Results and dividends The loss for the year after tax was £583,000 (2019: loss of £193,000). The Directors do not recommend the payment of a dividend. Going concern After making detailed enquiries, the Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and accordingly continues to prepare the ﬁnancial statements on a going concern basis. Further details relating to going concern are provided at note 1 on page 35 to the ﬁnancial statements. Auditor In accordance with section 489 of the Companies Act 2006, a resolution for the reappointment of BDO LLP as auditor of the Company is to be proposed at the forthcoming Annual General Meeting. By order of the Board Raschid Abdullah Director Parallel House 32 London Road Guildford Surrey GU1 2AB 27 May 2021 261330 Petards pp01-pp24.qxp 21/06/2021 17:20 Page 24 24 | Petards Group plc Annual report and ﬁnancial statements 2020 Statement of directors’ responsibilities in respect of the Annual Report and the ﬁnancial statements The directors are responsible for preparing the Annual Report and the Group and parent Company ﬁnancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and parent Company ﬁnancial statements for each ﬁnancial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group ﬁnancial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and have elected to prepare the parent Company ﬁnancial statements on the same basis. Under company law the directors must not approve the ﬁnancial statements unless they are satisﬁed that they give a true and fair view of the state of aﬀairs of the Group and parent Company and of their proﬁt or loss for that period. In preparing each of the Group and parent Company ﬁnancial statements, the directors are required to: l select suitable accounting policies and then apply them consistently; l make judgements and estimates that are reasonable, relevant and reliable; l state whether they have been prepared in accordance with IFRSs as adopted by the EU; l assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and l use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. The directors are responsible for keeping adequate accounting records that are suﬃcient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the parent Company and enable them to ensure that its ﬁnancial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of ﬁnancial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of ﬁnancial statements may diﬀer from legislation in other jurisdictions. 261330 Petards pp25-pp034.qxp 21/06/2021 17:29 Page 25 Petards Group plc Annual report and ﬁnancial statements 2020 | 25 Financial statements Independent auditor’s report to the members of Petards Group plc Opinion on the financial statements Conclusions relating to going concern In our opinion: l the ﬁnancial statements give a true and fair view of the state of the Group’s and of the Parent Company’s aﬀairs as at 31 December 2020 and of the Group’s loss for the year then ended; l the Group ﬁnancial statements have been properly prepared in in accordance with conformity with the requirements of the Companies Act 2006; international accounting standards l the Parent Company ﬁnancial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and as applied in accordance with the provisions of the Companies Act 2006; and l the ﬁnancial statements have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the ﬁnancial statements of Petards Group plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the year ended 31 December 2020 which comprise the Consolidated Income Statement, Group Statement of Changes in Equity, Company Statement of Changes in Equity, Group Balance Sheet, Company Balance Sheet, Group Statement of Cash Flows, Company Statement of Cash Flows and notes to the ﬁnancial statements, including a summary of signiﬁcant accounting policies. The ﬁnancial reporting framework that has been applied in their preparation is applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006 and, as regards the Parent Company ﬁnancial statements, as applied in accordance with the provisions of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the ﬁnancial statements section of our report. We believe that the audit evidence we have obtained is suﬃcient and appropriate to provide a basis for our opinion. Independence We remain independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the ﬁnancial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulﬁlled our other ethical responsibilities in accordance with these requirements. In auditing the ﬁnancial statements, we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the ﬁnancial statements is appropriate. Our evaluation of the Directors’ assessment of the Group and the Parent Company’s ability to continue to adopt the going concern basis of accounting included evaluating the following: l The Directors’ method for assessing going concern including the relevance and reliability of underlying data used to make the assessment, and whether assumptions and changes to assumptions from prior years are appropriate and where relevant consistent with each other; l The Directors’ plans for future actions in relation to the going concern assessment including whether such plans are feasible in the circumstances. This included considering the accuracy of historic forecasting and carrying out sensitivity analysis; l The Directors’ stress-testing of the forecasts to the extent of reasonable worst-case scenarios, which included modelling revenue slippage in the delivery of contracts in the rail business. We have assessed these assumptions against past performance and the Group’s results for the ﬁnancial year to date; l The compliance with covenants, including checking the calculations with reference to the loan agreement and determine if the calculations have been appropriately applied in the sensitised scenario; l Verifying the execution of the new CBILs facilities post year end, including the reﬁnancing of the existing term loan and the additional £2.5m overdraft facility. We also checked the terms and covenants attached for consistency with management’s sensitivity analysis; and l The adequacy and appropriateness of disclosures in the ﬁnancial statements regarding the going concern assessment. Based on the work we have performed, we have not identiﬁed any material uncertainties relating to events or conditions that, individually or collectively, may cast signiﬁcant doubt on the Parent Company’s and Group’s ability to continue as a going concern for a period of at least twelve months from when the ﬁnancial statements are authorised for issue. Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report. 261330 Petards pp25-pp034.qxp 21/06/2021 17:29 Page 26 26 | Petards Group plc Annual report and ﬁnancial statements 2020 Independent auditor’s report to the members of Petards Group plc (continued) Overview Full Scope Audit Coverage Key audit matters 94% (2019: 92%) of Group revenue 98% (2019: 98%) of Group total assets 2020 2019 Revenue recognition 3 3 Development costs x 3 Goodwill and intangible asset impairment risk 3 3 Going concern x 3 The capitalisation of development costs is no longer considered to be a key audit matter due to the signiﬁcantly lower level of costs capitalised compared to the prior year. Going concern is no longer considered to be a key audit matter due to the reduction in the uncertainty surrounding the COVID-19 pandemic and the new ﬁnancing facilities secured by the Group since the year end. Materiality Group ﬁnancial statements as a whole £105,000 (2019: £125,000) based on 0.8% (2019: 0.8%) of revenue An overview of the scope of our audit Key audit matters Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group’s system of internal control, and assessing the risks of material misstatement in the ﬁnancial statements. We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material misstatement. The Group’s operations are based in Gateshead, Kettering, Leeds and Guildford in the United Kingdom. We identiﬁed six components, three of which were considered signiﬁcant and subject to a full-scope audits by the group audit team. The signiﬁcant components subject to full-scope audit gave coverage of 94% of Group revenues and 98% of Group assets. The non-signiﬁcant components were subject to desktop review and speciﬁc scope procedures on certain ﬁnancial statements areas by the group audit team. Key audit matters are those matters that, in our professional judgement, were of most signiﬁcance in our audit of the ﬁnancial statements of the current period and include the most signiﬁcant assessed risks of material misstatement (whether or not due to fraud) that we identiﬁed, including those which had the greatest eﬀect on: the overall audit strategy, the allocation of resources in the audit, and directing the eﬀorts of the engagement team. These matters were addressed in the context of our audit of the ﬁnancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 261330 Petards pp25-pp034.qxp 21/06/2021 17:29 Page 27 Petards Group plc Annual report and ﬁnancial statements 2020 | 27 Financial statements Key audit matter How the scope of our audit addressed the key Revenue recognition (see note 2) The accounting policy in respect of the accounting for contracts with customers is included within the accounting policy on page 43; the accounting estimate in respect of revenue recognition is included within the accounting judgements and estimates note on page 37. Goodwill and intangible asset impairment risk The accounting policy in respect of the accounting for impairment is included within the accounting policy on page 40. The Group earns revenue from the sale of engineering services, software and hardware. We consider there to be a risk that revenues relating to solutions and product may be overstated due to hardware and software delivered around the year end being recognised before the performance obligations have been satisﬁed, or service revenues not being appropriately deferred. As detailed in the accounting policies and note 11 to the ﬁnancial statements, goodwill and other intangible assets are tested for impairment at least annually through comparing the recoverable amount of the cash-generating unit, based on a value-in-use calculation, to the carrying value. Furthermore, other intangible assets are tested for impairment where an indicator of impairment arises. The risk that goodwill and intangible assets may be impaired is considered to be a key audit matter due to the level of judgement involved in the impairment review and the opportunity and incentive for management bias within the impairment model assumptions. audit matter For a sample of hardware and software sales, we assessed whether revenue was recognised in the appropriate accounting period through agreeing revenue recorded to documentation such as dispatch notes and customer acceptance. This testing was carried out with a particular focus on transactions with a close proximity to the year end. For service revenues, on a sample basis this involved recalculating the revenue to be recognised over time with reference to the contractual terms and also recalculating the deferred revenue at the balance sheet date. Key observations: Based on the procedures performed, we have not identiﬁed any instances that may suggest that revenue has been inappropriately recognised. We examined the Group’s goodwill and intangible assets for indicators of impairment such as considering whether there were any evidence of a decline in the value of the assets due to events during the year and comparing net assets to market capitalisation. We also assessed impairment reviews prepared by management, speciﬁcally reviewing the integrity of management’s value-in-use model, such as agreeing the inputs on a sample basis to source documentation such as board approved forecasts and checking the mathematical accuracy, and, with the assistance of our internal valuation experts, we challenged the key assumptions and estimates, being forecast growth rates, operating cash ﬂows and the discount rate. Our audit procedures for the review of operating cash ﬂows and forecast growth rates included, amongst others, comparing the forecast to recent ﬁnancial performance and budgets approved by the Board. With the use of our internal valuation experts we used market data to independently calculate a discount rate for comparison and also performed our own sensitivity analysis upon the key valuation inputs. Key observations: Based on the work performed, we found management’s judgements and assumptions in this area to be reasonable. 261330 Petards pp25-pp034.qxp 21/06/2021 17:29 Page 28 28 | Petards Group plc Annual report and ﬁnancial statements 2020 Independent auditor’s report to the members of Petards Group plc (continued) Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the eﬀect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could inﬂuence the economic decisions of reasonable users that are taken on the basis of the ﬁnancial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identiﬁed misstatements, and the particular circumstances of their occurrence, when evaluating their eﬀect on the ﬁnancial statements as a whole. Based on our professional judgement, we determined materiality for the ﬁnancial statements as a whole and performance materiality as follows: Group financial statements Parent Company financial statements 2020 2019 2020 2019 £000 £000 £000 £000 Materiality 105 125 90 100 Basis for determining materiality 0.8% of revenue 90% of Group materiality (2019: 80% of Group materiality) Rationale for the benchmark applied Revenue is considered to be one of the Capped 90% (2019: 80%) of Group principal considerations for the users of the materiality given the assessment of the ﬁnancial statements in assessing the ﬁnancial components aggregation risk. performance of the Group. Performance materiality 74 75 63 60 Basis for determining performance materiality 70% (2019: 60%) of materiality based on a low expected total value of known and likely misstatements. Component materiality We set materiality for each component of the Group based on a percentage of between 24% and 86% of Group materiality dependent on the size and our assessment of the risk of material misstatement of that component. Component materiality ranged from £25,000 to £90,000. In the audit of each component, we further applied performance materiality levels of 70% of the component materiality to our testing to ensure that the risk of errors exceeding component materiality was appropriately mitigated. Reporting threshold We agreed with the Audit Committee that we would report to them all individual audit diﬀerences in excess of £2,200 (2019: £2,500). We also agreed to report diﬀerences below this threshold that, in our view, warranted reporting on qualitative grounds. Other information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report and ﬁnancial statements other than the ﬁnancial statements and our auditor’s report thereon. Our opinion on the ﬁnancial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the ﬁnancial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the ﬁnancial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 261330 Petards pp25-pp034.qxp 21/06/2021 17:29 Page 29 Petards Group plc Annual report and ﬁnancial statements 2020 | 29 Financial statements Other Companies Act 2006 reporting Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below. Strategic report and In our opinion, based on the work undertaken in the course of the audit: Directors’ report • the information given in the Strategic report and the Directors’ report for the ﬁnancial year for which the ﬁnancial statements are prepared is consistent with the ﬁnancial statements; and • the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and Parent Company and its environment obtained in the course of the audit, we have not identiﬁed material misstatements in the Strategic report or the Directors’ report. Matters on which we are We have nothing to report in respect of the following matters in relation to which the Companies required to report by exception Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate • the Parent Company ﬁnancial statements are not in agreement with the accounting records for our audit have not been received from branches not visited by us; or • certain disclosures of Directors’ remuneration speciﬁed by law are not made; or • we have not received all the information and explanations we require for our audit. and returns; or Responsibilities of directors As explained more fully in the statement of Directors’ responsibilities, the Directors are responsible for the preparation of the ﬁnancial statements and for being satisﬁed that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of ﬁnancial statements that are free from material misstatement, whether due to fraud or error. In preparing the ﬁnancial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the ﬁnancial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to inﬂuence the economic decisions of users taken on the basis of these ﬁnancial statements. Extent to which the audit was capable of detecting irregularities, including fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below: Our procedures included, but were not limited to: – Obtaining an understanding of the legal and regulatory framework in which the entity operates through enquiries of management, review of board minutes and consideration of the industry in which the entity operates. Relevant laws and regulations include health and safety and were communicated with the engagement team during the team brieﬁng; – Obtaining an understanding of management incentives, including the extent to which remuneration is inﬂuenced by reported results, and opportunities for fraudulent manipulation of the ﬁnancial statements such as management override; – We focussed on the judgements and estimates inherent in the key audit matters and exercised professional scepticism in considering the impact of those estimates and judgements on the reported results and key performance measures such as revenue and the loss before tax; 261330 Petards pp25-pp034.qxp 21/06/2021 17:29 Page 30 30 | Petards Group plc Annual report and ﬁnancial statements 2020 Independent auditor’s report to the members of Petards Group plc (continued) – Discussions with Management and the Audit Committee regarding known or suspected instances of non-compliance with laws and regulations; – Obtaining an understanding of controls designed to prevent and detect irregularities, including the internal review process in relation to work in progress balances; – Review of board meeting minutes for any evidence of fraud or non-compliance with laws and regulations including health and safety and taxation regulations; and – Testing of journal entries made to accounts that were considered to carry a greater risk of fraud as part of our planned audit approach. We also communicated relevant identiﬁed laws and regulations and potential fraud risks to all engagement team members and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. Our audit procedures were designed to respond to risks of material misstatement in the ﬁnancial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reﬂected in the ﬁnancial statements, the less likely we are to become aware of it. A further description of our responsibilities is available on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Malcolm Thixton (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor Southampton, United Kingdom 27 May 2021 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 261330 Petards pp25-pp034.qxp 21/06/2021 17:29 Page 31 Petards Group plc Annual report and ﬁnancial statements 2020 | 31 Financial statements Consolidated income statement For year ended 31 December 2020 Revenue Cost of sales Gross profit Administrative expenses Adjusted EBITDA* Amortisation of intangibles Depreciation of property, plant and equipment Amortisation of right of use assets Share based payment charges Exceptional restructuring costs Operating loss Finance income Finance expenses Loss before tax Income tax Loss for the year attributable to equity shareholders of the parent Other comprehensive income Total comprehensive expense for the year Loss per ordinary share (pence) Basic Diluted Note 2 11 8 10 19 5 5 3 6 7 7 2020 £000 13,001 (8,267) 4,734 (5,879) 320 (637) (244) (133) (26) (425) (1,145) – (93) (1,238) 655 (583) 2019 £000 15,706 (10,863) 4,843 (6,130) (281) (639) (204) (133) (30) – (1,287) 1 (176) (1,462) 1,269 (193) – – (583) (193) (1.01) (1.01) (0.34) (0.34) * Earnings before ﬁnancial income and expenses, tax, depreciation, amortisation, exceptional items, acquisition costs and share based payment charges. See Alternative Performance Measures Glossary on page 69. The accompanying notes form an integral part of the ﬁnancial statements. 261330 Petards pp25-pp034.qxp 21/06/2021 17:29 Page 32 32 | Petards Group plc Annual report and ﬁnancial statements 2020 Statements of changes in equity For year ended 31 December 2020 Group At 1 January 2019 Loss for the year Total comprehensive expense for the year Contributions by and distributions to owners Equity-settled share based payments Total contributions by and distributions to owners Share capital £000 Share premium £000 Equity reserve £000 Retained earnings £000 575 – – – – 1,617 – – – – 14 – – – – 5,435 (193) (193) 30 30 Total equity £000 7,641 (193) (193) 30 30 At 31 December 2019 575 1,617 14 5,272 7,478 At 1 January 2020 575 1,617 14 5,272 7,478 (583) Loss for the year (583) – – – Total comprehensive expense for the year Contributions by and distributions to owners Equity-settled share based payments Exercise of share options Total contributions by and distributions to owners – – – – – – 7 7 – – – – (583) (583) 26 – 26 26 7 33 At 31 December 2020 575 1,624 14 4,715 6,928 Company At 1 January 2019 Proﬁt for the year Total comprehensive income for the year Contributions by and distributions to owners Equity-settled share based payments Total contributions by and distributions to owners Share capital £000 Share premium £000 Equity reserve £000 Retained earnings £000 575 – – – – 1,617 – – – – 14 – – – – 7,654 87 87 30 30 Total equity £000 9,860 87 87 30 30 At 31 December 2019 575 1,617 14 7,771 9,977 At 1 January 2020 575 1,617 14 7,771 9,977 190 Proﬁt for the year 190 – – – Total comprehensive income for the year Contributions by and distributions to owners Equity-settled share based payments Exercise of share options Total contributions by and distributions to owners – – – – – – 7 7 – – – – 190 190 26 – 26 26 7 33 At 31 December 2020 575 1,624 14 7,987 10,200 The accompanying notes form an integral part of the ﬁnancial statements. 261330 Petards pp25-pp034.qxp 21/06/2021 17:29 Page 33 Balance sheets At 31 December 2020 ASSETS Non-current assets Property, plant and equipment Right of use assets Intangible assets Investments Deferred tax assets Current assets Inventories Trade and other receivables Cash and cash equivalents Petards Group plc Annual report and ﬁnancial statements 2020 | 33 Financial statements Note 8, 9 10 11 12 13 14 15 16 Group 2020 £000 761 387 4,617 5 522 6,292 2,372 2,645 2,204 7,221 2019 £000 973 466 4,733 – 528 6,700 2,430 3,798 827 7,055 Company 2020 £000 – – – 12,856 145 13,001 – 225 1,097 1,322 2019 £000 – – – 12,851 130 12,981 – 772 72 844 Total assets 13,513 13,755 14,323 13,825 EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital Share premium Equity reserve Retained earnings Total equity Non-current liabilities Interest-bearing loans and borrowings Trade and other payables Current liabilities Interest-bearing loans and borrowings Trade and other payables Total liabilities Total equity and liabilities 20 21 17 18 17 18 575 1,624 14 4,715 6,928 649 – 649 376 5,560 5,936 6,585 575 1,617 14 5,272 7,478 338 – 338 1,014 4,925 5,939 6,277 575 1,624 14 7,987 10,200 375 956 1,331 252 2,540 2,792 4,123 575 1,617 14 7,771 9,977 – 930 930 881 2,037 2,918 3,848 13,513 13,755 14,323 13,825 As permitted by section 408 of the Companies Act 2006, the parent company’s income statement has not been included in these ﬁnancial statements. The parent company’s proﬁt for the ﬁnancial year was £190,000 (2019: £87,000). These ﬁnancial statements were approved by the Board of Directors on 27 May 2021 and were signed on its behalf by: Raschid Abdullah Director Registered number: 02990100 The accompanying notes form an integral part of the ﬁnancial statements. 261330 Petards pp25-pp034.qxp 21/06/2021 17:29 Page 34 34 | Petards Group plc Annual report and ﬁnancial statements 2020 Statements of cash ﬂows For year ended 31 December 2020 Cash flows from operating activities (Loss)/proﬁt for the year Adjustments for: Depreciation of property, plant and equipment Amortisation of right of use assets Amortisation of intangible assets Loss on disposal of property, plant and equipment Proﬁt on disposal of right of use assets Financial income Financial expenses Equity settled share-based payment expenses Income tax (credit)/charge Operating cash flows before movement in working capital Change in inventories Change in trade and other receivables Change in trade and other payables Cash generated from operations Tax received Net cash from operating activities Cash flows from investing activities Acquisition of property, plant and equipment Acquisition of right of use assets Sale of right of use assets Acquisition of intangible assets Capitalised development expenditure Acquisition of investments Interest received Net cash outflow from investing activities Cash flows from financing activities Bank loan repaid Interest paid on loans and borrowings Principal paid on lease liabilities Interest paid on lease liabilities Other interest and foreign exchange Proceeds from exercise of share options Net cash outflow from financing activities Net (decrease)/increase in cash and cash equivalents Total movement in cash and cash equivalents in the year Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Note 8, 9 10 11 5 5 19 6 8, 9 10 10 11 11 12 17 17 17 17 20 16 The accompanying notes form an integral part of the ﬁnancial statements. Group 2020 £000 2019 £000 Company 2020 £000 (583) 244 133 637 1 (5) – 93 26 (655) (109) 58 226 563 738 1,660 2,398 (33) – 16 (150) (371) (5) – (543) (250) (33) (138) (20) (44) 7 (478) 1,377 1,377 827 2,204 (193) 190 204 133 639 – – (1) 176 30 (1,269) (281) 1,118 (379) (425) 33 109 142 (263) (5) – – (696) – 1 (963) (250) (53) (117) (25) (24) – (469) (1,290) (1,290) 2,117 827 – – – – – – 61 26 (15) 262 – 547 529 1,338 – 1,338 – – – – – (5) – (5) (250) (33) – – (32) 7 (308) 1,025 1,025 72 1,097 2019 £000 87 2 – – – – – 80 30 – 199 – (514) 605 290 – 290 – – – – – – – – (250) (53) – – – – (303) (13) (13) 85 72 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 35 Petards Group plc Annual report and ﬁnancial statements 2020 | 35 Financial statements Notes (forming part of the ﬁnancial statements) Accounting policies 1 Petards Group plc (the “Company”) is a company incorporated in the UK. The Group ﬁnancial statements consolidate those of the Company and its subsidiaries (together referred to as the “Group”). The parent company ﬁnancial statements present information about the Company as a separate entity and not about its Group. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated ﬁnancial statements. Statement of compliance Both the parent company ﬁnancial statements and the Group ﬁnancial statements have been prepared and approved by the directors in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. On publishing the parent company ﬁnancial statements here together with the Group ﬁnancial statements, the Company is taking advantage of the exemption in section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved ﬁnancial statements. Basis of preparation The ﬁnancial information is presented in pounds sterling, rounded to the nearest thousand, and is prepared on the historic cost basis. Going concern Petards is a critical supplier to many of its customers supporting the UK’s police and armed forces as well as the safe running of the railways. The main risks to the Group’s cash ﬂows identiﬁed are ﬁrstly, that customers may delay or re-schedule deliveries for orders already in the Group’s order book and secondly that, in the short term, contract awards that the Group was expecting to secure for revenue in 2021 may be delayed. By their nature these risks are diﬃcult for the Group to directly inﬂuence or control, but by keeping in close contact with our customers we are seeking to ensure that we are well-informed about their plans and prepared to secure contracts awards as and when the opportunities arise. The Group is fortunate that its customer base comprises blue chip companies, the UK Government and its agencies and its exposure to credit risk is low. The Group currently meets its day to day working capital requirements through its own cash resources and since the year end has entered into a 3-year overdraft facility of £2.5 million which is available until May 2024. Interest bearing loans and borrowings total £1.03 million at the year-end (note 17). The Group has prepared working capital forecasts based on the 2021 budget updated for material known changes since it was prepared and the 2021 management accounts to 31 March 2021. The time period reviewed is to 30 June 2022. At 30 April 2021 the Group had cash balances of £2.9 million and its available working capital facilities were undrawn. The model also considers the potential impact of rail contract awards that the Group is expecting to secure for revenue during the period that may be delayed or cancelled. The Board has concluded, after reviewing the work performed and detailed above that there is a reasonable expectation that the Group has adequate resources to continue in operation until at least 31 May 2022. Accordingly, they have adopted the going concern basis in preparing these ﬁnancial statements. Changes in accounting policies a) New standards, interpretations and amendments effective from 1 January 2020 The Group has applied the following standards and amendments for the ﬁrst time in the annual reporting period commencing 1 January 2020, none of which have had a material impact of the Group’s ﬁnancial statements for the year ended 31 December 2020: l IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Amendment – Deﬁnition of Material) l IFRS 3 Business Combinations (Amendment – Deﬁnition of Business) l Revised Conceptual Framework for Financial Reporting 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 36 36 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 1 b) Accounting policies continued New standards, interpretations and amendments not yet effective The adoption of the following mentioned standards, amendments and interpretations in future years are not expected to have a material impact on the Group’s ﬁnancial statements: l Annual Improvements to IFRS Standards 2018 – 2020 Cycle eﬀective 1 January 2021 Judgements and estimates The preparation of ﬁnancial statements requires the directors to make judgements, estimates and assumptions that may aﬀect the application of accounting policies and the reported amounts of assets and liabilities, and income and expenses. The key areas requiring the use of estimates and judgements which may signiﬁcantly aﬀect the ﬁnancial statements are considered to be: Key Judgements a) Revenue recognition (note 2) The Group recognises revenue when it transfers control over a product or service to its customer. Revenue is measured based on the consideration speciﬁed in a contract with a customer and excludes amounts collected on behalf of third parties. Where a modiﬁcation to an existing contract occurs, the Group assesses the nature of the modiﬁcation and whether it represents a separate performance obligation required to be satisﬁed by the Group, or whether it is a modiﬁcation to the existing performance obligation. The Group applies judgements and estimates to its portfolio of contracts in order to identify speciﬁc performance obligations and the timing of transfer of control of a product or service to a customer. The most signiﬁcant area of judgement arises in the determination of revenue recognition when undertaking engineering development contracts. Those undertaken in 2019 and 2020 have been recognised at a point in time on acceptance, rather than over the duration of the project. The impact of this is to defer revenue to the point at which the development is completed. At 31 December 2020 contract liabilities (note 18) included £453,000 of revenues deferred in this way (2019: £761,000). The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group has not needed to apply estimates and judgements in respect of the time value of money as applied to transaction prices. b) c) d) Recognition of deferred tax assets (notes 6 and 13) The Group has substantial deferred tax assets. In determining how much of these assets can be recognised this requires an assessment of the extent to which it is probable that future taxable proﬁts will be available. This assessment is based on management’s future assessment of the Group’s ﬁnancial performance and forecast ﬁnancial information. If suﬃcient future taxable proﬁts are not available the value of the deferred tax asset will reduce by an amount equal to 19% of any shortfall. Impairment of intangible assets (note 11) The Group performs impairment reviews at the reporting period end to identify any intangible assets that have a carrying value that is in excess of its recoverable value. Determining the recoverability of an intangible asset requires judgement in both the methodology applied and the key variables within that methodology. Where it is determined that an intangible asset is impaired, its carrying value will be reduced to its recoverable value with the diﬀerence recorded as an impairment charge in the income statement. Sensitivity analysis has been performed on the key assumptions for discount rate and forecast future cashﬂows to determine when impairment would occur. Capitalised development expenditure (note 11) This involves the identiﬁcation of and judgement to capitalise development expenditure which is recoverable through future product revenue together with an assessment of the estimated useful economic life of any asset recognised. Assets recognised in this way are also subject to impairment reviews. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 37 Petards Group plc Annual report and ﬁnancial statements 2020 | 37 Financial statements 1 Accounting policies continued The estimates and associated assumptions are based on forecasts of future product revenues, historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may diﬀer from these estimates. The impact should the actual useful economic lives of one or more of the products be shorter than estimated would be an additional amortisation charge at that time. The conservative nature of the rail industry, and the long asset lives of the rail vehicles to which the Group’s products are ﬁtted, has historically meant that no material adjustments of this nature have been required. At 31 December 2020 the net book value of capitalised development expenditure was £2,693,000 (2019: £2,855,000). Basis of consolidation 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 that are currently exercisable. 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. Inter-company balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated when preparing the consolidated ﬁnancial information. Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Non- monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign exchange diﬀerences arising on translation are recognised in the income statement. Classification of financial instruments issued by the Group Following the adoption of IAS 32, ﬁnancial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions: (a) they include no contractual obligations upon the Company (or Group as the case may be) to deliver cash or other ﬁnancial assets or to exchange ﬁnancial assets or ﬁnancial liabilities with another party under conditions that are potentially unfavourable to the Company (or Group); and (b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company exchanging a ﬁxed amount of cash or other ﬁnancial assets for a ﬁxed number of its own equity instruments. To the extent that this deﬁnition is not met, the proceeds of issue are classiﬁed as a ﬁnancial liability. Where the instrument so classiﬁed takes the legal form of the Company’s own shares, the amounts presented in these ﬁnancial statements for called up share capital and share premium account exclude amounts in relation to those shares. Finance payments associated with ﬁnancial liabilities are dealt with as part of ﬁnancial expenses. Finance payments associated with ﬁnancial instruments that are classiﬁed in equity are treated as distributions and are recorded directly in equity. Investments in subsidiaries Investments in subsidiaries are carried at cost less impairment in the Company balance sheet. Derivative financial instruments Derivative ﬁnancial instruments are recognised both initially and subsequently at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 38 38 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) Accounting policies continued 1 Intra-group financial guarantee contracts Where the Company enters into ﬁnancial guarantee contracts to guarantee the indebtedness of other companies within its Group, the Company considers these to be insurance arrangements and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Where parts of an item of property, plant and equipment have diﬀerent useful lives, they are accounted for as separate items of property, plant and equipment. Depreciation is charged to the income statement on a straight line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The estimated useful lives are as follows: Leasehold improvements life of lease straight line Plant and equipment: Plant and equipment 3-10 years Computer equipment 3-5 years Furniture and ﬁttings 3-5 years Motor vehicles 4-5 years The residual values and useful economic lives are reassessed annually. Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Acquisitions on or after 1 January 2010 For acquisitions on or after 1 January 2010, the Group measures goodwill at the acquisition date as: l l l l the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus the fair value of the existing equity interest in the acquiree; less the net recognised amount (generally fair value) of the identiﬁable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in proﬁt or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classiﬁed as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in proﬁt or loss. On a transaction-by-transaction basis, the Group elects to measure non-controlling interests, which have both present ownership interests and are entitled to a proportionate share of net assets of the acquiree in the event of liquidation, either at its fair value or at its proportionate interest in the recognised amount of the identiﬁable net assets of the acquiree at the acquisition date. All other non-controlling interests are measured at their fair value at the acquisition date. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 39 Petards Group plc Annual report and ﬁnancial statements 2020 | 39 Financial statements Accounting policies continued 1 Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged on a straight line basis over the estimated useful lives of intangible assets. Other intangible assets are amortised from the date they are available for use. Research and development Expenditure on research activities is recognised as an expense in the period in which it is incurred. Expenditure on activities for the development of new or substantially improved products is capitalised if the product is technically and commercially feasible, and the Group has the technical ability and has suﬃcient resources to complete development and if the Group can measure reliably the expenditure attributable to the intangible asset during its development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Development expenditure not meeting the above criteria is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. Internally generated development expenditure is amortised on a straight-line basis over the period which the directors expect to obtain economic beneﬁts (typically 3 to 8 years from asset being available for use). Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and accumulated impairment losses. Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indeﬁnite. Intangible assets with an indeﬁnite useful life and goodwill are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: Technology related assets 4-10 years Customer related assets 3-5 years Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank borrowings that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose only of the statement of cash ﬂows. Impairment The carrying amounts of the Group’s assets, other than inventories and deferred tax assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. Goodwill is allocated to cash generating units and is tested annually for impairment and more frequently if there are indications of impairment. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash generating units are allocated ﬁrst to reduce the carrying amount of any goodwill allocated to cash generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash generating unit is the smallest identiﬁable group of assets that generates cash inﬂows that are largely independent of the cash inﬂows from other assets or groups of assets. Reversals of impairment An impairment loss in respect of goodwill is not reversed. An impairment loss in respect of other assets is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 40 40 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) Accounting policies continued 1 Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest- bearing borrowings are stated at amortised cost with any diﬀerence between cost and redemption value being recognised in the income statement over the period of the borrowings on an eﬀective interest basis. Employee benefits Defined contribution plans Obligations for contributions to deﬁned contribution pension plans are recognised as an expense in the income statement as service is provided. Short-term benefits Short-term employee beneﬁt obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or proﬁt-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Share-based payment transactions Short-term employee beneﬁt obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or proﬁt-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Share-based payment transactions Options granted under the Group’s employee share schemes are equity settled. The grant date fair value of options granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reﬂect the actual number of share options that vest except where forfeiture is due only to share prices not achieving the threshold for vesting. Exceptional items Exceptional items are items of income and expenditure that are individually material due to size or incidence that the directors consider require separate disclosure in order for the reader to obtain a full understanding of the performance of the Group in the year. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outﬂow of economic beneﬁts will be required to settle the obligation. If the eﬀect is material, provisions are determined by discounting the expected, risk adjusted, future cash ﬂows at a pre-tax risk-free rate. Financial assets and liabilities Classification and measurement The Group classiﬁes its ﬁnancial instruments in accordance with IFRS 9 Financial Instruments. The Group has no derivative ﬁnancial instruments either designated as cash ﬂow hedges or not qualifying for hedge accounting. Financial assets previously classiﬁed in the “loans and receivables” category and measured at amortised cost under IAS 39 (being trade and other receivables and amounts owed by equity accounted investments) continue to be classiﬁed in the “amortised cost” category under IFRS 9. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 41 Petards Group plc Annual report and ﬁnancial statements 2020 | 41 Financial statements Accounting policies continued 1 Impairment of financial assets The Group has two types of ﬁnancial assets that are subject to IFRS 9’s expected credit loss model: l l trade and other receivables; contract receivables. The Company has one type of ﬁnancial asset that is subject to IFRS 9’s expected credit loss model: l amounts owed by group undertakings in respect of the Company. Trade and other receivables and contract receivables do not contain a signiﬁcant ﬁnancing element and therefore expected credit losses are measured using the simpliﬁed approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from the initial recognition of the receivables. The Group has assessed credit risk in relation to defence-related sales to government customers or sub-contractors to governments and believes it to be extremely low, therefore no expected credit loss provision is required for these trade and other receivables, or contract receivables. The Group also considers expected credit losses for non-government commercial customers, however this risk is not expected to be material to the ﬁnancial statements. Impairment provisions in respect of amount owed by group undertakings are recognised based on a forward-looking expected credit loss model. The methodology used to determine the amount of the provision is based on whether there has been a signiﬁcant increase in credit risk since initial recognition of the ﬁnancial asset. For those where the credit risk has not increased signiﬁcantly since initial recognition of the ﬁnancial asset, twelve-month expected credit losses along with gross interest income are recognised. For those for which credit risk has increased signiﬁcantly, lifetime expected credit losses along with the gross interest income are recognised. For those that are determined to be credit impaired, lifetime expected credit losses along with interest income on a net basis are recognised. While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, no impairment loss was identiﬁed. Classification The Group classiﬁes its ﬁnancial assets in the following measurement categories: l l those to be measured subsequently at fair value (either through other comprehensive income, or through proﬁt or loss); and those to be measured at amortised cost. Measurement At initial recognition, the Group measures a ﬁnancial asset at its fair value plus, in the case of a ﬁnancial asset not measured at fair value through proﬁt or loss, transaction costs that are directly attributable to the acquisition of the ﬁnancial asset. The Group subsequently measures trade and other receivables, amounts owed by group undertakings in respect of the Company and contract receivables at amortised cost. Impairment For trade and other receivables, contract receivables and amounts due from equity accounted investments, the Group applies the simpliﬁed approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 42 42 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) Accounting policies continued 1 Financial liabilities Financial liabilities include the following items: Bank borrowings are initially recognised at fair value net of any directly attributable transaction costs. Such interest bearing liabilities are subsequently measured at amortised cost using the eﬀective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated statement of ﬁnancial position. For the purposes of each ﬁnancial liability, interest expense includes initial transaction costs and any premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding. Trade and other payables and other short-term monetary liabilities are initially recognised at fair value and subsequently carried at amortised cost using the eﬀective interest method. Contracts with customers Revenue represents income derived from contracts for the provision of goods and services by the Group to customers in exchange for consideration in the ordinary course of the Group’s activities. Revenue is stated net of VAT, discounts and rebates. Performance obligations Upon approval by the parties to a contract, the contract is assessed to identify each promise to transfer either a distinct good or service or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Goods and services are distinct and accounted for as separate performance obligations in the contract if the customer can beneﬁt from them either on their own or together with other resources that are readily available to the customer and they are separately identiﬁable in the contract. Transaction price At the start of the contract, the total transaction price is estimated as the amount of consideration to which the Group expects to be entitled in exchange for transferring the promised goods and services to the customer, excluding sales taxes. Variable consideration, such as price escalation, is included based on the expected value or most likely amount only to the extent that it is highly probable that there will not be a reversal in the amount of cumulative revenue recognised. The transaction price does not include estimates of consideration resulting from contract modiﬁcations, such as change orders, until they have been approved by the parties to the contract. The total transaction price is allocated to the performance obligations identiﬁed in the contract in proportion to their relative stand-alone selling prices. Given the bespoke nature of many of the Group’s products and services, which are designed and/or manufactured under contract to the customer’s individual speciﬁcations, there are sometimes no observable stand-alone selling prices. Instead, stand-alone selling prices are typically estimated based on expected costs plus contract margin consistent with the Group’s pricing principles. Revenue and profit recognition Revenue is recognised as performance obligations are satisﬁed and control of the goods or services is transferred to the customer. The majority of the Group’s revenue is derived from selling goods with revenue recognised at the point in time when control of the goods has transferred to the customer. This is generally when the goods are delivered to the customer. However, for export sales, control might also be transferred when delivered either to the port of departure or port of arrival, depending on the speciﬁc terms of the contract with a customer. There is limited judgement needed in identifying the point control passes: once physical delivery of the products to the agreed location has occurred, the Group no longer has physical possession, and usually will have a present right to payment and retains none of the signiﬁcant risks and rewards of the goods in question. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 43 Petards Group plc Annual report and ﬁnancial statements 2020 | 43 Financial statements Accounting policies continued 1 A small minority of contracts are negotiated on a bill and hold basis. In such arrangements revenue is recognised even though the Group still has physical possession only if: l l l l the arrangement is substantive (i.e. requested by the customer); the ﬁnished goods have been identiﬁed separately as belonging to the customer; the product is ready for physical transfer to the customer; and the Group does not have the ability to use the product to direct it to another customer. Some goods sold by the Group include warranties which require the Group to either replace or mend a defective product during the warranty period if the goods fail to comply with agreed-upon speciﬁcations. In accordance with IFRS 15, such warranties are not accounted for as separate performance obligations and hence no revenue is allocated to them. Instead, a provision is made for the costs of satisfying the warranties in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Performance obligations are satisﬁed over time if one of the following criteria is satisﬁed: l l l the customer simultaneously receives and consumes the beneﬁts provided by the Group’s performance as it performs; the Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or the Group’s performance does not create an asset with an alternative use to the Group and it has an enforceable right to payment for performance completed to date. For each performance obligation to be recognised over time, the Group recognises revenue using an input method, based on costs incurred in the period. Revenue and attributable margin are calculated by reference to reliable estimates of transaction price and total expected costs, after making suitable allowances for technical and other risks. Revenue and associated margin are therefore recognised progressively as costs are incurred, and as risks have been mitigated or retired. The Group has determined that this method faithfully depicts the Group’s performance in transferring control of the goods and services to the customer. The Group’s contracts that satisfy the over time criteria are typically services and maintenance support contracts where the customer simultaneously receives and consumed the beneﬁt provided by the Group’s performance. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately as an expense. The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust its transaction price for the time value of money. Software licences The Group sells software licences either separately or together with other goods and services. Revenue recognition in respect of software licences sold as part of a bundle of goods and services is considered separately when the licence is determined to be a separate performance obligation. Software licences either represent a right to access the Group’s intellectual property as it exists throughout the licence period or a right to use the Group’s intellectual property as it exists at the point in time at which the licence is granted. Revenue in respect of right to access licences is recognised over the licence term and revenue in respect of right to use licences is recognised upfront on delivery to the customer. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 44 44 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 1 Accounting policies continued Contract modifications The Group’s contracts are sometimes amended for changes in customers’ requirements and speciﬁcations. A contract modiﬁcation exists when the parties to the contract approve a modiﬁcation that either changes existing or creates new enforceable rights and obligations. The eﬀect of a contract modiﬁcation on the transaction price and the Group’s measure of progress towards the satisfaction of the performance obligation to which it relates is recognised in one of the following ways: (a) prospectively as an additional, separate contract; (b) prospectively as a termination of the existing contract and creation of a new contract; or (c) as part of the original contract using a cumulative catch up. The majority of the Group’s contract modiﬁcations are treated under either (a) (for example, the requirement for additional distinct goods or services) or (c) (for example, a change in the speciﬁcation of the distinct goods or services for a partially completed contract), although the facts and circumstances of any contract modiﬁcation are considered individually as the types of modiﬁcations will vary contract-by-contract and may result in diﬀerent accounting outcomes. Costs to obtain a contract The Group expenses pre-contract bidding costs which are incurred regardless of whether a contract is awarded. The Group does not typically incur costs to obtain contracts that it would not have incurred had the contracts not been awarded. Costs to fulfil a contract Contract fulﬁlment costs in respect of over time contracts are expensed as incurred. Contract fulﬁlment costs in respect of point in time contracts are accounted for under IAS 2 Inventories. Inventories Inventories include raw materials, work-in-progress and ﬁnished goods recognised in accordance with IAS 2 in respect of contracts with customers which have been determined to fulﬁl the criteria for point in time revenue recognition under IFRS 15. It also includes inventories for which the Group does not have a contract. This is often because fulﬁlment costs have been incurred in expectation of a contract award. The Group does not typically build inventory to stock. Inventories are stated at the lower of cost, including all relevant overhead expenditure, and net realisable value. Contract receivables Contract receivables represent amounts for which the Group has an unconditional right to consideration in respect of unbilled revenue recognised at the balance sheet date and comprises costs incurred plus attributable margin. Contract liabilities Contract liabilities represent the obligation to transfer goods or services to a customer for which consideration has been received, or consideration is due, from the customer. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 45 Petards Group plc Annual report and ﬁnancial statements 2020 | 45 Financial statements Accounting policies continued 1 Right-of use assets and leases The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, comprising the initial amount of the lease liability plus any initial direct costs incurred and any lease payments made at or before the lease commencement date, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the asset or the end of the lease term. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease, or if that rate cannot readily be determined, the incremental borrowing rate. The lease liability is subsequently measured at amortised cost using the eﬀective interest method. It is re-measured when there is a change in future lease payments arising from a change in an index or a rate or a change in the Group's assessment of whether it will exercise an extension or termination option. When the lease liability is re-measured, a corresponding adjustment is made to the right-of-use asset. Judgements are involved in determining the lease term, particularly if extension or termination options are included in property leases across the Group. In determining the lease term, management considers all facts and circumstances that create an economic incentive to extend or termination a property lease. Termination options are only included in the lease term if it is reasonably certain that the lease will be terminated. The assessment of the lease term is reviewed if a signiﬁcant event or a signiﬁcant change in circumstances occurs that is within the control of the Group. Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in proﬁt or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets are assets with a value of less than £5,000 when new, typically small items of IT equipment, oﬃce equipment and oﬃce furniture. Expenses Operating lease payments In applying paragraph 6 of IFRS 16, short term leases and leases for low value assets are not recognised as lease liabilities with a corresponding right-of-use asset. Payments under such leases are recognised in the income statement on a straight line basis over the term of the lease. Finance income Financial income comprises interest receivable on funds invested, and foreign exchange gains. Interest income is recognised in the income statement as it accrues using the eﬀective interest method. Finance expenses Financial expenses comprise interest payable on borrowings, interest on leases and foreign exchange losses. Taxation Income tax on the proﬁt or loss for the period comprises both current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary diﬀerences between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amounts of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable proﬁts will be available against which the asset can be utilised. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 46 46 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) Segmental information 2 The analysis by geographic segment below is presented in accordance with IFRS 8 on the basis of those segments whose operating results are regularly reviewed by the Board of Directors (the Chief Operating Decision Maker as deﬁned by IFRS 8) to make strategic decisions, to monitor performance and allocate resources. The Board regularly reviews the Group’s performance and balance sheet position for its entire operations as a whole. The Board receives ﬁnancial information, assesses performance and makes resource allocation decisions for its UK based business as a whole, therefore the directors consider the Group to have only one segment in terms of products and services, being the development, supply and maintenance of technologies used in advanced security, surveillance and ruggedised electronic applications. As the Board of Directors receives revenue, Adjusted EBITDA and operating proﬁt on the same basis as set out in the consolidated income statement no further reconciliation or disclosure is considered necessary. Revenue by geographical destination can be analysed as follows: 2020 £000 United Kingdom 12,080 Continental Europe 837 Rest of World 84 13,001 The timing of revenue recognition can be analysed as follows: 2020 £000 Products and services transferred at a point in time 11,118 Products and services transferred over time 1,883 13,001 Details of the revenues relating to the Group’s main customers in the year are given in note 15. Expenses and auditor’s remuneration 3 Profit/(loss) before tax is stated after charging/(crediting): 2020 £000 Amortisation of intangibles 637 Depreciation of property, plant and equipment 244 Amortisation of right-of-use assets 133 Development costs expensed directly to income 913 Net write down of inventories 108 Job Retention Scheme grants (141) Other grant income (10) Auditor’s remuneration: 2020 £000 Audit of these financial statements 15 Amounts receivable by the Company’s auditor and its associates in respect of: Audit of financial statements of subsidiaries pursuant to legislation 69 2019 £000 13,145 2,493 68 15,706 2019 £000 14,075 1,631 15,706 2019 £000 639 204 133 690 76 – – 2019 £000 12 49 Amounts receivable by the Company’s auditor and its associates in respect of services to the Company, other than the audit of the Company’s ﬁnancial statements, have not been disclosed as the information is required instead to be disclosed on a consolidated basis. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 47 Petards Group plc Annual report and ﬁnancial statements 2020 | 47 Financial statements Staff numbers and costs 4 The aggregate payroll costs, including directors, were as follows: Group 2020 £000 Wages and salaries 4,820 Share based payments (note 19) 26 Social security costs 469 Other pension costs (note 19) 177 5,492 2019 £000 5,240 30 551 213 6,034 The monthly average number of employees during the year (including directors) was as follows: Group 2020 Number 2019 Number Direct labour 63 Development 18 Sales 9 Administration 19 109 Directors’ remuneration 2020 £000 Directors’ emoluments 501 Company contributions to defined contribution pension schemes 1 502 The aggregate of emoluments of the highest paid director was £217,000 (2019: £208,000). 78 22 9 22 131 2019 £000 552 1 553 Salaries Other Share options and fees benefits Bonuses exercised Total Total 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Name of director £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 R Abdullah 130 130 – – – 25 – – 130 155 O Abdullah 130 130 – – – 25 – – 130 155 P Negus¹ 217 208 – – – – – – 217 208 T Connolly² 24 34 – – – – – – 24 34 501 502 – – – 50 – – 501 552 ¹ Includes fees for the services of P Negus payable to Adcel Limited of £182,000 (2019: £173,000). ² Included ex-gratia fee of £10,000 in 2019. No directors are accruing rights to shares under long term incentive schemes. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 48 48 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 4 Staff numbers and costs continued Number of directors exercising share options Number of directors accruing benefits under a defined contribution pension scheme Directors’ rights to subscribe for shares in the Company are as follows: 2020 2019 Number Number – 1 – 1 At start of year At end of year Director Number of shares Number of shares Exercise price (pence) R Abdullah 1,425,000 1,425,000 O Abdullah 2,737,500 2,737,500 P Negus 300,000 300,000 8p – 21.5p 8p – 21.5p 11.6p – 21.5p Further details of movement in rights to subscribe for shares are included in the Remuneration Report, under the heading ‘Directors’ Interests in Share Options’, which forms part of these audited ﬁnancial statements. 5 Finance income and expenses Recognised in profit or loss Interest on bank deposits Financial income Interest expense on ﬁnancial liabilities at amortised cost Interest expense on lease liabilities Other interest payable Other exchange loss Financial expenses 2020 2019 £000 £000 – 1 – 1 2020 2019 £000 £000 29 51 20 25 23 14 86 21 93 176 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 49 Petards Group plc Annual report and ﬁnancial statements 2020 | 49 Financial statements 6 Taxation Recognised in the income statement Current tax (credit)/expense Current tax charge Adjustments in respect of prior years Total current tax Deferred tax (credit)/expense Origination and reversal of temporary differences Recognition of previously unrecognised tax losses Utilisation of recognised tax losses Adjustment in respect of prior years Effect of change in rate of corporation tax Effect of differential tax rate for deferred tax Total deferred tax Total tax credit in income statement 2020 £000 87 (748) (358) – 13 412 (61) – 2020 £000 2019 £000 2019 £000 36 (1,167) (661) (1,131) (429) 84 16 166 – 25 6 (655) (138) (1,269) The £748,000 credit to current tax in respect of prior years related to enhanced tax deductions for R&D tax claims and losses surrendered for R&D tax credits in respect of prior years. These claims are recognised when receipt is determined to be probable. Following an announcement in the Budget on 11 March 2020, which was substantively enacted on 17 March 2020, the UK corporation tax rate applicable from 1 April 2020 remained at 19%, rather than the previously enacted reduction to 17%. The 17% rate was applied to the closing deferred tax balances at 31 December 2019 whereas the 19% rate has been applied to the closing deferred tax balances at 31 December 2020. Reconciliation of effective tax rate Loss before tax Tax using the UK corporation tax rate of 19% (2019: 19%) Non-deductible expenses Recognition of previously unrecognised tax losses Adjustments in respect of prior years Eﬀect of change in rate of corporation tax Eﬀect of diﬀerential tax rate for deferred tax Other reconciling items 2020 2019 £000 £000 (1,462) (1,238) (236) (278) 18 44 (41) (59) (336) (1,001) (61) – – 25 – 1 Total tax credit (655) (1,269) 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 50 50 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) Earnings per share 7 Basic earnings per share Basic earnings per share is calculated by dividing the proﬁt/(loss) for the year attributable to the shareholders by the weighted average number of shares in issue. Earnings Loss for the year (£000) Number of shares Weighted average number of ordinary shares (‘000) Basic loss per share (pence) 2020 2019 (583) (193) 57,526 57,468 (1.01) (0.34) Diluted earnings per share Diluted earnings per share assumes conversion of all potentially dilutive ordinary shares, which arise from share options that would decrease earnings per share or increase loss per share from continuing operations, and is calculated by dividing the adjusted proﬁt for the year attributable to the shareholders by the assumed weighted average number of shares in issue. Due to the loss in 2019 and 2020, the share options in issue had an anti-dilutive eﬀect. Adjusted earnings Loss for the year (£000) (583) Number of shares Weighted average number of ordinary shares (‘000) 57,526 (193) 57,468 2020 2019 Diluted loss per share (pence) (1.01) (0.34) 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 51 Petards Group plc Annual report and ﬁnancial statements 2020 | 51 Financial statements 8 Property, plant and equipment – Group Leasehold improvements £000 Plant and equipment £000 Motor vehicles £000 Cost Balance at 1 January 2019 Additions Reclassification due to adoption of IFRS 16 Balance at 31 December 2019 Balance at 1 January 2020 Additions Disposals Balance at 31 December 2020 Depreciation and impairment Balance at 1 January 2019 Depreciation charge for the year Reclassification due to adoption of IFRS 16 Balance at 31 December 2019 Balance as 1 January 2020 Depreciation charge for the year Disposals Balance at 31 December 2020 Net book value At 1 January 2019 At 31 December 2019 and 1 January 2020 At 31 December 2020 285 – – 285 285 1 – 286 228 18 – 246 246 17 – 263 57 39 23 1,854 263 – 2,117 2,117 32 (46) 2,103 1,000 183 – 1,183 1,183 227 (45) 1,365 854 934 738 72 – (57) 15 15 – (4) 11 40 3 (28) 15 15 – (4) 11 32 – – Total £000 2,211 263 (57) 2,417 2,417 33 (50) 2,400 1,268 204 (28) 1,444 1,444 244 (49) 1,639 943 973 761 Included within plant and equipment at 31 December 2019 were assets under the course of construction with a net book value of £58,000. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 52 52 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 9 Property, plant and equipment – Company Plant and equipment £000 Cost Balance at 1 January 2019 5 Additions – Balance at 31 December 2019 5 Balance at 1 January 2020 5 Additions – Balance at 31 December 2020 5 Depreciation and impairment Balance at 1 January 2019 3 Depreciation charge for the year 2 Balance at 31 December 2019 5 Balance at 1 January 2020 5 Depreciation charge for the year – Balance at 31 December 2020 5 Net book value At 1 January 2019 2 At 31 December 2019 and 1 January 2020 – At 31 December 2020 – 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 53 Petards Group plc Annual report and ﬁnancial statements 2020 | 53 Financial statements 10 Right of use assets – Group Assets Cost Balance at 1 January 2019 Additions Balance at 31 December 2019 Balance as 1 January 2020 Reclassification of opening balance Additions Disposals Balance at 31 December 2020 Amortisation Balance as 1 January 2019 Amortisation charge for the year Balance at 31 December 2019 Balance as 1 January 2020 Reclassification of opening balance Amortisation charge for the year Disposals Balance at 31 December 2020 Net book value At 1 January 2019 At 31 December 2019 and 1 January 2020 At 31 December 2020 The Company has no right of use assets. Land and buildings £000 Motor vehicles £000 Total £000 381 129 510 510 – 65 – 575 – 110 110 110 – 112 – 222 381 400 353 29 60 89 89 35 – (25) 99 – 23 23 23 35 21 (14) 65 29 66 34 410 189 599 599 35 65 (25) 674 – 133 133 133 35 133 (14) 287 410 466 387 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 54 54 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 10 Right of use assets – Group continued Lease liabilities Balance at 1 January 2019 Additions Interest expense Lease payments Balance at 31 December 2019 Balance as 1 January 2020 Additions Interest expense Lease payments Balance at 31 December 2020 Payable within one year (note 17) Payable after more than one year (note 17) Balance at 31 December 2020 Payable within one year (note 17) Payable after more than one year (note 17) Balance at 31 December 2019 Land and buildings £000 Motor vehicles £000 381 129 23 (116) 417 417 65 18 (137) 363 110 253 363 113 304 417 23 55 2 (26) 54 54 – 2 (21) 35 14 21 35 20 34 54 Total £000 404 184 25 (142) 471 471 65 20 (158) 398 124 274 398 133 338 471 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 55 Petards Group plc Annual report and ﬁnancial statements 2020 | 55 Financial statements 11 Intangible assets – Group Cost Balance at 1 January 2019 Additions - internally developed Balance at 31 December 2019 Balance at 1 January 2020 Additions Balance at 31 December 2020 Amortisation and impairment Balance at 1 January 2019 Amortisation charge for the year Balance at 31 December 2019 Balance as 1 January 2020 Amortisation charge for the year Balance at 31 December 2020 At 1 January 2019 At 31 December 2019 and 1 January 2020 At 31 December 2020 Customer related intangibles £000 Technology related intangibles £000 Goodwill £000 Development costs £000 178 – 178 178 – 178 82 44 126 126 52 178 96 52 - 448 – 448 448 150 598 65 45 110 110 52 162 383 338 436 1,488 – 1,488 1,488 – 1,488 – – – – – – 1,488 1,488 1,488 4,980 696 5,676 5,676 371 6,047 2,271 550 2,821 2,821 533 3,354 2,709 2,855 Total £000 7,094 696 7,790 7,790 521 8,311 2,418 639 3,057 3,057 637 3,694 4,676 4,733 2,693 4,617 Development costs relate to the ongoing development of the Group’s rail products. This includes an amount of £337,000 (2019: £374,000) for which amortisation has not yet commenced. Amortisation The amortisation charge is recognised within administrative expenses in the income statement. Impairment testing The Group considers that for the purpose of goodwill impairment testing it has three cash generating units (CGUs) involved in the development, supply and maintenance of technologies used in advanced security, surveillance, web-based real-time safety critical integrated software applications and ruggedised electronic applications. 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 56 56 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 11 Intangible assets – Group continued Goodwill has been allocated to cash generating units as follows: Petards Joyce-Loebl QRO Solutions RTS Solutions 2020 2019 £000 £000 219 401 488 306 781 781 1,488 1,488 Impairment is tested by calculating its value in use by reference to discounted cash ﬂow forecasts over a ﬁve year period. The key assumptions for the value in use calculation are those regarding the growth rates, discount rates and expected changes in proﬁt margins during the period. These are based on approved forecasts for the next year and an assumption of no growth thereafter has been applied in perpetuity (2019: approved forecasts for the next year and an assumption of no growth thereafter, applied in perpetuity) and are based on forecast proﬁt margin being maintained (2019: proﬁt margin maintained). The discount rate applied is 10% (2019: 10%). For Petards Joyce-Loebl the discount rate would have to increase to 38% before there is an impairment. The gross proﬁt would have to fall by 74% before there is an impairment. For QRO Solutions the discount rate would have to increase to 75% before there is an impairment. The gross proﬁt would have to fall by 87% before there is an impairment. For RTS Solutions the discount rate would have to increase to 32% before there is an impairment. The gross proﬁt would have to fall by 69% before there is an impairment. The Company had no intangible assets in 2019 or 2020. 12 Investments The Group and Company have the following investments in subsidiary undertakings: Name of company Petards Joyce-Loebl Limited QRO Solutions Limited RTS Solutions (UK) Limited RTS Solutions (Holdings) Limited Water Hall Group plc Petards Limited Joyce-Loebl Group Limited Petards International Limited Petards Traincare Limited Petards Railcare Limited Country of operation and registration England (2) England (1) England (1) England (1) England (1) England (2) England (2) England (2) England (1) England (1) Registered oﬃces: (1) Parallel House, 32 London Road, Guildford, GU1 2AB (2) 390 Princesway, Team Valley, Gateshead, Tyne and Wear, NE11 0TU Nature of business Holding Specialist electronic systems Specialist electronic systems Specialist electronic systems Ordinary shares Ordinary shares Ordinary shares Non-trading Non-trading Dormant Dormant Dormant Dormant Dormant Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Proportion held Group Company 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 57 Petards Group plc Annual report and ﬁnancial statements 2020 | 57 Financial statements 12 Investments continued Shares in subsidiary undertakings Company £000 Cost At 1 January 2019, 31 December 2019 and 1 January 2020 18,365 Acquisition 5 At 31 December 2020 18,370 Provisions for impairment in value At 1 January 2019, 31 December 2019 and 31 December 2020 5,514 Net book value At 1 January 2019 12,851 At 31 December 2019 12,851 At 31 December 2020 12,856 The addition in 2020 relates to a subscription for shares for a small shareholding in a private technology company. 13 Deferred tax assets and liabilities Group Recognised deferred tax assets and liabilities are attributable to the following: Property, plant and equipment Provisions Tax value of loss carry-forwards Intangible ﬁxed assets Initial application of IFRS 15 Tax assets/(liabilities) Oﬀset of tax Net tax assets Assets Liabilities Net 2020 £000 – 5 937 – – 942 (420) 522 2019 £000 – 5 919 – 12 936 (408) 528 2020 £000 (48) – – (372) – (420) 420 – 2019 £000 (80) – – (328) – (408) 408 – 2020 £000 (48) 5 937 (372) – 522 – 522 2019 £000 (80) 5 919 (328) 12 528 – 528 Unrecognised deferred tax assets are attributable to the following: Property, plant and equipment Provisions Tax value of loss carry-forwards Tax assets There is no expiry date on the above unrecognised deferred tax assets. Assets Assets 2020 2019 £000 £000 278 248 2 2 1,356 1,475 1,755 1,606 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 58 58 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 13 Deferred tax assets and liabilities continued Movement in deferred tax during the year Property, plant and equipment Provisions Tax value of loss carry-forwards Intangible ﬁxed assets Initial application of IFRS 15 Movement in deferred tax during the prior year Property, plant and equipment Provisions Tax value of loss carry-forwards Intangible ﬁxed assets Initial application of IFRS 15 Company Recognised deferred tax assets are attributable to the following: Tax value of loss carry-forwards Tax assets Unrecognised deferred tax assets are attributable to the following: Property, plant and equipment Provisions Tax value of loss carry-forwards Tax assets There is no expiry date on the above unrecognised deferred tax assets. 1 January 2020 £000 Recognised 31 December 2020 £000 in income £000 (80) 5 919 (328) 12 528 32 – 18 (44) (12) (6) (48) 5 937 (372) – 522 1 January 2019 £000 Recognised 31 December 2019 £000 in income £000 (46) 5 524 (103) 10 390 (34) – 395 (225) 2 138 (80) 5 919 (328) 12 528 Assets Assets 2020 2019 £000 £000 145 145 130 130 Assets Assets 2020 2019 £000 £000 26 23 3 2 124 98 127 149 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 59 Petards Group plc Annual report and ﬁnancial statements 2020 | 59 Financial statements 14 Inventories Raw materials and consumables Work in progress Group Company 2020 £000 1,357 1,015 2,372 2019 £000 1,278 1,152 2,430 2020 £000 – – – 2019 £000 – – – The directors consider all inventories to be essentially current in nature although the duration of certain contracts is such that a proportion of inventories will not be realised within 12 months. It is not possible to determine this amount with precision as this is dependent on a number of issues including future order volumes, the timing of project milestones and customer call oﬀ schedules. Inventories recognised as cost of sales in the year amounted to £4,944,000 (2019: £9,760,000). At 31 December 2020 inventories are shown net of provisions of £327,000 (2019: £251,000). 15 Trade and other receivables Trade receivables Amounts owed by group undertakings Corporation tax recoverable Other receivables Prepayments and accrued income Group Company 2020 £000 2,381 – 15 4 245 2,645 2019 £000 2,592 – 942 28 236 3,798 2020 £000 – 200 – – 25 225 2019 £000 – 738 – 13 21 772 At 31 December 2020 trade receivables include retentions of £240,000 (2019: £223,000). The Group has a variety of credit terms depending on the customer and these generally range from 14 to 60 days. The majority of the Group’s sales are made to government agencies and blue chip companies and consequently have very low historical default rates. No expected credit loss provision is considered necessary. At 31 December 2020 trade receivables are shown net of an allowance for credit notes of £nil (2019: £nil) arising from the ordinary course of business. The ageing of trade receivables at the balance sheet date was: Group Not past due date Past due date (0-90 days) Past due date (over 90 days) Group 2020 Gross and net trade receivables £000 2019 Gross and net trade receivables £000 1,850 1,628 350 624 340 181 2,381 2,592 261330 Petards pp35-end.qxp 21/06/2021 17:30 Page 60 60 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 15 Trade and other receivables continued Management has no indication that any unimpaired amounts will be irrecoverable. No other receivables are past due in either the current or prior year. In 2020 revenues for two customers each exceeded 10% of the Group’s revenues. Revenues from these customers were £3,827,000, and £1,462,000 (2019: Two customers: £4,976,000 and £1,966,000) of which £979,000 was included in the carrying amount of trade receivables at 31 December 2020 (2019: £1,424,000). The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: UK Europe Other regions Group 2020 2019 £000 £000 2,077 2,290 302 300 2 2 2,381 2,592 The Group’s exposure to credit and currency risks and impairment losses related to trade receivables is disclosed at note 22. The Company has no trade receivables but it has receivables from group undertakings which are analysed at note 26. No expected credit loss provision is considered necessary. 16 Cash and cash equivalents Cash and cash equivalents Cash and cash equivalents per balance sheet and per cash flow statement Group Company 2020 £000 2,204 2019 £000 827 2020 £000 1,097 2019 £000 72 The Group’s exposure to credit and currency risk related to cash and cash equivalents is disclosed at note 22. 17 Interest-bearing loans and borrowings This note provides information about the contractual terms of the Group’s and Company’s interest-bearing loans and borrowings, which are measured at amortised cost. More information about the Group’s and Company’s exposure to interest rate and foreign currency risk is disclosed at note 22. Non-current liabilities Bank loan Lease liabilities Current liabilities Bank loan Lease liabilities Group Company 2020 £000 375 274 649 252 124 376 2019 £000 – 338 338 881 133 1,014 2020 £000 375 – 375 252 – 252 2019 £000 – – – 881 – 881 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 61 Petards Group plc Annual report and ﬁnancial statements 2020 | 61 Financial statements 17 Interest-bearing loans and borrowings continued The interest rate is set at LIBOR plus 3.19% and the loan is secured by a ﬁxed and ﬂoating charge over the assets of the Group. In May 2021 the bank loan was re-ﬁnanced as a CBILS term loan over the existing term and no interest is payable for the ﬁrst year. The Group had available a revolving credit facility of up to £750,000 which was undrawn at both 31 December 2020 and 31 December 2019. Post year end that facility was replaced with a £2,500,000 3-year CBILS overdraft facility which expires in May 2024. Changes in liabilities from ﬁnancing activities Non-current Current loans and loans and borrowings borrowings £000 £000 Lease liabilities £000 Balance at 1 January 2019 – Cash items: Repayment of bank loan and interest – Payment of lease liabilities – Non-cash items: New lease liabilities (Note 10) – Interest expense – Re-classiﬁed from current to non-current in year 375 Balance at 31 December 2020 375 881 (283) – – 29 (375) 252 471 – (158) 65 20 – 398 Current Non-current loans and loans and borrowings borrowings £000 £000 Lease liabilities £000 Balance at 1 January 2019 875 Cash items: Repayment of bank loan and interest – Payment of lease liabilities – Non-cash items: New lease liabilities (note 10) – Interest expense – Re-classiﬁed from current to non-current in year (875) Balance at 31 December 2019 – 258 (303) – – 51 875 881 404 – (142) 184 25 – 471 18 Trade and other payables Non-current liabilities Amounts owed to group undertakings Current liabilities Trade payables Amounts owed to group undertakings Contract liabilities Non-trade payables and accrued expenses Group Company 2019 £000 – 2,251 – 1,320 1,354 4,925 2020 £000 956 31 2,234 – 275 2,540 2019 £000 930 48 1,847 – 142 2,037 2020 £000 – 1,434 – 1,177 2,949 5,560 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 62 62 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 18 Trade and other payables continued Contract liabilities At 1 January Amounts included in contract liabilities that were recognised as revenue during the year Cash received in advance of performance and not recognised as revenue during the year At 31 December Group Company 2020 £000 1,320 2019 £000 1,167 (867) (748) 724 1,177 901 1,320 2020 £000 2019 £000 – – – – – – – – No amounts included in current liabilities are expected to be settled in more than 12 months (2019: £nil). In both 2020 and 2019 amounts payable to group undertakings in current liabilities are due on demand but have no ﬁxed repayment dates. The non-current amount payable to a group undertaking is formally agreed, attracts interest at 3.25% and is not repayable before 30 June 2022. 19 Employee benefits Deﬁned contribution plans The Group operates deﬁned contribution pension plans. The total expense relating to deﬁned contribution plans in the current year was £175,000 (2019: £213,000). Share-based payments The Company has granted share options under its Enterprise Management Incentive Scheme (‘EMI Scheme’), and an Unapproved Share Option Scheme (‘Unapproved Scheme’). Options granted have a contractual life of ten years and are exercisable on the third anniversary from the date of grant. All options are to be settled by physical delivery of shares. The unexercised options at 31 December 2020 are stated below. Date of grant Scheme Nov 2013 Jan 2016 Jan 2016 Jul 2017 Oct 2018 Oct 2018 Apr 2019 EMI Scheme EMI Scheme Unapproved Scheme EMI Scheme EMI Scheme Unapproved Scheme EMI Scheme (1) Fully vested (2) 3 years from date of grant Exercise price (pence) 8.00p 12.25p 12.25p 29.00p 21.50p 21.50p 23.50p Number of options granted Vesting conditions 1,312,500 1,590,204 189,796 80,000 575,000 875,000 75,000 (1) (1) (1) (2) (2) (2) (2) Exercise period Nov 2013 – Nov 2023 Jan 2019 – Jan 2026 Jan 2019 – Jan 2026 Jul 2020 – Jul 2027 Oct 2021 – Oct 2028 Oct 2021 – Oct 2028 Apr 2022 – Apr 2029 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 63 Petards Group plc Annual report and ﬁnancial statements 2020 | 63 Financial statements 19 Employee benefits continued Outstanding at beginning of the year Granted Forfeited/lapsed Exercised Outstanding at the end of the year Exercisable at the end of the year 2020 2019 Weighted average exercise price £ 0.143 – 0.1225 0.1225 0.144 0.112 Number of shares 4,917,500 – (160,000) (60,000) 4,697,500 3,172,500 Number of shares 4,842,500 75,000 – – 4,917,500 3,312,500 Weighted average exercise price £ 0.141 0.235 – – 0.143 0.106 The estimated fair value of the options ranges between 2.5p and 9.8p. These were calculated by applying the Black-Scholes option pricing model. The model inputs were the share price at the date of grant, the appropriate exercise price, expected volatility of 30.7% (2019: 30.7%) and a risk free interest rate of 0.8% (2019: 0.8%). It was assumed that option holders would exercise their options during the ﬁrst year after the option vesting date. The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of daily share prices over the period of one year to the date of grant. During the year options were exercised in respect of 60,000 shares which were satisﬁed by the issue of new shares and for which the related weighted average share price at the time of exercise was 12.25p. The options outstanding at 31 December 2020 had exercise prices ranging from 8p to 29p and the weighted average remaining contractual life of the options was 5.4 years. The Group and Company recognised a total expense of £26,000 (2019: £30,000) in respect of equity settled share options. 20 Share capital At At 31 December 31 December 2019 Number 2020 Number Number of shares in issue – allotted, called up and fully paid Ordinary shares of 1p each Value of shares in issue – allotted, called up and fully paid Ordinary shares of 1p each 57,528,229 57,468,229 £000 £000 575 575 The Company’s issued share capital comprises 57,528,229 ordinary shares of 1p each, all of which have equal voting rights. On 13 January 2020 the Company issued 60,000 ordinary 1p shares at a price of 12.25p each on the exercise of employee share options. 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 64 64 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 21 Equity reserve The equity reserve relates to the fair value of the share options issued but not yet exercised in respect of the acquisition of Water Hall Group plc in 2013. 22 Financial risk management The Group’s and Company’s policy is to maintain a strong capital base with a view to ensuring that entities within the Group will be able to continue as going concerns. The Group’s and Company’s principal ﬁnancial instruments comprise short term debtors and creditors, short term bank deposits, cash, bank borrowings, leases and, when required, forward currency contracts and options. Neither the Group nor the Company trades in ﬁnancial instruments but, where appropriate, uses derivative ﬁnancial instruments in the form of forward foreign currency contracts and options to help manage foreign currency exposures. The prime objective of the Group’s and Company’s policy towards ﬁnancial instruments is to manage their working capital requirements and ﬁnance their ongoing operations. Capital management The Group’s and Company’s policy is to maintain a strong capital base with a view to ensuring that entities within the Group will be able to continue as going concerns. The Group and Company ﬁnance their operations through retained earnings, cash resources, bank borrowings, share placings and the management of working capital. It is the intention to issue new shares when satisfying share based incentive schemes. Capital is deﬁned as total equity as set out in the balance sheet. Management of ﬁnancial risk The main risks associated with the Group’s ﬁnancial instruments have been identiﬁed as credit risk, liquidity risk and foreign currency risk. The main risks associated with the Company’s ﬁnancial instruments have been identiﬁed as liquidity risk. The Board is responsible for managing these risks and the policies adopted, which have remained largely unchanged throughout the year. Credit risk The carrying amount of ﬁnancial assets included in the balance sheet, which represents the maximum credit risk, and the headings in which they are included are as follows: Current assets Trade receivables Other receivables Cash and cash equivalents Group Company 2020 £000 2,381 4 2,204 4,589 2019 £000 2,592 – 827 3,419 2020 £000 – 200 1,097 1,297 2019 £000 – 738 72 810 Credit risk is the risk of ﬁnancial loss to the Group if a customer or counterparty to a ﬁnancial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers. The Group’s risk is inﬂuenced by the nature of its customers. The majority of sales are made to government agencies and blue chip companies. New customers are analysed for creditworthiness before the Group’s standard payment and delivery terms and conditions are oﬀered and appropriate credit limits set. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis. The carrying amount of trade receivables in the balance sheet represents the maximum exposure to credit risk and further details are given in note 15 to the ﬁnancial statements. The Board considers the Group’s exposure to credit risk to be acceptable and normal for an entity of its size given the industries in which it operates. The Company’s ﬁnancial assets comprise amounts owed by group undertakings and the Board considers that there is no signiﬁcant exposure to credit risk. Surplus cash balances are placed on short term deposit with UK banks. 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 65 Petards Group plc Annual report and ﬁnancial statements 2020 | 65 Financial statements 22 Financial risk management continued Interest rate risk The Group has ﬁnanced its operations from its own cash resources and a bank loan drawn in 2018 for the acquisition of RTS Solutions (Holdings) Limited. The Group’s bank borrowings bear interest at LIBOR plus 3.19%. If LIBOR were to change by 50% the impact would be less than £10,000. The interest rate risk proﬁle of the Group’s and Company’s interest bearing ﬁnancial instruments was as follows: Group Company Interest rate risk profile of financial assets Floating rate assets (by currency): Sterling US dollar Euro Interest rate profile of financial liabilities Fixed rate liabilities (by currency): Sterling Floating rate liabilities (by currency): Sterling 2020 £000 2,101 100 3 2,204 398 627 2019 £000 800 1 26 827 471 881 2020 £000 1,097 – – 1,097 – 627 2019 £000 72 – – 72 – 881 The ﬁxed rate ﬁnancial liabilities comprises lease liabilities. While the Group and Company have access to a revolving credit facility which carries a variable interest rate, this facility was undrawn at 31 December 2020 and at 31 December 2019, so the Group and Company are not exposed to interest rate risk on this facility. Liquidity risk Liquidity risk is the risk that the Group and Company will not be able to access the necessary funds to ﬁnance their operations. Their own cash resources and bank borrowings are the predominant source of funds. Surplus cash is placed on short term deposit with UK banks. The Group manages its liquidity risk by monitoring existing facilities and cash ﬂows against forecast requirements based on a rolling cash forecast. The carrying amount of ﬁnancial liabilities included in the balance sheet and the headings in which they are included are as follows: Current liabilities Trade and other payables Lease liabilities Bank loan Amounts owed to group undertakings Non-current liabilities Lease liabilities Bank loan Amounts owed to group undertakings Group Company 2019 £000 4,925 133 881 – 338 – – 2020 £000 306 – 252 2,234 – 375 956 2019 £000 190 – 881 1,847 – – 930 2020 £000 5,560 124 252 – 274 375 – 6,585 6,277 4,123 3,848 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 66 66 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 22 Financial risk management continued The following are the contractual maturities of ﬁnancial liabilities, including estimated interest payments and excluding the eﬀect of netting agreements: Non-derivative financial liabilities Lease liabilities Bank loan Trade and other payables Carrying amount £000 Contractual cash flows £000 398 627 5,473 475 653 5,473 6,601 2020 1 year or less £000 147 267 5,473 5,887 1 to <2 years £000 2 to <5 years £000 5 years and over £000 144 259 – 403 184 127 – 311 – – – – The contractual cash ﬂows include interest estimated at a rate of between 3.28% and 4.25%. Non-derivative financial liabilities Finance lease liabilities Bank loan Trade and other payables Carrying amount £000 Contractual cash ﬂows £000 471 881 4,925 531 944 4,925 6,400 2019 1 year or less £000 146 291 4,925 5,362 1 to <2 years £000 2 to <5 years £000 5 years and over £000 138 269 – 407 247 384 – 631 – – – – The directors consider that the carrying amounts of ﬁnancial assets and liabilities approximate their fair values. Foreign currency risk The Group is exposed to currency risk on sales and purchases that are denominated in a currency other than the respective functional currencies of Group entities. About 6 percent (2019: 16 percent) of the Group’s sales are to customers in Continental Europe and less than 1 percent (2019: less than 1 percent) are to customers in the Rest of the World. These sales are priced in sterling and euros. The Group’s policy is to reduce currency exposures on sales through, where appropriate, forward foreign currency contracts. The Group also makes purchases in sterling, euros and US dollars and this provides a small element of natural hedge. All the other sales are denominated in sterling. Currency risk of ﬁnancial assets and liabilities The Group also has non-structural currency exposures i.e. those exposures arising from sales and purchases by group companies in currencies other than that company’s functional currency. These exposures give rise to net currency gains/losses recognised in the income statement, and represent monetary assets and liabilities of the Group that were not denominated in the functional currency of the company involved. 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 67 Petards Group plc Annual report and ﬁnancial statements 2020 | 67 Financial statements 22 Financial risk management continued At 31 December 2020 and 2019 the signiﬁcant exposures in this respect were trade receivables and payables and were as follows: Currency US dollar Euro 2020 Receivables £000 2020 Payables £000 2019 Receivables £000 2019 Payables £000 8 – 8 (118) (60) (178) – 8 8 (40) (182) (222) In the opinion of the directors the business has no signiﬁcant exposure to market risk arising from currency exchange or other price ﬂuctuations at 31 December 2020 and it has therefore not been deemed necessary to include a sensitivity analysis. 23 Lease expenses Short term lease expense Low value lease expense Group 2020 £000 36 6 42 2019 £000 41 6 47 Company 2020 £000 7 – 7 2019 £000 15 – 15 24 Capital commitments At 31 December 2020 the Group was committed to capital expenditure of £73,000 (2019: £nil). The Company had no such commitments (2019: none). 25 Contingent liabilities At 31 December 2020 the Company has guaranteed the contract performance of subsidiary companies in respect of customer contracts which have yet to be completed amounting to £7,328,000 (2019: £8,623,000). 26 Related party transactions Transactions/balances with subsidiaries – Company During the year the Company provided administrative services to subsidiary undertakings totalling £1,148,000 (2019: £1,172,000). The balances due by subsidiaries at year end are shown in note 15 and comprised an amount owed by RTS Solutions (Holdings) Ltd of £200,000 (2019: £200,000). The balances due to subsidiaries at the year end shown in note 18 comprised amounts owed to Petards Joyce-Loebl Ltd of £466,000 (2019: owed from Petards Joyce-Loebl Ltd £538,000), QRO Solutions Ltd of £653,000 (2019: £889,000), Water Hall Group plc £956,000 (2019: £930,000) and to RTS Solutions (UK) Ltd £1,115,000 (2019: £958,000). There is no ultimate controlling party of Petards Group plc. Transactions with directors – Group Fees of £182,000 (2019: £173,000) were paid to Adcel, a company wholly controlled by P Negus, in respect of fees for the provision of consultancy services (note 4). 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 68 68 | Petards Group plc Annual report and ﬁnancial statements 2020 Notes (continued) (forming part of the ﬁnancial statements) 26 Related party transactions continued Key management compensation Key management compensation comprises salaries, fees, bonuses, employer pension contributions, share based payment charges and employer social security costs. The key management of the Group are the directors of Petards Group plc and their compensation is as follows: Salaries, fees and bonuses Employer pension contributions Share based payment charges Employer social security costs Group 2019 £000 552 1 29 41 623 2020 £000 501 1 24 37 563 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 69 Petards Group plc Annual report and ﬁnancial statements 2020 | 69 Financial statements Alternative performance measures glossary This report provides alternative performance measures (“APMs”), which are not deﬁned or speciﬁed under the requirements of International Financial Reporting Standards. The Board believes that these APMs provide management with useful performance measurement indicators and readers with important additional information on the business. Adjusted EBITDA Adjusted EBITDA is earnings before ﬁnancial income and expenses, tax, depreciation, amortisation, exceptional items, acquisition costs and share based payment charges. Adjusted EBITDA is considered useful by the Board since by removing exceptional items, acquisition costs and share based payment charges, the year on year operational performance comparison is more comparable. Order intake The value of contractual orders received from customers during any period for the delivery of performance obligations. This allows management to monitor the performance of the business. Order book The value of contractual orders received from customers yet to be recognised as revenue. This allows management to monitor the performance of the business and provides forward visibility of potential earnings. Net funds/(debt) Total net funds comprises cash and cash equivalents less interest bearing loans and borrowings. This allows management to monitor the indebtedness of the Group. Current net funds/(debt) Current net funds comprises cash and cash equivalents less current liabilities in respect of interest bearing loans and borrowings, excluding liabilities recognised on the adoption of IFRS 16 ‘Leases’. This allows management to monitor the short term indebtedness of the Group. 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 70 70 | Petards Group plc Annual report and ﬁnancial statements 2020 AGM and information Directors, oﬃcers and advisors Directors Raschid Abdullah (Chairman) Osman Abdullah Terry Connolly FCA Paul Negus Company Secretary Southern Secretarial Services Limited Registered Office Parallel House 32 London Road Guildford Surrey GU1 2AB Company Registration Number 02990100 Independent Auditor BDO LLP Arcadia House Maritime House Ocean Village Southampton SO14 3TL Bankers Santander UK plc 1 Dorset Street Southampton SO15 2DP Nominated Advisor & Joint Broker WH Ireland Limited St. Brandon's House 29 Great George St Bristol BS1 5QT Joint Broker Hybridan LLP 20 Ironmonger Lane London EC2V 8EP Registrar Share Registrars The Courtyard 17 West Street Farnham GU9 7DR Website www.petards.com 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 71 Petards Group plc Annual report and ﬁnancial statements 2020 | 71 Financial statements Notice of Annual General Meeting Notice is hereby given that the 2021 Annual General Meeting of Petards Group plc (the “Company”) will be held at The County Club, 158 High Street, Guildford, Surrey GU1 3HJ on 22 July 2021 at 11.00 a.m.. Whilst the Directors are hopeful that the current public health restrictions across England will make attendance at the AGM lawful for shareholders, given ongoing public health considerations, shareholders are strongly encouraged not to attend the meeting in person. The Board encourages shareholders to complete Forms of Proxy, appointing the Chair of the meeting as proxy, and to vote on the resolutions before the deadline of 11.00 a.m. on 20 July 2021. The Meeting will deal with the following items: Ordinary Business 1. To receive and consider the audited accounts of the Company for the year ended 31 December 2020 together with the directors' report and the auditor’s report. 2. That Paul Negus, who retires by rotation, be re-elected as a director of the Company. 3. To re-appoint BDO LLP as auditor to hold oﬃce from the conclusion of the meeting until the conclusion of the next general meeting at which the accounts are laid before the Company. 4. Subject to resolution 3 being approved, to authorise the directors to ﬁx the auditor’s remuneration. Special Business To consider and, if thought ﬁt, pass the following resolutions of which resolution number 5 shall be passed as an ordinary resolution and resolution numbers 6 and 7 shall be passed as special resolutions: 5. That, in substitution for all existing authorities, to the extent unused, and pursuant to section 551 of the Companies Act 2006 (the “Act”) the directors of the Company be and they are hereby generally and unconditionally authorised to exercise all the powers of the Company to allot shares in the Company or to grant rights to subscribe for or convert any security into shares in the Company up to an aggregate nominal amount of £189,843 (being approximately 33% of the present issued ordinary share capital of the Company) provided that this authority shall, unless renewed, varied or revoked, expire on the conclusion of the Annual General Meeting of the Company to be held in 2022, save that the directors be and they are hereby entitled, as contemplated by section 551(7) of the Act, to make at any time prior to the expiry of such authority any oﬀer or agreement which would or might require shares to be allotted or rights to subscribe for or convert securities into shares to be granted after the expiry of such authority and the directors may allot shares or grant rights to subscribe for or convert securities into shares in pursuance of such an oﬀer or agreement as if the authority conferred hereby had not expired. 6. That, subject to and conditional on resolution 5 above being duly passed, the directors of the Company be and they are hereby empowered pursuant to section 570 of the Act to allot equity securities (within the meaning of section 560 of the Act) in the capital of the Company for cash pursuant to the authority conferred by resolution 5 above as if section 561(1) of the Act did not apply to such allotment, provided that this power shall be limited to the allotment of equity securities: (A) in connection with an oﬀer of such securities by way of rights, or other pre-emptive oﬀer, to holders of ordinary shares in proportion (as nearly as may be practicable) to their respective holdings of such shares, but subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to fractional entitlements or any legal or practical problems under the laws of any relevant territory, or the requirements of any regulatory body or stock exchange; and (B) otherwise than pursuant to (a) above up to a maximum aggregate nominal amount of £86,292 (being approximately 15% of the present issued ordinary share capital of the Company): provided that such power shall expire at the conclusion of the Annual General Meeting of the Company to be held in 2022, save that the Company may make an oﬀer or agreement prior to such expiry which would or might require equity securities to be allotted after the expiry of such power, and the directors may allot equity securities in pursuance of that oﬀer or agreement as if such power had not expired. 7. That the Company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Act to make one or more market purchases (within the meaning of section 693(4) of the 2006 Act) of ordinary shares of 1p each of the Company provided that: (A) the maximum number of ordinary shares authorised to be purchased is 5,752,822 (representing 10 per cent of the Company's issued ordinary share capital as at 21 June 2021; 261330 Petards pp35-end.qxp 21/06/2021 17:31 Page 72 72 | Petards Group plc Annual report and ﬁnancial statements 2020 AGM and information Notice of Annual General Meeting (continued) (B) the minimum price which may be paid for an ordinary share is 1 pence (exclusive of expenses); (C) the maximum price (exclusive of expenses) which may be paid for an ordinary share is an amount equal to 5 per cent above the average of the middle market quotations for an ordinary share as derived from the London Stock Exchange for the 5 business days immediately preceding the date on which the ordinary share is contracted to be purchased; (D) unless previously received, varied, or revoked, the authority hereby conferred shall expire at the conclusion of the Company's Annual General Meeting to be held in 2022; and (E) the Company may make a contract to purchase ordinary shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiry of such authority and may make a purchase of ordinary shares pursuant to any such contract. BY ORDER OF THE BOARD Southern Secretarial Services Limited Company Secretary Registered Oﬃce: 32 London Road Guildford 25 June 2021 Surrey GU1 2AB Company Number: 02990100 Notes: These notes need to be considered subject to the UK Government’s measures that are currently in force to limit the spread of Covid-19. 1. Pursuant to Part 13 of the Act and paragraph 18(c) of the Companies Act 2006 (Consequential Amendments) (Uncertificated Securities) Order 2009, only those members registered in the register of members of the Company at 11.00 a.m. on 20 July 2021 (or if the AGM is adjourned, 11.00 a.m. on the date falling two days before the date fixed for the adjourned AGM) shall be entitled to attend and vote at the AGM in respect of the number of shares registered in their name at that time. Any changes to the register of members after such time shall be disregarded in determining the rights of any person to attend or vote at the AGM. However, in light of the Covid-19 pandemic, members and their proxies will not be allowed to attend the meeting. 2. Members who wish to attend the AGM in person should ensure that they arrive at the venue for the AGM in good time before the commencement of the meeting. Members may be asked to provide proof of identity in order to gain admission to the AGM. 3. A member who is entitled to attend, speak and vote at the AGM may appoint a proxy to attend, speak and vote instead of him. A member may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares (so a member must have more than one share to be able to appoint more than one proxy). A proxy need not be a member of the Company but must attend the AGM in order to represent you. A proxy must vote in accordance with any instructions given by the member by whom the proxy is appointed. Appointing a proxy will not prevent a member from attending in person and voting at the AGM (although voting in person at the AGM will terminate the proxy appointment). 4. A form of proxy accompanies this document. The notes to the proxy form include instructions on how to appoint the Chairman of the AGM as a proxy, and should be followed carefully. 5. To be valid, a proxy form, and the original or duly certified copy of the power of attorney or other authority (if any) under which it is signed or authenticated, should reach the Company’s registrar, Share Registrars, The Courtyard, 17 West Street, Farnham, Surrey GU9 7DR, or by e-mail to voting@shareregistrars.uk.com, by no later than 11.00 a.m. on 20 July 2021. 6. If a member returns more than one proxy form, either by paper or electronic communication, the appointment received last by the Registrar before the latest time for the receipt of proxies will take precedence. 7. In the case of joint holders of shares, the vote of the first named in the register of members who tenders a vote shall be accepted to the exclusion of the votes of other joint holders. 8. A member that is a company or other organisation not having a physical presence cannot attend in person but can appoint someone to represent it. This can be done by the appointment of a proxy (described in Notes 3 to 7 above). 9. In order for a proxy appointment made by means of CREST to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by Share Registrars (ID 7RA36) no later than 48 hours, excluding non-working days, before the time fixed for the AGM. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which Share Registrars is able to retrieve the message by enquiry to CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular messages and normal system timings and limitations will apply in relation to the input of a CREST Proxy Instruction. It is the responsibility of the CREST member concerned to take such action as shall be necessary to ensure that a message is transmitted by means of the CREST System by any particular time. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. Introduction Petards’ operations continue to be focused upon the development, supply and maintenance of technologies used in advanced security, surveillance and ruggedized electronic applications, the main markets for which are: Rail – software driven video and other sensing systems for on-train applications sold under the eyeTrain brand to global train builders, integrators and rail operators, and web-based real-time safety critical integrated software applications supporting the UK rail network infrastructure sold under the RTS brand; Traﬃc –Automatic Number Plate Recognition (“ANPR”) systems for lane and speed enforcement and other applications, and UK Home Oﬃce approved mobile speed enforcement systems, sold under the QRO and ProVida brands to UK and overseas law enforcement agencies and commercial customers; and Defence – electronic countermeasure protection systems, mobile radio systems and related engineering services sold predominantly to the UK Ministry of Defence (“MOD”). Contents Financial and operational highlights 1 2 Chairman’s statement Strategic report 4 12 Chairman’s corporate governance statement 19 Directors’ remuneration report 21 Directors’ report 24 Statement of directors’ responsibilities in respect of the Annual Report and the financial statements 25 Independent auditor’s report to the members of Petards Group plc 31 Consolidated income statement 32 Statements of changes in equity 33 Balance sheets 34 Statements of cash flows 35 Notes 69 Alternative performance measures glossary 70 Directors, officers and advisors 71 Notice of Annual General Meeting Perivan 261330 Annual report and financial statements 31 December 2020 Petards Group plc Registered number 2990100 Petards Group plc 0 2 0 2 r e b m e c e D 1 3 s t n e m e t a t s l i a c n a n i f d n a t r o p e r l a u n n A c l p p u o r G s d r a t e P Petards Group plc Parallel House, 32 London Road, Guildford, GU1 2AB, United Kingdom Tel: +44 (0) 1483 230345 www.petards.com

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